Just over a year ago, on December 6, 2018, the US Senate confirmed Kathy Kraninger as the next director of the Consumer Financial Protection Bureau (the "CFPB" or the "Bureau"), ending Mick Mulvaney's year-long tenure as acting director. While the Bureau's first director, Richard Cordray, was known for his aggressive enforcement of consumer financial law, Mick Mulvaney represented the other extreme and worked to limit the use of enforcement and roll back regulations promulgated by the Cordray Bureau. Kraninger has forged her own path and cannot be labeled as easily as either Cordray or Mulvaney. Under Kraninger, we have seen a sharp uptick in Bureau enforcement, as well as the surprising decision to no longer defend the constitutionality of the agency, a stance that was even too extreme for Acting Director Mulvaney. In this Legal Update, we take a closer look at the CFPB during the first year of Kraninger's leadership and discuss what to expect in the year ahead.
Leading an Unconstitutionally Structured Agency
Perhaps the most significant and surprising development of the Kraninger CFPB to date is the agency's conclusion that its structure is unconstitutional. The Bureau had previously taken the position that its structure was constitutional. Even under former Acting Director Mick Mulvaney, who once described the agency as a "sick, sad" joke,1 the Bureau defended its constitutionality, and, for the first nine months of Kraninger's tenure, the Bureau did the same.
The US Supreme Court will hear a case challenging the Bureau's constitutionality in March 2020. The challenge focuses on the fact that the agency is led by a single director who is appointed to a five-year term and is removable only for "inefficiency, neglect of duty, or malfeasance in office."2 That is, the director is removable only for cause and cannot be removed at will by the president. It is for this reason that Richard Cordray continued to serve as Bureau director nearly a full year into the Trump presidency.
It is understandable that the Bureau would want the courts to resolve the question of its constitutionality. The agency has faced repeated challenges to its structure for years, and, in testimony before the House Financial Services Committee, Kraninger explained that litigation over the Bureau's constitutionality has caused "significant delays to some of [the Bureau's] enforcement and regulatory actions."3 Indeed, the very case that the Supreme Court 2 Mayer Brown | One Down, Four to Go? A Look at Kathy Kraninger's First Year as CFPB Director and What is Ahead in 2020 will hear is a lawsuit brought by the CFPB to enforce a civil investigative demand it had issued back in February 2017, which has been held up due to the constitutional question.
The remedy for any constitutional problem may be to simply strike the "for cause" removal provision, allowing the Bureau to operate as usual on a going forward basis. Interestingly, this result would benefit a new Democratic administration if one were to take power in 2021. If the director is only removable for cause, Kraninger likely would serve a five-year term that would expire in December 2023. On the other hand, if the director is removable at will, a new administration could replace Kraninger in January 2021.
While the case is pending, the Bureau says that it can still take action even though it concedes that it is unconstitutionally structured. It continues to litigate, bring enforcement actions, draft rules, supervise entities and otherwise proceed with business as usual. Kraninger explained that her position is that "this question will not stop the Bureau from fulfilling our statutory responsibilities. We will continue to defend the actions that the Bureau takes now and has taken in the past."4
Uptick in Enforcement and Litigation
Under Mick Mulvaney, enforcement slowed significantly. Mulvaney announced only 11 new enforcement matters during his 12-and-a-half months as director compared to the 47 new cases Director Cordray announced in his final year as director. When Kraninger was confirmed, there was much speculation about whether she would follow in Mulvaney's footsteps and be reluctant to use the Bureau's enforcement authority.
Reviewing her first year, Kraninger has proven far more willing to use enforcement than Mulvaney. In her first year, Kraninger announced 22 new cases, double the number Mulvaney filed. Seventeen of these new cases have been resolved through settlement and an additional five are contested, demonstrating that Kraninger is willing to litigate cases the Bureau is unable to settle. Additionally, Kraninger settled several matters initially filed by Director Cordray. Somewhat surprisingly, the CFPB has continued to bring new enforcement matters, including by filing lawsuits, after announcing that it believes it is unconstitutionally structured.
Kraninger required civil money penalties ("CMPs") at a slightly higher rate than both Mulvaney and Cordray. Of the 17 new cases brought under Kraninger that the Bureau settled, about 94 percent involved a CMP; by comparison, about 70 percent of the new cases filed under Mulvaney that the Bureau settled and about 82 percent of the new cases filed and settled during Cordray's last year involved a CMP. The amount of the CMPs Kraninger imposed were also higher than those imposed by Cordray and Mulvaney, when we exclude the $1 billion CMP Mulvaney assessed in one case as an outlier. Of the 16 new cases Kraninger announced in her first year that she settled with a CMP, the average CMP was over $7 million. This compares to an average CMP of about $1.3 million for both the new cases Mulvaney announced that he settled with a CMP (excluding the $1 billion CMP) and for the new cases announced during Cordray's final year that he settled with a CMP.5 The Kraninger Bureau has been criticized, however, for failing to require consumer redress.
The industries targeted in the Bureau's enforcement actions over the last year are those that have been in the Bureau's crosshairs since its inception, including the mortgage servicing, debt collection, consumer reporting and student-lending industries. Similarly, the nature of the claims the Bureau has brought under Kraninger's leadership are like those brought under both Cordray and Mulvaney. Under Kraninger, the CFPB continued to exercise the Bureau's UDAAP ("Unfair, Deceptive or Abusive Acts or Practices") authority, bringing UDAAP claims in the majority of the enforcement actions announced during her first year.
1. Credit Union Times, "CFPB a 'Sick, Sad Joke': Onsite Coverage" (Sept. 10, 2014).
2. 12 U.S.C. § 5491(c)(3).
3. CFPB, "Remarks by Director Kathleen L. Kraninger before House Financial Services Committee" (Oct. 16, 2019), available at: https://www.consumerfinance.gov/aboutus/newsroom/remarks-director-kathleen-kraninger-beforehouse-financial-services-committee/.
5. To calculate the averages, we used any lesser amount imposed on respondents after the Bureau deemed part of the payment to be satisfied.
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