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07/19/2018

CFPB’S Arbitration Rule Under Scrutiny in Report from Cause of Action Institute

Washington, DC – July 19, 2018 – Cause of Action Institute (CoA Institute) today released a report on the failure of the Consumer Financial Protection Bureau (CFPB) to conduct a proper study on its arbitration rule, which banned certain corporations from using pre-dispute arbitration clauses in their consumer credit contracts. CoA Institute Case Study on the CFPB’s Arbitration Rule: How the Bureau Evaded Scientific Guidelines and Bypassed Peer Review—And How to Fix It examines the failings of the arbitration study and offers solutions to ensure future policy is informed by sound science.

The rule was overturned by Congress and President Trump in February of 2018, but lasting change is needed to CFPB’s analytical approach to prevent future rules from being based on weak science. President Trump nominated Kathy Kraninger as the new potential CFPB director and, just today, July 19, she had her nomination hearing. If confirmed, she needs to immediately take steps to ensure that the CFPB follows the law when conduct future studies and promulgating rules.

CoA Institute attorney Eric R. Bolinder said, “The CFPB not only had to adhere to the orders of Congress in Dodd-Frank to do the study, it was also required to follow the Information Quality Act and Office of Management and Budget guidelines on peer review. The Bureau ignored both. Accountability is needed to keep this too-powerful agency in check.”

As CoA Institute’s report explains:

In the Dodd-Frank Act, Congress delegated to the CFPB the power to study and regulate, if necessary, mandatory-binding arbitration clauses in consumer financial contracts. This power came with an important caveat: the CFPB must first conduct a study on the effect arbitration clauses have on consumers, and any regulation promulgated by the agency must be based on that study. The CFPB already had the goal in mind to regulate and ban these arbitration clauses, driven largely by internal bias and promoted by third-party interests. Instead of conducting an objective study backed by peer-reviewed data, the agency sought a pre-determined result, abusing junk science and methodology to get there.

See the report and more about this issue here.

For any media inquiries, contact media@causeofaction.org.

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07/19/2018

CoA Institute Case Study on the CFPB’s Arbitration Rule: How the Bureau Evaded Scientific Guidelines and Bypassed Peer Review—And How to Fix It

 

Executive Summary

The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) is an agency unlike most any other in the history of the United States.  It possesses untold power over the American people and businesses, and the heft of this power is in a single agency director accountable to no one.  As Judge Kavanaugh of the U.S. Court of Appeals for the D.C. Circuit held in a since-vacated decision, “the Director enjoys more unilateral authority than any other officer in any of the three branches of the U.S. Government, other than the President.”[1]

In the Dodd-Frank Act of 2010, Congress delegated to the CFPB the power to regulate, if necessary, mandatory-binding arbitration clauses in consumer financial contracts.  This power came with an important caveat: the CFPB must first conduct a study on the effect arbitration clauses have on consumers, and any regulation promulgated by the agency must be based on that study.  Yet the CFPB already had the goal in mind to regulate and ban these arbitration clauses, driven largely by internal bias and promoted by third-party interests.  Instead of conducting an objective study backed by peer review, the agency sought a pre-determined result, abusing junk science and methodology to get there.  In doing so, it ignored the requirements of the Information Quality Act (“IQA”) and the ensuing Office of Management and Budget (“OMB”) bulletin requiring agency peer review.  This paper examines the failings of the arbitration study and offers solutions to the potential new agency head to ensure future policy is informed by sound science.

Recommendations

The best way to curtail the CFPB’s abuse of junk science is to force the agency to follow the standards contained within the IQA and the OMB peer review bulletin.  If the CFPB were to strictly adhere to the IQA’s standards of data quality—objectivity, integrity, and utility—and conduct rigorous, academic peer review, outcomes like the one detailed in this paper would be avoided.

Cause of Action Institute (“CoA Institute”) recommends that the new CFPB Director, once confirmed, immediately institute rulemaking actions to codify these already-mandatory requirements of the IQA and peer review.  This should apply to all studies or scientific findings released by the agency, whether they undergird a rule or not.[2]  Although the Director could just order agency personnel to follow these directives through a memorandum, that would only be a temporary solution.  Rulemaking under the Administrative Procedure Act (“APA”) would ensure that these science-based requirements have more permanence and apply regardless of who is running the agency five years from now.[3]  Furthermore, the new Director should require, whether through rulemaking or otherwise, that all published scientific findings be accompanied by full disclosure of outside datasets, sources, and lobbying.

