Recent CFPB Ruling Ends ‘Rulemaking Through Enforcement’

A recent federal court ruling affirmed the Consumer Financial Protection Bureau’s place in the financial regulatory framework, but the decision also contained a victory for the business community.

“Rulemaking through enforcement efforts for past conduct is rejected,” Phil Schulman, a partner in the Washington, D.C. office of law firm Mayer Brown, said on a Thursday conference call. “The court was clear that the CFPB may not make rules through enforcement without providing fair notice and an opportunity for comment from the public.”

Initial reports on the January 31 ruling in PHH Corp. v. CFPB focused on the win for the government: Despite mortgage lender PHH’s objections, the Court of Appeals for the D.C. Circuit ruled that the bureau’s power has a constitutional basis and historical precedent. PHH had argued that the CFPB’s single-director format — with the leader removable only in cases of malfeasance or neglect of duty — gives the bureau far too much authority with little oversight.

But Schulman noted that the 10-member court unanimously nullified the CFPB’s ability to institute penalties for actions without extensive warning and input from the general public.

“New interpretations may not be used to sanction companies for activities that were expressly permissible prior to the CFPB’s new interpretation,” Schulman said. “And the CFPB should be putting its views on these new interpretations out through … public notice and comment so the public understands the ground rules before the enforcement actions are initiated for that conduct.”

The conference call for journalists and other interested parties also touched upon the ongoing battle over the CFPB’s acting directorship, a position currently held by Office of Management and Budget director Mick Mulvaney. Leandra English, the CFPB’s deputy director, is currently attempting to challenge Mulvaney’s position and claim the acting director position for herself, citing the legal language that created the CFPB back in 2010.

The outcome of that case could also play into PHH’s legal strategy moving forward, according to Mayer Brown partner Andrew Pincus: If Mulvaney, Trump’s pick, emerges victorious, PHH may not see a need to appeal its case to the Supreme Court given the administration’s business-friendly policies.

But should the courts rule in favor of English, further limiting the president’s authority to control leadership at the CFPB, PHH could have a more compelling case for the Supreme Court.

Whatever the outcome of that drama, the PHH ruling reshaped the regulatory picture for financial companies.

“I think the PHH decision will have a profound impact on the CFPB’s efforts to go after companies for practices they disfavor when those practices were condoned or permitted by past administrations or agencies,” Schulman said.

Written by Alex Spanko

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