Will CFPB Ruling Spur Banks to Reopen Old Enforcement Actions?

Companies weighing whether to reopen past settlements with the Consumer Financial Protection Bureau after a federal appeals court limited the agency's powers may want to think twice, according to industry experts.

A three-judge panel ruled this week that the CFPB must abide by a three-year statute of limitations governing administrative enforcement actions — a timeline the agency has not followed in the past. That theoretically could allow firms that have already agreed to pay heavy penalties for older violations to protest their settlements in court.

Yet doing so would bring with it a new set of risks and could ultimately backfire against the institution, experts said.

"It would be challenging for an institution to take the position that a settlement with the bureau, which it entered into voluntarily, should be reopened on the grounds that the bureau did not have the jurisdiction or was not constitutional at the time," said Ben Olson, a partner at BuckleySandler and a former CFPB deputy assistant director.

Many enforcement actions are similar to settlement agreements in that they are considered settled contracts, whereby a company waives their right to go to court and negotiate a settlement without admitting or denying wrongdoing.

Joann Needleman, an attorney at Clark Hill in Philadelphia, said a major bank that was subject to a recent consent order called her asking if there was any chance to renegotiate. She said it was unlikely to prevail.

"Unless you can show that the CFPB made a material misrepresentation in the settlement or there was fraud, you can't get an enforcement action overturned," Needleman said. "What's done is done."

Some lawyers might be willing to try to fight it, but that has perils of its own, Needleman said.

"There are a lot of guys out there pounding their chests saying hire me, but I think that is a very risky and low-odds outcome," she said.

At issue is a ruling by the U.S. Court of Appeals for the D.C. Circuit which said the CFPB's single-director structure was unconstitutional because it did not allow for enough oversight.

As a result, the court struck down the Dodd-Frank Act's provision that said a director could only be removed "for cause," allowing the president to remove a CFPB head for any reason.

But the court also took issue with the CFPB's assertion that there was no statute of limitations when enforcing the Real Estate Settlement Procedures Act in an administrative proceeding. In particularly harsh wording, the court called the CFPB's position "absurd," and invalidated its $109 million fine against the nonbank mortgage lender PHH Mortgage.

"Why would Congress allow the CFPB to bring administrative actions for an indefinite period, years or even decades after the fact?" Judge Brett Kavanaugh's ruling said. "Why would Congress create such a nonsensical dichotomy between CFPB court actions and CFPB administrative actions?"

The CFPB has 45 days to file an appeal either to the full D.C. Circuit or to the Supreme Court.

Several lawyers said the CFPB would almost certainly appeal because the ruling significantly curtailed its ability to assess civil money penalties by restricting the statute of limitations.

The CFPB has brought several enforcement actions in which it claimed the statute of limitations did not apply.

For example, it alleged that the one-year statute of limitations under the Fair Debt Collection Practices Act did not apply in an action against Frederick J. Hanna & Associates, a Georgia law firm.

To be sure, some lawyers said a firm might be successful in reopening a past settlement. Joe Lynyak, a partner at Dorsey and Whitney, said he has received several inquiries from financial institutions asking if they can modify or void a past settlement agreement — and particularly if they can get their money back.

"At what level does an illegally constituted agency lose its ability to enter into a contract?" Lynyak asked. "If they legally didn't exist and were acting in an unconstitutional manner, they had no ability to enforce a penalty."

"The language of the court was that the bureau was unconstitutional up until the moment they issued their decision, so the agency was not constitutionally sound," he said. "Some companies may wish to take that position if they paid a significant civil money penalty."

A potentially bigger issue is how the CFPB will respond to the court's ruling while it is presumably under repeal.

Christopher Peterson, a law professor at the University of Utah's S.J. Quinney College of Law, said the CFPB's general counsel will respect the D.C. Circuit's decision.

"I would anticipate that the agency will respect the rule of law and defer to the D.C. Circuit opinion as long as it's in force," said Peterson, a former special adviser to CFPB Director Richard Cordray.

Peterson, who released a study earlier this year of the CFPB's public enforcement actions, said there are very few past cases where the statute of limitations would have applied. Federal court cases are not applicable because the CFPB generally abided by statutes of limitation.

Needleman said it may be harder for CFPB to attempt any novel interpretations of the law, as it did in the PHH case and against the online payments firm Dwolla.

"I would say that the agency is tainted now," she said. "They don't have the bravado now that they had yesterday."

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