Eric Bolinder is Counsel at Cause of Action Institute

[1] PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1, 7 (D.C. Cir. 2016), vacated on reh’g en banc, 881 F.3d 75 (D.C. Cir. 2018); see Consumer Fin. Prot. Bureau v. RD Legal Funding, LLC, No. 17-890, 2018 WL 3094916, at *35 (S.D.N.Y. June 21, 2018) (“Respectfully, the Court disagrees with the holding of the en banc court and instead adopts Sections I-IV of Judge Brett Kavanaugh’s dissent[.]”).
[2] This, of course, would extend to any scientific findings that are part of a proposed rule.
[3] A future Director could institute rulemaking to reverse the requirements, but that is a cumbersome process subject to judicial review.

 

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04/18/2018

Senate Overturns CFPB “Guidance” Document

The Senate has overturned a CFPB “guidance” document that was for all intents and purposes a regulation. This repeal was effected by the Congressional Review Act (“CRA”) which allows the Congress to overturn regulations within 60 days of the later of the regulation being sent to Congress or being published in the Federal Register. As I wrote for the Hill in March of last year, the CRA’s evasion of the filibuster invites a deregulatory agenda by the Congress that need not be blocked by partisan divisions or the filibuster. As we noted on this website at that time there are many, many such regulations. With the wise test of a “guidance document” by Senator Toomey more avenues for reform open up.

I have remarked on the threat to the Rule of Law and our Constitutional structure by the CFPB before. One of its previous high-handed regulations has already been removed by a similar use of the CFPB to our applause. The various federal agencies’ attempts to rule by letter and by guidance have been brushed back here and there. But they remain a troubling bureaucratic subversion of the fundamental separation of powers created to protect and empower American liberty.

John J. Vecchione is president and CEO at Cause of Action Institute.

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02/7/2018

CFPB’s Constitutionality Problem: Who’s Afraid of the Big Bad Wolf?

Who’s Afraid of the Big Bad Wolf?

Could a dispute over the constitutionality of the Consumer Finance Protection Bureau (“CFPB”) overturn a thirty-year-old Supreme Court precedent and vindicate the late Justice Antonin Scalia in one of his most famous dissents?  On the last day of January, the D.C. Circuit issued an opinion on the structure of that controversial independent agency:  PHH Corporation, et. al., v. CFPB, No. 15-1177 (D.C. Cir., January 31, 2018) en banc.   This opinion, with concurrences and dissents, is two hundred fifty pages long.  There is an awful lot to unpack, but this post will only focus on one glaring precedent that jumps out from the Opinion and every concurrence and dissent:  Morrison v. Olson, 487 U.S. 654 (1988)

In a quick review, I counted 43 citations of it in the Opinion, 12 in a concurrence and 40 times in the dissents (many of these were to Scalia’s lone dissent).  There is only one Justice now on the Court who was on the Court when Morrison was decided.  But Justice Kennedy took no part in consideration of the case.  Of all the protagonists, only Kennedy and Ted Olson (the Olson in the caption and also counsel for PHH) are still in the picture.

In a nutshell, the majority and the concurrences rely on Morrison v. Olson for the proposition that the “independent” nature of the head of the CFPB is constitutional.  Not unreasonably, Judge Pillard and her majority believe that case is binding and it allows a single administrator insulated from at-will dismissal by the President.  The dissents believe they have distinguished that case and another older precedent, and the combination of insulation from Congress and from the Executive makes the CFPB different and worse from other agencies whose structures have been upheld in the past.  Judge Kavanaugh puts his finger on the shaky foundation upon which the majority builds. In footnote 3 of his dissent he notes:

Recall, moreover, that the independent counsel experiment ended with nearly universal consensus that the experiment had been a mistake and that Justice Scalia had been right back in 1988 to view the independent counsel system as an unwise and unconstitutional departure from historical practice and a serious threat to individual liberty. See Morrison v. Olson, 487 U.S. 654, 699 (1988) (Scalia, J., dissenting) (“this wolf comes as a wolf”); see also Stanford Lawyer 4 (Spring 2015) (quoting Justice Kagan’s statement that Justice Scalia’s dissent in Morrison is “one of the greatest dissents ever written and every year it gets better”). The independent counsel experience strongly counsels against single-Director independent agencies.

