Legal Update December 4, 2018

Mulvaney’s BCFP One Year Later: Change and Continuity

Just one year ago, as you were contemplating Not surprisingly, many former Bureau employees what to do with your leftover Thanksgiving have moved on, from line attorneys to senior turkey, a storm was brewing at the agency enforcement personnel, and Mulvaney brought in formerly known as the Consumer Financial a number of political appointees. He has also Protection Bureau. On November 24, 2017, then- reorganized various aspects of the Bureau, most Director resigned. His last act notably in the area of Fair Lending. Mulvaney was to appoint his chief of staff, , moved the Office of Fair Lending and Equal as the agency’s deputy director, with the Opportunity from the Division of Supervision, expectation that English would become the next Enforcement, and Fair Lending (“SEFL”), where acting director. Later that day, President Trump it had supervisory and enforcement authority, to named OMB Director as acting the Office of the Director, where it serves as solely director, and, two days later, a legal battle ensued a policy office; fair lending supervision and in the DC Circuit. Since then, Acting Director enforcement activities remained within SEFL. Mulvaney has changed the name of the Bureau, The rationale was to have one office that handles declined operating funds from the Fed, publicly enforcement matters and one that handles decried the Bureau’s prior mission, and rolled supervision (rather than two of each). Separately, back supervisory, regulatory, and enforcement Mulvaney moved the Office for Students and activities. In this Legal Update, we take a closer Young Consumers into the Bureau’s financial look at how the Bureau of Consumer Financial education office. Protection (“BCFP” or the “Bureau”) looks one Other high-profile moves include the August year later and what to expect in the year ahead. 2018 departure of the Student Loan Ombudsman of the Bureau, Seth Frotman, who announced his Comings and Goings: Staffing Changes resignation from the Bureau in public fashion. In at the Bureau his resignation letter, he accused Acting Director For now, Mulvaney continues to serve as both the Mulvaney and President Trump of undermining acting director of the Bureau and director of the the Bureau and the Bureau’s ability to protect OMB. English resigned from the Bureau and consumers. He claimed that the “current dropped her lawsuit in July 2018 after President leadership” of the Bureau undermines the Trump nominated Kathy Kraninger to serve as agency’s independence and actively shields “bad BCFP director. Kraninger survived a narrow actors from scrutiny.” He cited leadership’s Senate committee vote in August and is awaiting decision to suppress a report about student full Senate confirmation. In the coming week, we account fees as an example of harming students. expect her to be approved as the next BCFP The Bureau did not comment on Frotman’s director. resignation. We expect more personnel changes and The RFI process provides an opportunity for potentially new political hires once Kraninger Kraninger, if she so chooses, to bring about more begins her tenure, but, for now, the personnel change in how the Bureau operates. The RFIs and shake-up and reorganization appear to have the public comments submitted in response to slowed down. them should provide her a menu of options from which to choose as she moves to put her imprint Mulvaney’s Call for Evidence: A on the agency. Reexamination of Bureau Practices Litigation and Enforcement Trends: Less One of Acting Director Mulvaney’s first initiatives of More of the Same was a “call for evidence to ensure that the Bureau is fulfilling its proper and appropriate functions In January 2018, Acting Director Mulvaney to best protect consumers.”1 Mulvaney indicated declared that the Bureau had pushed its last that the Bureau would be “critically examin[ing] envelope with respect to enforcement activities.3 its policies and practices to ensure they align with However, looking back on enforcement activities the Bureau’s statutory mandate.”2 To that end, during Mulvaney’s first year, the theme that the Bureau published a series of Requests for comes to mind is “less of more of the same”— Information (“RFIs”) seeking comments on there was less enforcement overall, but the virtually all of the Bureau’s activities—from enforcement activity that did occur was more of enforcement to supervision to its handling of the same, with similar unfair, deceptive and consumer complaints. Beginning in January abusive acts and practices (“UDAAP”) claims as 2018, the Bureau published 13 RFIs seeking the Bureau has been bringing since its inception. comments on such topics as enforcement The numbers tell the story of “less.” In the past (including civil investigative demands (“CIDs”) year, the BCFP has brought nine enforcement and associated processes), supervision, guidance, actions—eight settlements and one lawsuit—and rulemaking, market monitoring, data, consumer settled one previously filed lawsuit. In contrast, in complaints, and education activities. his last year in office, Cordray brought 47 new At the time, Mulvaney’s “call for evidence” enforcement actions, 16 of which were contested suggested the potential for sweeping changes to and 31 of which were filed as settled cases. But core Bureau functions and processes. After that is where the differences end. requesting comments on a broad range of topics, Although it is very challenging to compare however, it is unclear exactly what, if any, remedies imposed in different cases, a look at the changes the Bureau will make based on numbers suggests a rough equivalence between comments received through the RFIs. No major the Cordray and Mulvaney Bureaus. Of the 31 announcements have come out of the RFI process cases the Bureau settled in Cordray’s last year, 26 to date, but the Bureau did announce some included a civil money penalty (“CMP”), about modest alterations in response to comments half of those (14) included a penalty greater than received on the RFI on External Engagements. In $1 million, and the average penalty in those 26 June 2018, the Bureau announced that it is cases was about $1.5 million. By contrast, eight of reconstituting its advisory groups with new and the nine settlements under Mulvaney involved a smaller membership and ramping up outreach to CMP—roughly the same percentage as under external groups. The Bureau also stated that it Cordray. In almost half of those cases, the penalty plans to increase its strategic outreach through amount announced by the Bureau was deemed regional and national town halls and regular satisfied by payment of a lesser amount. national calls. Excluding from the calculation the record-setting and average-skewing penalty of $1 billion

