In Consumer Financial Protection Bureau (CFPB or Bureau) news, there’s a major shakeup at the Bureau after Kristen Donoghue, a former Richard Cordray appointee who joined the CFPB back in 2011, resigned as the Bureau’s enforcement chief. Meanwhile, the CFPB filed a new lawsuit against credit repair companies and reached a $3.9 million settlement with a student loan servicer.
Outside the enforcement arena, the CFPB’s constitutionality was upheld by the U.S. Court of Appeals, Ninth Circuit, a decision in line with the D.C. Circuit, although the potential for a circuit split remains with other cases pending in the Second and Fifth Circuits.
What happened
After issuing its long-awaited debt collection rules, the CFPB turned its efforts to enforcement.
- Donoghue resigns. Less than a week after the resignation of controversial CFPB senior employee Eric Blankenstein, Kristen Donoghue has left the CFPB after openly criticizing Blankenstein’s tenure. Her acting replacement is her ideological clone, Cara Petersen, previously Donoghue’s principal deputy. Like her predecessor, Petersen has been at the CFPB since early 2011, joining from the Federal Trade Commission, where she handled consumer protection investigations for the FTC’s Division of Financial Practices. Prior to the FTC gig, Petersen was an Arnold & Porter litigation associate. She has an undergraduate degree in economics from George Washington University, and her law degree is from the University of Iowa. Director Kathy Kraninger now has an interesting decision: stick with Donoghue’s close former deputy in the medium term or choose a more politically aligned replacement. We expect the latter.
- Credit repair company complaint. In a new lawsuit filed in Utah federal court against a credit repair company, its subsidiaries and a related individual, the Bureau accused the defendants of violating the Telemarketing Sales Rule (TSR) by requesting and receiving payment of prohibited upfront fees for credit repair services.
The defendants also engaged in deceptive marketing representations in violation of the Consumer Financial Protection Act (CFPA), the CFPB alleged, using a business model of relying on a network of “marketing affiliates” that advertised consumer credit products or services. The affiliates, paid per lead by the defendants, offered “illusory products or services to lure in consumers,” according to the complaint, falsely representing to consumers that they had to use the defendants’ credit repair services in order to obtain the advertised products and services.
The false advertising included fake real estate ads, fake rent-to-own housing opportunities, fake relationships with lenders, false credit guarantees and false, unsubstantiated statements about past consumer outcomes, the CFPB said.
Ads also featured deceptive claims about consumers’ likelihood of success in obtaining products and services, according to the complaint, with claims such as a guarantee that any consumer could obtain “a 0-3.5% down” mortgage “no matter how bad their credit is when we start.”
The lawsuit seeks injunctive relief as well as restitution and civil money penalties.
- Settlement with servicer. In a separate action, the CFPB reached a deal with a student loan servicing company that allegedly engaged in unfair practices by failing to adjust the principal balances of student loans in a timely manner to account for circumstances such as deferment, forbearance or entrance into the income-based repayment program.
Instead, between 2005 and 2015, loans that required an adjustment were placed into queues, the Bureau said. Some adjustments took years to occur; in other cases, the adjustment was never made. As a result, in some instances borrowers paid off loans with inaccurate balances, while borrowers seeking to consolidate were forced to wait until the adjustment occurred.
Pursuant to the consent order, the servicer will pay a $3.9 million fine and make proper adjustments to the principal balances of the relevant loans or otherwise make restitution to borrowers who paid off the loans.
The servicer neither admitted nor denied the charges, which the CFPB said constituted unfair acts or practices in violation of the CFPA.
- Ninth Circuit decision. In non-enforcement news, a unanimous panel of the Ninth Circuit declared that the structure of the CFPB is constitutional, relying heavily on the D.C. Circuit’s opinion in a similar dispute.
The case involved a law firm being investigated by the Bureau for potential violations of the TSR. As part of its review, the CFPB issued a civil investigative demand (CID) to the law firm, requiring it to respond to seven interrogatories and four requests for documents. After the firm refused to comply with the CID, the CFPB filed a petition in California district court to enforce compliance.
In response, the law firm challenged the structure of the Bureau, arguing that it violates the Constitution’s separation of powers because the agency is headed by a single director who exercises substantial executive power but can be removed by the president only for cause.
The Ninth Circuit disagreed, relying on controlling separation of powers decisions from the U.S. Supreme Court, as well as the D.C. Circuit’s 2018 decision in PHH Corp. v. CFPB.
“[T]he for-cause removal restriction protecting the CFPB’s director does not ‘impede the President’s ability to perform his constitutional duty’ to ensure that the laws are faithfully executed,” the panel wrote. In addition, the CFPB has the statutory authority to issue the CID, the court said, affirming the district court’s order in favor of the Bureau.
To read the CFPB’s complaint, click here.
To read the CFPB’s consent order, click here.
Why it matters
The Donoghue departure is big news in Bureau circles, and whoever replaces her will have enormous power to influence Bureau activities. On constitutionality, the Ninth Circuit decision was not a surprising result and maintains the status quo by aligning with the D.C. Circuit. That said, the possibility of a circuit split remains. The Fifth Circuit recently heard oral argument on the issue in a case that began when the CFPB sued a check cashing company for assorted violations of the CFPA, and the Second Circuit is reviewing a June 2018 decision from a New York federal court judge found the CFPB’s structure unconstitutional. With multiple cases in play, the issue of the Bureau’s constitutionality could still find its way to the U.S. Supreme Court.