CFPB Has Ratified Most Existing Regulations, But Questions Remain

6 min

On July 7, 2020, the Consumer Financial Protection Bureau (CFPB) announced the ratification by Director Kathleen Kraninger of "most" of its prior regulatory actions. However, the CFPB excepted rules regarding arbitration agreements and small-dollar lending from its omnibus ratification, while issuing on the same day a separate ratification of the payments provisions of the small-dollar-lending rule. The Bureau left the status of pending enforcement actions uncertain, declining to include such actions within the omnibus ratification but indicating that some may be ratified on an ad hoc basis in the future.

Legal Background: Smooth Sailing After Seila?

The CFPB's ratifications were issued in reaction to the Supreme Court's June 29, 2020 decision in Seila Law v. CFPB. In Seila Law, the Court held that the statutory provision protecting the CFPB director from removal except on the basis of "inefficiency, neglect of duty, or malfeasance in office" was unconstitutional, but that this provision was "severable from the other statutory provisions bearing on the CFPB's authority." The Court's ruling left the agency free to operate, albeit with the director now removable at will by the president. However, it cast into doubt the validity of actions taken by the CFPB under directors who served under the protection of the unconstitutional for-cause provision—specifically, former director Richard Cordray and, until the Court's ruling in Seila Law, Kraninger.

This is not the first time that the CFPB has relied upon ratification to cure a constitutional defect. After the Senate confirmed Cordray as director, the Bureau issued a blanket ratification of all actions taken during Cordray's service as a recess appointee, in order to "avoid any possible uncertainty" regarding the legal authorization for such actions. Although the Supreme Court later held in NLRB v. Noel Canning, that Cordray's recess appointment had in fact been unconstitutional, the Ninth Circuit upheld the CFPB's ratification of actions taken while Cordray served as a recess appointee. See CFPB v. Gordon, 819 F.3d 1179, 1185–86 (9th Cir. 2016). In Seila Law itself, the CFPB argued before the Ninth Circuit—and Court-appointed amicus Paul Clement argued before the Supreme Court—that former acting director Mick Mulvaney had ratified the civil investigative demand issued to Seila Law under Cordray, as well as the subsequent suit to enforce it. According to this argument, since Mulvaney had never been nominated by the president and confirmed by the Senate, he had never enjoyed the protection of the unconstitutional for-cause removal provision.

However, the Supreme Court declined in Seila Law to rule upon the efficacy of Mulvaney's alleged ratification. Noting that the parties disputed both the factual reality of Mulvaney's alleged ratification and its legal sufficiency—especially since Kraninger had litigated the case after inheriting it from Mulvaney—the Court remanded the case for the Ninth Circuit to "consider whether the civil investigative demand [issued to Seila Law] was validly ratified" by Mulvaney. Id. (slip op., at 36). Yet, even given this uncertainty regarding its efficacy, ratification remains the CFPB's best hope of preventing the Seila Law decision from potentially nullifying actions taken either under Cordray or under Kraninger prior to the decision.

The CFPB's Ratifications

The omnibus ratification announced by the CFPB on July 7, 2020 encompasses "a number of previous actions by the Bureau," including "the large majority of the Bureau's existing regulations, as well as certain other actions." These "other actions" ratified by the CFPB include all consumer information publications issued by the Bureau under Regulation X, 12 CFR part 1024, and Regulation Z, 12 CFR part 1026, and all notices titled "Fair Credit Reporting Act Disclosures."

At the same time, the CFPB excluded two rules from its omnibus ratification of regulations: the July 2017 Arbitration Agreements rule and the November 2017 rule regarding small-dollar lending (the Payday, Vehicle Title, and Certain High-Cost Loan Installments Rule). The Bureau explained that the Arbitration Agreements rule had previously been disapproved by Congress and the president under the Congressional Review Act. With respect to the small-dollar-lending rule, the Bureau noted that it has revoked the rule's mandatory underwriting provisions. Moreover, the entire rule is subject to litigation, and its compliance date has been stayed.

Instead of including the small-dollar-lending rule within the omnibus ratification, the CFPB issued a separate ratification of the rule's payments provisions. These provisions govern the withdrawal by lenders of payments for covered loans from consumers' bank accounts. In particular, they prohibit lenders from making a new attempt to withdraw funds from an account where two consecutive attempts have failed, unless consumers consent to further withdrawals. They also require lenders to provide written notice to consumers before making their first attempt to withdraw payments from consumers' accounts and before any subsequent attempts that involve different dates, amounts, or payment channels.

Lingering Questions

Notably, the CFPB's omnibus ratification does not cover enforcement actions. Instead, the Bureau stated that it is "considering whether ratifications of certain other legally significant actions by the Bureau, such as certain pending enforcement actions, are appropriate," and that it will make such ratifications separately where it concludes that ratification is in fact appropriate. For example, on July 6, the CFPB filed an ad-hoc ratification in Bureau of Consumer Protection v. Forster & Garbus, LLP, an enforcement action pending in the Eastern District of New York. The court in Forster & Garbus had administratively closed the case pending the outcome of Seila Law. In the wake of the Supreme Court's ruling affirming that the CFPB can continue to operate, the Bureau sought leave to reopen the Forster & Garbus case, attaching a declaration from Kraninger ratifying the decision to file the lawsuit.

In some cases, companies have challenged the Bureau's authority to ratify enforcement actions that it initiated against them prior to Seila Law. For example, in a July 13 letter to the Second Circuit Court of Appeals, RD Legal Funding LLC argued that the CFPB could not validly ratify its suit against RD Legal, initiated in 2017, because the CFPB did not have the authority to "do the act ratified at the time the act was done." RD Legal further argued that the Bureau's attempted ratification was ineffective because the time for appeal had lapsed. Similarly, in a July 10 brief, Navient argued that the CFPB's attempted ratification in its case, pending in the Middle District of Pennsylvania, was invalid because the statute of limitations had expired.

Meanwhile, the Bureau asserted in the omnibus ratification that it is not "necessary for this ratification to include various previous Bureau actions that have no legal consequence for the public, or enforcement actions that have been finally resolved." The ratification also leaves open the status of issues working their way through the CFPB supervision process.

Perhaps the most significant unresolved question concerns how the Bureau will ultimately treat pending enforcement actions beyond those for which it has already issued ratifications. Although the announcement leaves open the possibility that at least some pending enforcement actions may not be ratified, the odds of changes for some such actions are low given that the current CFPB leadership has already had ample time to weigh in on them individu