2 Mayer Brown | BCFP Year in Review announced against a large bank, the average funds that had been lent to the consumer. The penalty amount in the six remaining penalty claim at issue could just as easily have been cast cases was about $1.5 million—in line with the as an unfairness claim. average from the prior year—and half of the cases Moreover, notwithstanding all the rhetoric about involved penalties in excess of $1 million.4 the end of regulation by enforcement, several of More surprisingly, the nature of the claims that the Bureau’s claims asserted UDAAP violations the BCFP has brought and defended has not for conduct that had not been clearly prohibited changed substantially under Mulvaney. The or whose contours are more amenable to Bureau under his leadership has filed briefs rulemaking. For example, a recent consent order supporting novel theories of abusiveness that involved claims that the failure to timely forward were first asserted under Cordray, and consumer payments to debt buyers is an unfair Mulvaney’s Bureau recently brought its first practice. What “timely” means, however, is abusiveness claim in the context of a payday entirely unclear and seems well-suited to the debt lender that also offered check cashing services.5 collection rulemaking in which the Bureau is This claim was brought in October 2018, just days currently engaged. Similarly, the Bureau has after Mulvaney announced that the Bureau would brought unfairness claims regarding debt consider engaging in rulemaking to define collection activity involving first-party collectors, abusiveness because it is not well defined in the who are not covered by the Fair Debt Collection case law. In that matter, the Bureau found an Practices Act (“FDCPA”). This issue, too, is part of abusive practice where the respondent used the the pending debt collection rulemaking. check proceeds to pay off outstanding payday More generally, the Bureau has continued to loan debts and provided only the remaining funds enforce the prohibition on UDAAP. Indeed, eight to the consumer. The consent order notes that of the nine cases brought under Mulvaney include this practice was disclosed to consumers at the UDAAP claims, and five of them were based time they took out loans with the company and solely on UDAAP. In that respect, the new BCFP that consumers, in fact, signed an is very much like the old CFPB (and the FTC) in acknowledgement in the applications that they that UDAAP claims have continued to be the had received these disclosures. The Bureau bread and butter of enforcement. Based on the nevertheless found this conduct abusive because Bureau’s enforcement actions over the past year, the disclosures sometimes occurred months or there is no reason to think that will change. years before the check cashing transaction and because the company took steps to not inform Finally, perhaps the most important recent consumers coming in for check cashing services development on the enforcement front is the fact that their check proceeds may be set off against that the Bureau seems to have opened new any outstanding debt. These practices, in the enforcement investigations. All of the Bureau’s words, “nullified” the disclosures that enforcement actions announced under consumers had been provided and constituted an Mulvaney’s leadership to date likely involved abusive practice. investigations that had been opened prior to his arrival at the Bureau. In the past month, however, While this abusiveness claim was reminiscent of the Bureau has issued CIDs in new investigations, the Bureau’s abusiveness claim in a prior case which is the first sign of such enforcement involving check cashing, it was surprising that a activity under the new regime. This may mean market-oriented director like Mulvaney would that the new leadership at the Bureau has made choose to bring such a claim when the conduct decisions about where and how it wants to deploy was expressly disclosed to the consumer and the agency’s enforcement resources. Under ultimately entailed no more than the recovery of Cordray, the enforcement office had its own

