1 John L. Culhane, Jr., PartnerRegulatory Round up Federal Efforts Impacting Student Loan Servicing and Collections NCHER Spring Convention June 7, 2017 Clearwater Beach, FL John L. Culhane, Jr., Partner Consumer Financial Services Group Ballard Spahr LLP Copyright 2017 by Ballard Spahr LLP
2 Overview – A Hostile ClimateRepublican administrations usually oppose federal regulation, but this one has been particularly hostile During the campaign candidate Trump promised on numerous occasions to dismantle Dodd-Frank Likewise candidate Trump promised to role back federal regulations Recall that Steve Bannon said that this administration’s goal is “deconstruction of the administrative state” The attack on federal regulations has been waged in the executive, legislative, and judicial branches
3 Executive Action
4 Executive – Memos & Executive OrdersThe “Regulatory Freeze” Memo (January 20, 2017) Memo from Reince Preibus, Assistant to the President and Chief of Staff Told agency heads to refrain from sending rules to the Office of the Federal Register Likewise told agency heads to withdraw any rules that had been submitted but had not yet been published Also told agency heads to postpone the effective date of any rules that had been published but had not yet taken effect Independent agencies “encouraged” to participate in the regulatory freeze
5 Executive – Memos & Orders (cont.)Executive Order – Reducing Regulation and Controlling Regulatory Costs (January 30, 2017) The so-called “two for one” order Requires an agency to identify two regulations to be repealed for each new regulation proposed Sets a “zero incremental cost” limit on all new regulations, including repealed regulations Requires the Director of OMB to set a total amount of incremental costs for each agency for the next fiscal year Independent regulatory agencies again “encouraged” to comply with these standards
6 Executive – Memos & Orders (cont.)Executive Order – Core Principles for Regulating the United States Financial System (February 3, 2017) Order requires Treasury to consult with FSOC, including CFPB, and report on compliance with core principles, including: Empowering Americans to make independent financial decisions and informed choices Fostering economic growth and vibrant financial markets through more rigorous regulatory impact analysis Making regulation efficient, effective, and appropriately tailored Restoring public accountability within Federal financial regulatory agencies and rationalizing the regulatory framework
7 Executive – Memos & Orders (cont.)Additional Executive Orders and Presidential Memoranda Executive Order – Enforcing the Regulatory Reform Agenda (February 24, 2017) Executive Order – Comprehensive Plan for Reorganizing the Executive Branch (March 13, 2017) Executive Order – Identifying and Reducing Tax Regulatory Burdens (April 21, 2017) Presidential Memorandum regarding Dodd Frank Orderly Liquidation Authority (April 21, 2017) Presidential Memorandum regarding Financial Stability Oversight Council (April 21, 2017)
8 Legislative Action
9 Legislative – Congressional Review ActCRA requires every agency to report on almost every rule Must include a copy, a summary, and the proposed effective date Must also include a cost-benefit analysis Rule cannot take effect until the later of Sixty legislative days after receipt by Congress Sixty days after publication in the Federal Register Congress can pass a joint resolution of disapproval Disapproval blocks the rule absent a Presidential veto Congress can still override any veto (not an issue here)
10 Legislative – CRA (cont.)Disapproval precludes issuance of any similar rule Rule may not be reissued in substantially the same form No gloss on “substantially the same” New rule may not be issued unless separately authorized by law Actions under the CRA are not subject to judicial review Disapproval by Congress is not reviewable An agency’s failure to comply may not be reviewable Two circuit courts have rejected CRA challenges to rulemaking One federal district court has upheld a CRA challenge Joint statement by Congressional sponsors favors court review
11 Legislative – CRA (cont.)Fourteen resolutions of disapproval have been passed and signed into law by President Trump A wide range of agency rules have been rejected to date, including the broadband privacy rule One Dodd Frank rule issued by the SEC has been rejected Disclosure of government payments to energy companies Two Department of Education rules have been rejected Accountability and state plan provisions under the ESSA Standards for teacher preparation under the HEA
12 Legislative – CRA (cont.)A GSA rule banning arbitration has been rejected GSA rule required federal contracting officers to make sure that contractors did not mandate arbitration for certain claims Some rules thought to be targets have not been rejected Department of Education borrower defense to repayment rule was not rejected No CFPB rule has been rejected so far; resolutions to reject the prepaid card rule were introduced in February but did not pass S.J. Res. 19 H.J. Res. 62 and H.J. Res. 73
13 Judicial Action
14 Judicial – The PHH Case D.C. Circuit court panel rules on October 11, 2016 that the CFPB is unconstitutional because “too independent” CFPB has authority to conduct investigations, bring enforcement actions, and impose fines and penalties CFPB is insulated from Congressional influence because its budget is automatically funded by the Federal Reserve CFPB is insulated from Presidential influence because the Director has a five-year term and is removable only “for cause” Remedy is to sever “for cause” and allow the President to remove the Director at will Remedy seems to make the CFPB an executive agency
15 Judicial – The PHH Case (cont.)On November 18, 2016, CFPB files petition with the DC Circuit seeking en banc review of the decision At the invitation of the DC Circuit, on December 22, 2016, the DOJ files a brief in support of the CFPB’s petition DC Circuit grants CFPB petition seeking en banc review on February 16, 2017, vacating the panel decision On March 3, 2017, DOJ files an “unopposed” motion for leave to submit an amicus brief by March 17, 2017 PHH brief filed on March 10, 2017 argues that the CFPB should be completely dismantled
