Recent CFPB Ruling Ends ‘Rulemaking Through Enforcement’

A recent federal court ruling affirmed the Consumer Financial Protection Bureau’s place in the financial regulatory framework, but the decision also contained a victory for the business community.

“Rulemaking through enforcement efforts for past conduct is rejected,” Phil Schulman, a partner in the Washington, D.C. office of law firm Mayer Brown, said on a Thursday conference call. “The court was clear that the CFPB may not make rules through enforcement without providing fair notice and an opportunity for comment from the public.”

Initial reports on the January 31 ruling in PHH Corp. v. CFPB focused on the win for the government: Despite mortgage lender PHH’s objections, the Court of Appeals for the D.C. Circuit ruled that the bureau’s power has a constitutional basis and historical precedent. PHH had argued that the CFPB’s single-director format — with the leader removable only in cases of malfeasance or neglect of duty — gives the bureau far too much authority with little oversight.

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But Schulman noted that the 10-member court unanimously nullified the CFPB’s ability to institute penalties for actions without extensive warning and input from the general public.

“New interpretations may not be used to sanction companies for activities that were expressly permissible prior to the CFPB’s new interpretation,” Schulman said. “And the CFPB should be putting its views on these new interpretations out through … public notice and comment so the public understands the ground rules before the enforcement actions are initiated for that conduct.”

The conference call for journalists and other interested parties also touched upon the ongoing battle over the CFPB’s acting directorship, a position currently held by Office of Management and Budget director Mick Mulvaney. Leandra English, the CFPB’s deputy director, is currently attempting to challenge Mulvaney’s position and claim the acting director position for herself, citing the legal language that created the CFPB back in 2010.

The outcome of that case could also play into PHH’s legal strategy moving forward, according to Mayer Brown partner Andrew Pincus: If Mulvaney, Trump’s pick, emerges victorious, PHH may not see a need to appeal its case to the Supreme Court given the administration’s business-friendly policies.

But should the courts rule in favor of English, further limiting the president’s authority to control leadership at the CFPB, PHH could have a more compelling case for the Supreme Court.

Whatever the outcome of that drama, the PHH ruling reshaped the regulatory picture for financial companies.

“I think the PHH decision will have a profound impact on the CFPB’s efforts to go after companies for practices they disfavor when those practices were condoned or permitted by past administrations or agencies,” Schulman said.

Written by Alex Spanko

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  • Great move, this is another good move in controlling the outlandish power the CFPB has had since the inception of the “Financial Regulatory Reform Bill” (Dodd-Frank)!

    The sooner the Dodd-Frank bill can get repealed, the better off the entire financial system and industry will be.

    We need a common sense bill that does not put the American people in “Harms Way”! The Dodd-Frank bill does just that.

    I am not saying we don’t need some form of a financial regulatory reform bill, we do! I am also not saying that there are not some portions of the Dodd-Frank bill that are good and should be used.

    However, what I am saying is the Dodd-Frank bill needs to be completely repealed, NOT dissected but repealed in its entirety and we need to start from scratch!

    John A. Smaldone
    http://www.hanover-financial.com

    • John,

      We can close our eyes and childishly pretend that Dodd-Frank is not an Act (passed by each chamber of Congress and signed by the President into law) or we can work for needed change. Repeal solves little unless there is no appetite for financial institution reform.

      What we need is what to replace it with. Until that happens, what is needed is amendment and sections deleted until there is a bill to replace the current law of the land.

      Who cares about the name? “A rose by any other name….” Until a reform bill can be created and a majority (60 Senators in the Senate) in each chamber of Congress support it, then our Senators and Representatives need to sharpen their pencils and carve away.

      Repeal is irresponsible without replace. Even you seem to realize immediate replacement is required. Pragmatism and compromise must prevail for there to be any headway on this critical matter.

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