3 Mayer Brown | BCFP Year in Review strategic plan that identified those market areas the rule indefinitely “pending further order of the that enforcement wanted to address in the court.” We expect the court to revisit this issue coming year. Presumably, Mulvaney’s team after the Bureau issues its promised notice of wanted to review those priorities before proposed rulemaking. authorizing new investigations. Second, Mulvaney has signaled that the Bureau These first new investigations of the Mulvaney will consider clarifying the meaning of era, therefore, may suggest that a new “abusiveness” through the rulemaking process.11 enforcement strategic direction has been adopted The generalized prohibition on UDAAPs has been and that we will see more investigations opened on Mulvaney’s radar since the beginning of his in the near future. If that’s the case, we may gain tenure, though, as discussed above, it has greater insights into the areas of priority for the continued to rely heavily on UDAAP claims in its agency. When Kraninger takes over, there may enforcement work. Rulemaking to further define well be another period of upheaval and change. abusiveness would mitigate some of industry’s But, for now, it appears that we can expect less of concerns about what constitutes a UDAAP, but, more of the same. as in many things, the devil is in the details. The abusiveness rulemaking is in the category of Rulemaking: Regulation Through “long-term” rulemaking on the Bureau’s latest Regulations rulemaking agenda, suggesting we may not see any action in this space for some time. Shortly after being appointed as the acting director of the Bureau, Mulvaney promised In the nearer term, the Bureau indicated that it “more formal rulemaking and less regulation by intends to issue a notice of proposed rulemaking enforcement.”6 Not surprisingly, the new addressing debt collection-related Bureau’s formal rulemaking process is just as communication practices and consumer slow as the old Bureau’s, though Mulvaney has disclosures by March 2019. The Bureau explained been quick to respond to industry concerns on that debt collection remains a top source of the regulations that were in-process as of last complaints it receives, and both industry and November. The two most notable developments consumer groups have encouraged the Bureau to were related to the payday lending rule and modernize FDCPA requirements through UDAAPs. rulemaking. The Bureau did not specify whether its proposed rulemaking would be limited to First, at the beginning of the year, Mulvaney third-party collectors subject to the FDCPA, but signaled that the Bureau would engage in notice its reference to FDCPA requirements suggests and comment rulemaking to reconsider the that is likely to be the case. This is another area of payday lending rule that the Bureau finalized in continuity with the Cordray CFPB, which 7 October 2017. The Bureau has since announced conducted a substantial amount of pre-rule that it expects to issue a notice of proposed activity regarding debt collection, though one rulemaking by January 2019 that will address would expect that the substance of a proposed both the merits and the compliance date rule will be different under Mulvaney (or 8 (currently August 2019) of the rule. Notably, the Kraninger) than it would have been under Bureau intends to revisit only the ability to repay Cordray. In addition to the debt collection provisions and not the payment provisions of the rulemaking, we can expect guidance governing 9 rule. To complicate matters, in a lawsuit brought public disclosure of data under HMDA. by trade associations challenging the validity of the rule, the court stayed the implementation The remaining regulatory actions include date of the rule but did not provide a new industry-friendly moves, such as relief under the implementation date.10 Instead, the court stayed Home Mortgage Disclosure Act (“HMDA”),

