Is the end of regulatory extortion near?

In early November, the Consumer Financial Protection Bureau ("CFPB"), submitted a writ of certiorari to the U.S. Supreme Court. The agency asks the high court to void a ruling by the U.S. Court of Appeals for the Fifth Circuit, which held that the Bureau's funding structure violates the Appropriations Clause of the Constitution. 

"The CFPB also asks the court to consider the 5th Circuit's decision to vacate the agency's 2017 final rule covering "Payday, Vehicle Title, and Certain High-Cost Installment Loans" on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding," Buckley LP notes in an analysis.

This is not the first time that the CFPB's unique structure, the brainchild of Senator Elizabeth Warren (D-MA) and other progressives, has been challenged in court.  The CFPB is perhaps the most aggressive progressive effort to use regulators to attack the private sector, ostensibly on behalf of consumers. But in this case, maybe Senator Warren overreached.

In 2020, the Supreme Court rejected Senator Warren's effort to isolate the CFPB from the Executive Branch. The court held that allowing the sole director of the CFPB to be removed for cause only was a violation of the separation of powers. The court stated the CFPB director must be an at-will employee of the President.

The question of the agency's funding, however, is not as easy to fix as the issue of accountability to the White House.  If the court either declines to hear the case or rules against the CFPB outright, then the agency may be effectively crippled and the legal enforceability of its orders and fines since inception will be called into question.  

"The Fifth Circuit found that Congress improperly and unconstitutionally ceded control over the CFPB's budget by allowing it to self-fund directly from the Federal Reserve," note Anthony DiResta and Luis Garcia at Holland and Knight. "This funding structure, the Fifth Circuit found, rendered the CFPB no longer accountable to Congress and the people."  Today the CFPB is unable to enforce its orders within the Fifth Circuit.

Killing the CFPB is unlikely to cause many tears in the housing industry.  Since its creation in 2010, the CFPB terrorized the mortgage industry, often without any documented reason or evidence of consumer harm. In 2017, for example, the CFPB sued Ocwen Financial after the company refused to pay an additional $1 billion fine demanded by then-director Richard Cordray for alleged errors in calculating escrow balances.

Ocwen ultimately won the litigation against the CFPB in 2021, a rare instance of a mortgage company publicly fighting for its rights against this entirely unaccountable federal agency. Cordray left the CFPB later in 2017 for an unsuccessful run for governor in Ohio. The attack on Ocwen and its shareholders was entirely unwarranted, and caused an adverse reaction by Ginnie Mae and scores of states, none of which had any evidence of error or consumer harm by the issuer.  It took years for Ocwen to resolve the legal mess created by Cordray's erroneous and politically motivated accusations.

Since the creation of the CFPB, dozens of banks and mortgage firms have been subject to fines or endless enforcement actions that can only be described as regulatory blackmail.  While there is rarely any evidence of actual error by the issuer or harm to consumers – any consumers – in CFPB actions, most mortgage firms are cowed into settlements and silence, two troubling hallmarks of the progressive inquisition.

And the CFPB is not the only federal agency guilty of such unfair treatment. In October 2021, the Office of the Comptroller of the Currency (OCC) issued a Consent Order against Cenlar FSB of Ewing, N.J.  The order was approved by acting Controller Michael J. Hsu, who has a penchant for issuing press releases. As with the Ocwen case, there was no consumer harm or even any evidence of error by the large residential servicer. 

One industry CEO who is not silent is Bruce Rose, founder and CEO of lender, distressed servicer and asset manager Carrington Mortgage. In a statement issued this month after settling a dispute with the CFPB, Rose made clear that the agency's process was entirely unfair and lacking in basic accountability.

"In trying to help borrowers affected by the COVID-19 pandemic, Carrington acted in good faith and focused on delivering a benefit to consumers," said Rose. "The settlement does not demand additional consumer remediation, which reflects the lack of consumer harm in this matter."

Sources: MBA, FDIC

Rose added: "The CFPB's use of extortion tactics as its primary tool for regulation does nothing to help the industry or consumers. Ultimately, it is consumers who eventually pay more because of the additional regulatory costs imposed on lending and servicing."

Given the recent rulings by the Court, the CFPB is not seen as having great chances of success in its appeal. "A request for a hearing before the Supreme Court [is] perhaps the best of the CFPB's not-great options," notes Ian Katz of Capital Alpha Partners.  

Yet leaving aside the structure of CFPB funding, a larger threat is approaching all of the federal consumer agencies from the CFPB created by Dodd-Frank going back a century to the New Deal.

"In 1984, the Supreme Court ruled, in Chevron v. Natural Resources Defense Council, that when the language of statutes enacted by Congress is ambiguous, federal agencies are entitled to interpret it as they see fit, as long as their interpretations are not unreasonable," writes Harvard Professor Cass Sunstein in the New York Review of Books.

Over the forty years since the court ruled, conservatives have come to loath the Chevron decision, arguing that federal agencies like the CFPB have become entirely politicized. Conservatives hope that the court soon will roll back the administrative state.

Early signs of this seismic movement came during the COVID lockdown, when the Supreme Court voided an OSHA mandate for vaccination and later struck down the CDC's mask mandate. In both cases, the court did not even refer to Chevron, suggesting to some observers that the doctrine may already be dead.

"If the modern administrative state is a constitutional disgrace, the Chevron doctrine, which increases agency power, starts to look impossible to defend," Sunstein writes.  "Among conservatives on the Supreme Court today, there's a lot of anti-Chevron sentiment. Justice Clarence Thomas, who once applied Chevron with zest, now believes that it is inconsistent with the Constitution."

As the mortgage community goes into the holiday season for year-end 2022, they can take some comfort from the fact that a decade of regulatory abuse and intimidation by the CFPB may soon end. Republican control of the House of Representatives means that CFPB could be sidelined for years.

But the big hope for 2023 and beyond lies with the possibility that the Supreme Court will eventually discard the Chevron doctrine. This would force Congress to specifically legislate on every significant action taken by federal regulatory agencies.  

In the event, Senator Warren's designs for protecting the CFPB will be defeated. Blessed gridlock will come to the world of consumer regulation. And the mortgage industry will finally get some relief after a decade of extortion by aspiring progressive politicians.