Is CFPB being stretched thin by litigation?

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Litigation is soaking up a significant share of resources at the Consumer Financial Protection Bureau, which faces at least a dozen cases challenging its constitutionality and a surging number of legal disputes to its enforcement actions.

Many smaller companies that traditionally would have rolled over and settled with the agency appear emboldened to fight given the political and legal uncertainty hanging over the CFPB. Firms are hoping to get enforcement actions dismissed or, possibly, relief from the Trump administration.

The CFPB has filed 21 enforcement actions through May — the most to date at this point in the year since it was created — and one-third are being challenged in federal court.

"Litigation takes a toll, it's a strain on resources," said Lucy Morris, a partner at Hudson Cook and a former deputy enforcement director at the CFPB.

The CFPB does not provide a breakdown of how it spends the $565 million it requested in funds for fiscal year 2016, but the agency maintains it has enough resources to tackle the roughly three dozen significant cases it has in the works.

But outsiders and former agency employees argue that the agency is being taxed.

"We're reaching a watershed moment for the CFPB," said Amy L. Hanna, a creditors'-rights attorney in Atlanta at Baker, Donelson, Bearman, Caldwell & Berkowitz. Even small companies are challenging the agency's constitutionality, she said. "I have to think they are stretched thin and will be stretched thinner if their budget is impacted."

The House is expected to vote Thursday on the Financial Choice Act, which, among other things, would force the agency to go through congressional appropriations, a change that would almost certainly severely limit the agency's funding. But the legislation is unlikely to be enacted given Democratic resistance in the Senate.

While all agencies face some legal challenges, the CFPB has attracted a significant number since its creation in 2011. Ironically, part of its predicament now may be a result of its early successes when it was first created and big banks quickly agreed to million-dollar settlements. Those wins fostered a culture that encouraged big settlements and a refusal to negotiate that now is backfiring in this changed political climate, according to observers.

"As a new agency, the CFPB may not have figured out how to change their approach and settle more cases," Morris said. "The more strict their position, the less likely [they are] to settle, and the more cases they have to litigate."

Its biggest case so far, PHH Corp. v. CFPB, also paved the way for other companies to challenge the agency's single-director structure as unconstitutional. More big companies are pushing back, including Navient, the largest student loan servicer; Ocwen Financial, the largest subprime mortgage servicer; and TCF National Bank, a $21 billion-asset bank in Wayzata, Minn.

In the past month or so, the CFPB has also been forced to go to trial on several cases.

"Obviously, litigation soaks up resources that could be used to begin and proceed with investigations," said Eric Mogilnicki, a partner at Covington & Burling LLP.

Some lawyers said the CFPB was not really built for litigating.

Though the CFPB earned its reputation as a tough enforcement agency, the bureau has fewer attorneys with litigation or trial experience than other agencies. Each trial that necessitates significant discovery typically requires three or more attorneys, a paralegal and technology, accounting or other support staff.

Still, attorneys who have fought the bureau still expressed caution about doing so.

Randy Miller, a partner at Venable, spent four years litigating against the CFPB on behalf of the debt relief company Morgan Drexen, which was sued in 2013 for charging consumers illegal fees. The company challenged the CFPB's constitutionality but ended up fighting two lawsuits in separate jurisdictions.

"They pursued a two-front strategy to muscle us to the ground," Miller said. "With other federal agencies there is usually a litigator you can talk to and they're not coming at you with tanks and nuclear weapons." The CFPB "brings overwhelming force, so the target cannot reasonably defend themselves."

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