4 Mayer Brown | BCFP Year in Review technical corrections to mortgage servicing rules Bureau did under Cordray.15 Indeed, it appears and TRID, interim final rules to implement that Mulvaney has not introduced “check-the- amendments to the Fair Credit Reporting Act and box” examinations focused solely on technical Gramm-Leach-Bliley Act, and updates to the compliance with regulations but has continued 2016 prepaid rule, including extending the the Bureau’s practice of examining compliance effective date to April 1, 2019. Mulvaney’s Bureau management systems and for UDAAP concerns. also finalized portions of a 2016 proposed rule The statements about the unenforceability of regarding the disclosure of records. The Bureau supervisory findings and guidance were released has also shelved certain rules that had been on against the backdrop of congressional the regulatory agenda under Cordray, including disapproval of the Bureau’s 2013 Bulletin on the overdraft services rule and a student loan indirect auto lending. The Government servicing rule, and delayed the creation of the Accountability Office (“GAO”) concluded that the Small Business Lending Data Collection rule. Bureau’s 2013 Bulletin on indirect auto lending qualified as a “rule” subject to the Congressional Supervision: Guidance on Guidance Review Act (“CRA”) even though, according to the Mulvaney’s BCFP has taken a number of steps, GAO, it is informal guidance that “offers clarity along with other financial regulators, to reduce and guidance on the Bureau’s discretionary the impact of supervisory guidance and enforcement approach.”16 In May 2018, President examinations. In a joint statement with federal Trump signed a joint resolution of Congress to prudential regulators in September 2018, the repeal the Bulletin, marking the first, and so far agencies explained that “supervisory guidance only, time the CRA has been used to repeal does not have the force and effect of law, and the agency guidance. The repeal prohibits the Bureau agencies do not take enforcement action based on from issuing a substantially similar rule unless supervisory guidance.”12 The agencies further specifically authorized by law to do so.17 stated that supervisory guidance is meant to Separately, the Bureau is considering changes to outline supervisory expectations and articulate a the Trial Disclosure Program (“TDP”) to help general view regarding appropriate practices, but spur additional innovation in the financial guidance should not serve as the basis for services marketplace.18 The TDP permits covered enforcement actions. persons to conduct trial disclosure programs and Similarly, in a Bulletin discussing types of provides a safe harbor (or waiver) from the supervisory findings, the Bureau stated that corresponding applicable regulatory supervisory findings are not legally enforceable.13 requirements. Under Cordray, the Bureau did not This was the only Bulletin of the Mulvaney era. approve a single trial disclosure. The potential And notably absent from the Mulvaney Bureau’s changes to the TDP, along with the creation of a first and only edition of Supervisory Highlights new Office of Innovation, suggest that the Bureau was introductory language found in prior versions may take a more active role in helping to foster emphasizing the corrective action that the Bureau innovation than it did under Cordray’s Project had required of supervised entities. Instead, it Catalyst. emphasized that “institutions are subject only to Collectively, these efforts signal the Bureau’s (and the requirements of relevant laws and other regulators’) industry-focused approach to 14 regulations.” However, that issue of supervision and an effort to encourage flexibility Supervisory Highlights revealed that the Bureau and innovation in the marketplace. We expect continued to conduct supervisory activities in this trend to continue in the year to come. many of the same industries and identified similar types of compliance concerns as the

5 Mayer Brown | BCFP Year in Review Bureau Reports: Fulfilling Statutory businesses, or arbitrarily remake American Mandates financial markets.” In his introduction letter, Mulvaney suggested In 2018, the Bureau released more than a dozen that Congress created an agency that is designed reports. Most of the reports were published to ignore due process and asked for four key because of a statutory mandate. These include the changes: (1) that the Bureau be funded through 2018 Financial Report, the Consumer Response congressional appropriations, (2) to require Annual Report, and the Fair Debt Collection legislative approval of major rules, (3) to ensure Practices Act Annual Report. Only a few reports that the director be answerable to the president, published by the Bureau were not explicitly and (4) that the Bureau should have its own required by statute, including a report on independent inspector general. It remains to be Geography of Credit Invisibility and a report on seen whether the new Congress will heed these Final Student Loan Payments and Broader calls for reform, but the new Democratic majority Household Borrowing. These “optional” reports, in the House makes such sweeping changes published by the Bureau’s Office of Research, unlikely in the coming years. have always included an introductory note indicating that they are occasional reports that are “intended to further the Bureau’s objective of A Look Ahead providing an evidence-based perspective on Though many entities in the Bureau’s previous consumer financial markets, consumer behavior, line of fire were hopeful that Mulvaney’s arrival and regulations to inform the public discourse.”19 would mean wholesale and sweeping change Under Mulvaney, this introductory language is immediately, when you step past the headlines, now accompanied by a statutory citation to the progress toward Mulvaney’s vision of the Bureau Dodd-Frank provisions permitting the has been slow. Nevertheless, Mulvaney has publication of such reports.20 Although this gradually changed the face of the BCFP. Aside addition is minor, it underscores Mulvaney’s from changing the seal and the name, the acting intention that all actions taken by the Bureau are director has rolled back or delayed regulations, firmly rooted in statutory requirements. reduced the impact of the Bureau’s supervisory functions, and substantially slowed the pace of This theme was made even more apparent in the enforcement. first semiannual report released under Mulvaney’s leadership.21 The report tracked The unresolved RFI process leaves open the exactly with the nine elements that are outlined possibility that Kraninger will impose more in the Dodd-Frank Act for inclusion in reports to substantial process and organizational changes, Congress, and it did not include information though that will depend on her vision for the above and beyond the statutorily required agency. Ultimately, what we expect in the coming elements, unlike previous reports that had been year is more of the same—a somewhat steady published under Cordray’s leadership. But the stream of regulatory changes coupled with reason this report made waves was not because of modest enforcement activities. Unlike Mulvaney, the content in the report itself, but the Kraninger will have a full five-year term to introduction and press release that were issued implement her agenda and will have the benefit along with it. Mulvaney used the press release of not having “acting” attached to her title. and introductory letter as an opportunity to Whether that means more gradual or more reiterate his view that the Bureau is too powerful. urgent change is the big open question as we head He stated the power wielded by the director could into the new year and a new era for the Bureau. “all too easily be used to harm consumers, destroy