Scalia’s famous “called shot” of the trouble such a statute would cause has echoed down the years and is one reason why the Independent Counsel statute was not renewed.  It is also telling that when Morrison was decided the renaissance of originalism, textualism and the focus on separation of powers were in their infancy.  Now, a generation and a half of scholars and judges have grown up reading Scalia’s dissent.  Its most famous passage is:

Frequently an issue of this sort will come before the Court clad, so to speak, in sheep’s clothing: the potential of the asserted principle to effect important change in the equilibrium of power is not immediately evident, and must be discerned by a careful and perceptive analysis. But this wolf comes as a wolf.

I have little doubt this case will be before the Supreme Court before long, and Scalia (and Olson) might at long last be vindicated on the nature of the Executive and on separation of powers in the Constitution.

John J. Vecchione is president and CEO at Cause of Action Institute.

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01/31/2018

Records show Richard Cordray scrambled in final days to name successor, thwart Trump’s nominee

The last-ditch coup by Richard Cordray was orchestrated despite apparent pushback from CFPB’s top attorney

Cause of Action Institute (“CoA Institute”) has uncovered documents that reveal Richard Cordray and his lieutenants, in Cordray’s last days as director of the Consumer Financial Protection Bureau (“CFPB”), scrambled to plan a gambit to usurp the president’s appointment authority and allow Cordray to name his own successor.

Cordray announced on November 15, 2017 that he would be stepping down as director of the CFPB, presumably to run for governor of Ohio.  Later that same day, the president announced his intention to appoint an acting director until a new director could be nominated and approved by the Senate.  Here’s where things get interesting.  On November 24, 2017, Cordray named the agency’s chief of staff, Leandra English, as the deputy director of the CFPB.  Then, he announced his resignation and tapped English as the acting director.

President Trump ignored this attempted unlawful action and appointed his own acting director, Mick Mulvaney.  Then the next day, the general counsel of the CFPB issued an opinion supporting the president and holding Mulvaney as the acting director.

Accordingly, as General Counsel for the Bureau, it is my legal opinion that the President possesses the authority to designate an Acting Director for the Bureau under the FVRA, notwithstanding § 5491(b)(5).

English, however, refused to back down, creating the absurd situation where a government agency had two people claiming to be acting director.  She sued in federal court, asking Judge Timothy Keller to make her acting director.  The court, however, denied her request, holding that “[d]enying the president’s authority to appoint Mr. Mulvaney raises significant constitutional questions.”  The agency, relying both on the opinion of its general counsel and the court’s decision, has recognized Mulvaney as the leader.  The Court case continues.  What follows is the result of CoA Institute’s investigation into the final weeks of Cordray’s tenure as director.

Internal CFPB communications reveal that on November 15, the date Richard Cordray announced his intent to retire, English forwarded Cordray a Politico Pro email that contained a report of the president’s intention to appoint an acting director.  A number of top CFPB employees were CC’d on this email, including General Counsel Mary McLeod.

The next substantial action came on November 22, when “RC” (presumably Richard Cordray) circulated an article from creditslips.com that outlines a legal argument for Cordray to appoint his own successor. Just two minutes later, Cordray sent another article from theintercept.com which, relying on the creditslips.com article, posits that David Silberman, then acting deputy director, should succeed Cordray.  The article notes “[t]he legal argument that Silberman would become interim director would be greatly improved if Cordray officially named him deputy director[.]”  CC’d on both these emails is General Counsel McLeod.  The full subject of Cordray’s email includes the line: “Mary [McLeod], need you to have people consider it further please[.]”

On the day of the formal resignation, November 24, documents revealed a scramble inside CPFB to properly time the gambit.  In an email thread titled “Possible presser” sent between Zixta Martinez, associate director for external affairs, Jennifer Howard, assistant director for communications, Kate Fulton, deputy chief of staff,[1] Cordray, and English, the group appears to discuss a document that is distinct from Cordray’s formal resignation announcement.  The group is concerned about the resignation going out before this “presser” document which, presumably, was the announcement of Leandra English as deputy director.

Later that day, in Cordray’s final letter to the staff, he made public his intention to name Leandra English as deputy director and his self-proclaimed successor.  The email below reveals that the agency wanted to wait until virtually the last minute to put this all into process.

Cordray’s team grappled with when, and in what order, to update the website.

And, finally, discussion of the order of the email to staff and the resignation letter.

