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A Response to Professor Adam Levitin about the Fifth Circuit Opinion in Community Financial Services Association of America, LTD v. CFPB

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Even though I often disagree with Professor Levitin’s opinions and policy positions about consumer financial services developments, I maintain high respect for him because he is very knowledgeable in this area. Shortly after the Fifth Circuit held that the CFPB was unconstitutionally funded and invalidated the Payday Loan Rule, Adam published a blog on Credit Slips in which he presented a host of reasons why he believes that the case was wrongly decided. Although I’m not going to say in this blog whether I agree with the Fifth Circuit’s reasoning or Adam’s critique (after all, the only thing that matters here is what the Republican-dominated Supreme Court thinks and, perhaps, what Congress should do to save the CFPB if the Supreme Court affirms), I will acknowledge that he articulated a more persuasive argument than the CFPB did in its briefs in the Fifth Circuit and in its more recent briefs in supplemental filings it has made in other pending cases after the Fifth Circuit decision came down. If this was a moot court argument, Adam would win it hands down.

On October 28, Adam published an op-ed in the American Banker entitled “Those Seeking to bring down the CFPB should be careful what they wish for” (article behind paywall). In his op-ed, he makes the in terrorem argument that an affirmance of the Fifth Circuit opinion will lead to chaos. Although I can’t quote his entire article, let me quote a couple of the same excerpts from the article quoted recently by the Consumer Law & Policy Blog (October 29, 2022):

* * *

Consider a mortgage lender that needs to make disclosures when making a loan. For years that lender has been using the disclosure forms promulgated by the CFPB, knowing that using them shields it from liability. If the agency is unconstitutional, the use of those forms ceases to provide any legal protection.

Likewise, the CFPB’s Qualified Mortgage safe harbor from the Dodd-Frank Act’s ability-to-repay requirement will disappear if the CFPB is unconstitutional, triggering immediate liability on lenders’ warranties to investors that the mortgages they sold them were qualified mortgages. Every bank that charges an overdraft fee will suddenly be breaking the law, because overdraft fees are exempted from cost of credit disclosures by virtue of CFPB regulation.

While I agree with Adam that a large part of the consumer financial services industry should be careful not to throw out the baby with the bath water, there is a path forward which could result in saving the CFPB and the regs (other than the Payday Loan Rule) which it has promulgated during its more than 11 year life. One obvious way to accomplish that is for the Supreme Court to affirm the Fifth Circuit, but make its order prospective only. As it has done on other occasions in the past, it probably would stay its mandate for some reasonable period of time to allow Congress to correct the funding problem. While I don’t have a great deal of confidence in Congress, I think that there would be strong bipartisan support to retain the CFPB and most, if not all, of its regs and enforcement actions, as long as Dodd-Frank is amended to require funding by Congressional appropriations and governance by a 5-member Board of Directors instead of a single director. Hopefully, however, part of that process, Congress might very well overturn some of the numerous opinions, circulars, policy statements, etc. which are not full-blown regs.  As readers of this blog know, I have been very critical of Director Chopra’s penchant for issuing unanticipated and controversial “guidance” by fiat rather than by rule making pursuant to the Administrative Procedures Act. One of the most egregious examples of that was his amendment of the UDAAP Exam Manual to broaden the definition of the “unfairness” prong to include discrimination (including disparate impact) in a manner that goes well beyond the reach of the Equal Credit Opportunity Act and the Federal Fair Housing Act. This spawned a lawsuit against the CFPB challenging the action by the U.S. Chamber of Commerce and bank trade associations.

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