6 Mayer Brown | BCFP Year in Review For more information about the topics raised Tori K. Shinohara in this Legal Update, please contact any of [email protected] the following lawyers. +1 202 263 3318 Ori Lev Anjali Garg [email protected] [email protected] +1 202 263 3270 +1 202 263 3419 Stephanie C. Robinson Christa L. Bieker [email protected] [email protected] +1 202 263 3353 +1 202 263 3438

Endnotes

1 BCFP, “Acting Director Mulvaney Announces Call for 10 Order, Cmty Fin. Srvs. Ass’n, Ltd. v. Consumer Fin’l Prot. Evidence Regarding Consumer Financial Protection Bureau Bureau, No. A-18-CV-0295-LY (W.D. Tex. Nov. 6, 2018). Functions” (Jan. 17, 2018), available at 11 BCFP, Fall 2018 Regulatory Agenda, available at https://www.consumerfinance.gov/about- https://www.reginfo.gov/public/do/eAgendaMain. us/newsroom/acting-director-mulvaney-announces-call- 12 BCFP, et al., “Interagency Statement Clarifying the Role of evidence-regarding-consumer-financial-protection- Supervisory Guidance” (Nov. 11, 2018), available at bureau-functions/. https://s3.amazonaws.com/files.consumerfinance.gov/f/do 2 Id. cuments/interagency-statement_role-of-supervisory- 3 Mick Mulvaney, The Wall Street Journal, “The CFPB has guidance.pdf. Pushed Its Last Envelope” (Jan. 23, 2018), available at 13 BCFP, Bulletin 2018-01, “Changes to Types of Supervisory https://www.wsj.com/articles/the-cfpb-has-pushed-its- Communications” (Sept. 25, 2018), available at last-envelope-1516743561. https://s3.amazonaws.com/files.consumerfinance.gov/f/do 4 This figure is based on the lesser amount imposed on cuments/bcfp_bulletin-2018-01_changes-to-supervisory- respondents after the Bureau deemed part of the payment to communications.pdf. The Bulletin explains that the Bureau be “satisfied.” will use Matters Requiring Attention to address violations of 5 Ori Lev, Mayer Brown Legal Update, “What’s in a Name? consumer financial law, remediation of harmed consumers, That Which We Called the CFPB Is Still Bringing UDAAP and weaknesses in compliance management systems Claims” (Oct. 25, 2018), available at (“CMS”) that examiners found are directly related to https://www.mayerbrown.com/Whats-in-a-Name-That- violations of law. The Bureau will use Supervisory Which-We-Called-the-CFPB-Is-Still-Bringing-UDAAP- Recommendations when examiners have not identified a Claims-10-25-2018/ violation of law but have observed weaknesses in CMS. The new category of Supervisory Recommendations signifies 6 Mulvaney, supra note 3. that the Bureau views that failure to have a CMS program 7 BCFP, “Statement on Payday Rule” (Jan. 16, 2018), available itself is not typically a violation of consumer financial law. at https://www.consumerfinance.gov/about- 14 BCFP, Supervisory Highlights, Issue 17, Summer 2018, us/newsroom/cfpb-statement-payday-rule/. available at 8 BCFP, Fall 2018 Regulatory Agenda, available at https://s3.amazonaws.com/files.consumerfinance.gov/f/do https://www.reginfo.gov/public/do/eAgendaMain. cuments/bcfp_supervisory-highlights_issue-17_2018- 9 BCFP, “Public Statement Regarding Payday Rule 09.pdf. Reconsideration and Delay of Compliance Date” (Oct. 26, 15 Id. 2018), available at 16 GAO, Letter to Hon. Patrick Toomey (Oct. 19, 2017), https://www.consumerfinance.gov/about- available at https://www.gao.gov/assets/690/687879.pdf. us/newsroom/public-statement-regarding-payday-rule- 17 reconsideration-and-delay-compliance-date/. It is unclear, however, what this means in the context of agency guidance. If agency guidance is an interpretation of