English confirms:

The general counsel, Mary McLeod, was obviously aware that this is all going on, given that she was CC’d on virtually all of these emails, including the one above.  Yet, in the biggest blow to Cordray’s gambit, General Counsel McLeod sends a letter memo to the CFPB Leadership Team the very next day, November 25, with a concrete conclusion:

I advise all Bureau personnel to act consistently with the understanding that Director Mulvaney is the Acting Director of the CFPB . . . . Accordingly, as General Counsel for the Bureau, it is my legal opinion that the President possesses the authority to designate an Acting Director for the Bureau under the FVRA, notwithstanding § 5491(b)(5).

Elsewhere in her letter, McLeod states, “[t]his confirms my oral advice to the Senior Leadership team[.]”  Oral advice that the team ignored when they tried to install English.

To make matters worse, English continued to send emails claiming to be the Acting Director.  The first came in an email to the Senior Leadership Team, which included the General Counsel.

She made the same claim in an email to the staff of Senator Elizabeth Warren:

And finally in a staff-wide email.

This brazen attempt to commandeer an entire agency threatens the Constitutional Order.  Were Richard Cordray and Leandra English successful, they would have essentially created an agency that fell outside of any of the three branches of government.  As D.C. Circuit Court of Appeals Judge Brett Kavanaugh stated, the Director of the CFPB holds “enormous power over American business, American consumers, and the overall U.S. economy. [ ] The Director alone decides what rules to issue; how to enforce, when to enforce, and against whom to enforce the law[.]”[3]  Judge Kavanaugh concluded, “the Director enjoys more unilateral authority than any other officer in any of the three branches of the U.S. Government, other than the President.”[4]  Deciding who wields such awesome power should not happen in a series of harried emails between bureaucrats.  It should be decided by the President[5] and, when a permanent successor is ultimately named, the Senate confirmation process.[6]

Eric Bolinder is counsel at Cause of Action Institute.

 

[1] According to LinkedIn.

[3] PHH Corp v. Consumer Fin. Prot. Bureau, 839 F.3d 1, 7 (D.C. Cir. 2016), vacated and granted en banc review, Feb. 16, 2017.  The D.C. Circuit granted en banc review for this case, which automatically vacates Judge Kavanaugh’s opinion.  A decision is still pending.

[4] Id.

[5] See U.S. Const. art. II, § 3, cl. 2. (the Appointments Clause).

[6] This author would like to note he agrees with Judge Kavanaugh that the overall structure of the CFPB is unconstitutional, regardless of who appoints the Director.

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12/13/2017

John Vecchione discusses CFPB “Dumbledore’s Army” on KZIM’s Morning News Watch

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12/6/2017

CoA Institute Investigates CFPB’s ‘Dumbledore Army’ Using Encrypted Messaging Apps to Thwart Transparency

Washington D.C. – Cause of Action Institute (“CoA Institute”) today filed a Freedom of Information Act (“FOIA”) request after media reports identified a number of career employees at the Consumer Financial Protection Bureau (“CFPB”) who use encrypted messaging apps to communicate about ways to resist changes under newly Trump-appointed acting director Mick Mulvaney. The group reportedly refers to itself as Dumbledore’s Army, a nod to a fictional resistance movement in the Harry Potter novels.

CoA Institute Counsel Eric Bolinder: “A number of CFPB employees are reportedly using encrypted apps on their phones to evade transparency laws and conceal their communications from oversight. Under the Federal Records Act, the CFPB has a legal obligation to preserve all records made by employees working on official government business. Congress and the public have a right to know if federal employees are intentionally evading transparency in order to resist changes under CFPB’s new leadership.”

A December 5, 2017 article by the New York Times reported that CFPB employees are communicating among themselves using encrypted messaging applications:

An atmosphere of intense anxiety has taken hold, several employees said. In some cases, conversations between staff that used to take place by phone or text now happen almost exclusively in person or through encrypted messaging apps.

It is unknown whether these employees discuss work-related issues using their CFPB-issued or personal devices. Under the Federal Records Act, the CFPB has a legal obligation to preserve records evidencing employees working on government business, no matter the medium of their communication.

CoA Institute’s FOIA seeks all records reflecting the number of CFPB devices on which encrypted messaging applications were installed, internal policy guidelines on the use of such apps, as well as the communications themselves and efforts by CFPB to recover and archive these messages. The FOIA also specifically requests all communications that contain the words “Dumbledore,” “Dumbledore’s Army,” “Snape,” “Voldemort,” and “He-who-shall-not-be-named,” among other records.

The full FOIA can be found here.

For information regarding this press release, please contact Zachary Kurz, Director of Communications at CoA Institute: zachary.kurz@causeofaction.org.

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