16 Judicial – The PHH Case (cont.)Amicus brief filed by DOJ on March 17, 2017 reverses course and argues that The CFPB’s structure makes it unconstitutional The “for cause” removal provision should be severed from the statute The court has the discretion to reach the constitutional issue and should do so DOJ describes the change as resulting from further review of the panel decision and reconsideration of the issues
17 Judicial – The PHH Case (cont.)Oral argument in DC Circuit held on May 24, 2017 Predictions based on the oral argument have been mixed Case has interesting implications for CFPB litigation Section 1054 of Dodd Frank generally requires the CFPB to notify the Attorney General when bringing a civil suit Section 1054 may require the CFPB to notify the Attorney General if sued over any regulation it issues Section 1054 also appears to give the Attorney General veto power over CFPB petitions for Supreme Court review
18 CFPB Reaction
19 CFPB Reaction Only direct public statements are made by Director Cordray during a WSJ forum on January 24, 2017 Cordray says that the change in administrations “shouldn’t change the job at all” Cordray signals continued aggressive enforcement by the CFPB – “Our pace needs to be steady and vigorous” Cordray expresses some uncertainty as to whether the rulemaking freeze applies to the CFPB No real public statements thereafter but a track record indicating extreme caution in rulemaking
20 CFPB Reaction – Disparate ImpactCFPB Bulletin No indicates that CFPB will apply the disparate impact theory to indirect auto lending From that point on CFPB applies the theory and Congressional Republicans seek to “repeal the guidance” Blog post by Patrice Ficklin on December 16, 2016 seems to indicate that the CFPB is moving away from the issue But 2016 Fair Lending Report says that CFPB intends to look at discrimination in student loan servicing Unclear if CFPB will use a disparate treatment analysis
21 CFPB Reaction – Disparate ImpactGAO is looking at whether the guidance is a CRA rule and, if so: CFPB might have to withdraw the guidance or follow notice and comment rulemaking procedures Private plaintiff might sue challenging the effectiveness of the guidance due to CFPB’s failure to comply with CRA Republican lawmakers might introduce a resolution of disapproval
22 CFPB Reaction – Debt CollectionAdvance notice of proposed rulemaking is published in the Federal Register on November 12, 2013 SBREFA proposal for third party collection is released to small business representatives on July 28, 2016 CFPB promises to issue a SBREFA proposal for first party collection “in the next several months” Initial posting of CFPB Fall 2016 semiannual regulatory agenda calls for pre-rule activities through February 2017 CFPB portion of Unified Agenda in Federal Register pushes the date for action to “sometime” in 2017
23 CFPB Reaction – Debt CollectionPre-rule activities continue with new consumer survey Notice published in the Federal Register on June 5, 2017 Survey of 8,000 individuals regarding disclosure forms Focus on consumer comprehension and decision making in response to disclosure forms CFPB estimates screening 17,750 individuals before conducting its survey
24 CFPB Reaction – ArbitrationRulemaking proceeding arguably begins on April 27, 2012 with CFPB request for information regarding clauses CFPB releases its preliminary study based on responses to RFI on December 12, 2013 Final report to Congress required by Dodd-Frank issued on March 1, 2015 SBREFA framework circulated to small business representatives on October 7, 2015 Proposed rule issued on May 24, 2016 with August 22, 2016 comment deadline
25 CFPB Reaction – Arbitration (cont.)Speculation that final rule will be issued so that 60-day period for CRA review will expire prior to inauguration Initial posting of CFPB Fall 2016 semiannual regulatory agenda gives a February 2017 date for a final rule CFPB portion of Unified Agenda in Federal Register pushes the date back to sometime in the Spring of 2017
26 CFPB Reaction – Student Loan ServicingCFPB publishes a request for information on student loan servicing on May 21, 2015 On September 29, 2015, CFPB issues a report, based on the comments, critical of student loan servicing practices CFPB, Treasury and the Department of Education release the Joint Statement of Principles on student loan servicing On May 3, 2016, CFPB publishes a request for information about communications to borrowers about alternative repayment options
27 CFPB Reaction – Student Loan ServicingCFPB consults on the Mitchell Memo issued by the Department of Education on July 20, 2016 Memo identifies “best practices” for federal student loan servicing CFPB Fall 2016 semiannual regulatory agenda says that CFPB will continue to evaluate potential rulemaking Potential rulemaking is identified as a long-term action with no specific milestones or timetables disclosed On February 23, 2017, CFPB issues a request for information on its student loan servicing market monitoring initiative
28 CFPB Reaction – Student Loan ServicingOn April 3, 2017, Department of Education dramatically changes course in statement issued by Betsy DeVos Department withdraws the Mitchell Memo about federal loan servicing standards Department apparently also withdraws from the Joint Principles previously announced
29 Thank you! Panelist John L. Culhane, Jr. PartnerConsumer Financial Services Group
30 Panelist – John L. Culhane, Jr.Partner at Ballard Spahr and a member of the firm’s Consumer Financial Services, Mortgage Banking, Bank Regulation and Supervision, Higher Education, and Privacy and Data Security Groups as well as its Marketplace Lending Task Force, Fair Lending Task Force, TCPA Task Force, and Military Lending Act Task Force Compliance practice emphasizes counseling clients on the development and implementation of innovative loan, leasing, and payment programs, and includes counseling on fair lending, servicing and collection issues Regulatory practice includes preparing clients for banking agency and CFPB targeted fair lending and full spectrum compliance examinations as well as assisting in the defense of consumer class actions, attorney general investigations, and agency enforcement actions Named a top consumer financial services lawyer by Chambers USA, 2015 & 2016 Charter member of the American College of Consumer Financial Services Lawyers Former Chair of the Subcommittee on Fair Lending of the ABA Committee on Consumer Financial Services DMEAST # v1