7 Mayer Brown | BCFP Year in Review existing statutes and regulations, and Congress repeals only Mayer Brown is a distinctively global law firm, uniquely positioned to the guidance/interpretation but not the existing statutes (or advise the world’s leading companies and financial institutions on their regulations, if applicable), it is possible that an agency could most complex deals and disputes. With extensive reach across four simply attempt to return to its initial stance (for instance, a continents, we are the only integrated law firm in the world with BCFP director could possibly refocus on indirect auto approximately 200 lawyers in each of the world’s three largest financial centers—New York, London and Hong Kong—the backbone lenders, using an approach similar to that announced in the of the global economy. We have deep experience in high-stakes BCFP’s 2013 Bulletin). litigation and complex transactions across industry sectors, including 18 Ori Lev and Anjali Garg, “BCFP’s Focus on Innovation our signature strength, the global financial services industry. Our diverse teams of lawyers are recognized by our clients as strategic Continues with Revival of the Disclosure Sandbox; partners with deep commercial instincts and a commitment to Comments are Due October 10, 2018” (Sept. 11, 2018), creatively anticipating their needs and delivering excellence in available at https://www.cfsreview.com/2018/09/bcfps- everything we do. Our “one-firm” culture—seamless and integrated focus-on-innovation-continues-with-revival-of-the- across all practices and regions—ensures that our clients receive the disclosure-sandbox-comments-are-due-october-10-2018/. best of our knowledge and experience.. Please visit www.mayerbrown.com for comprehensive contact 19 See, e.g., BCFP, “Semi-annual Report of the Bureau of information for all Mayer Brown offices. Consumer Financial Protection” (April 2018), available at Any tax advice expressed above by Mayer Brown LLP was not intended or written to be https://s3.amazonaws.com/files.consumerfinance.gov/f/do used, and cannot be used, by any taxpayer to avoid U.S. federal tax penalties. If such advice was written or used to support the promotion or marketing of the matter addressed cuments/cfpb_semi-annual-report_spring-2018.pdf. above, then each offeree should seek advice from an independent tax advisor.

20 This Mayer Brown publication provides information and comments on legal issues and 12 U.S.C. 5493(d). developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. 21 BCFP, supra note 19. Readers should seek legal advice before taking any action with respect to the matters discussed herein. Mayer Brown is a global services provider comprising associated legal practices that are separate entities, including Mayer Brown LLP (Illinois, USA), Mayer Brown International LLP (England), Mayer Brown (a Hong Kong partnership) and Tauil & Chequer Advogados (a Brazilian law partnership) (collectively the “Mayer Brown Practices”) and non-legal service providers, which provide consultancy services (the “Mayer Brown Consultancies”). The Mayer Brown Practices and Mayer Brown Consultancies are established in various jurisdictions and may be a legal person or a partnership. Details of the individual Mayer Brown Practices and Mayer Brown Consultancies can be found in the Legal Notices section of our website. “Mayer Brown” and the Mayer Brown logo are the trademarks of Mayer Brown. © 2018 Mayer Brown. All rights reserved.

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