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As summarized in the March 2018 issue of the American Bankruptcy Institute Journal, ABI’s Consumer Bankruptcy Committee has recently issued several recommendations and made several observations regarding the treatment of student loans under the Bankruptcy Code, codified in Title 11 of the United States Code.

First, the Committee intends to fashion a program that would address possible ways of securing greater access for consumers owing student loans to the bankruptcy process and competent legal counsel. The Committee praised what they called consumer attorneys’ “very creative litigation to obtain relief for student loan debtors.” However, it noted that “[m]any debtors . . . cannot afford or have no access to attorneys who are willing and able to bring dischargeability [(i.e., elimination)] actions for student loan debt.”

Second, the Committee endorsed procedures, pioneered by the United States Bankruptcy Courts for the Middle District of North Carolina and the Western District of Texas (Austin Division), to allow for the repayment of student loans through a Chapter 13 plan. In general, a Chapter 13 bankruptcy is also called a “wage earner’s” plan and enables individuals with regular income to develop a plan to repay all or part of their debts. The prototype plans so far formulated are limited to loans paid through an income-based repayment plan and thus require debtors to apply for such a plan prior to filing for bankruptcy protection.

Third, the Committee expressed its support for the creation and adoption of court-sponsored student loan debt mediation programs. As currently envisioned, such a program would resemble many bankruptcy courts’ mortgage mediation programs, praised for their effectiveness and efficiency by debtors, creditors, and courts during the financial crisis of 2007-08. As the Committee observed, “a local rule requiring mandatory mediation for student loan dischargeability actions” would do better than the otherwise informal encouragement of such efforts voiced by many bankruptcy judges.

Fourth, the Committee endorsed statutory amendments to Code § 523(a)(8), which governs the discharge of student loans, and § 1322(b), which dictates the permissible content of a Chapter 13 plan.

With respect to § 523(a)(8), the Committee announced its opposition to any wholesale deletion of § 523(a)(8) as urged by some advocates. Instead, it recommends that the following statutory changes be enacted:

(1)   that its coverage of private student loans, a change made by Congress in 2005, be rolled back;

(2)    that “undue” be struck from this subsection’s “undue hardship” standard, thereby lowering the bar for securing a student loan’s nullification;

(3)    that Congress should adopt some guidance as to the appropriate construction of the term “hardship”; and

(4)    that the current test for “undue hardship” be replaced by the totality-of-circumstances test favored in the Eighth and First circuits (but not by a majority of bankruptcy courts).

The Committee favored “an amendment to the statute” because, in its words, “[i]t has become all too clear that . . . [Department of Education] policies can be changed with the stroke of a pen and a change in administrations.”

As to § 1322(b), the Committee favors a revision that would allow separate classification and treatment of student loan debt for a debtor enrolled in an income-driven repayment plan, as defined under the Higher Education Act of 1965.

“With the high default rate on this debt and the need to preserve this important resource for future students, it is time to explore options for dealing suc­cessfully with student loan debt in bankruptcy proceedings,” the Committee concluded.

More information on the Committee and its work can be found here.


In the student loan market, servicers play a critical role. These entities maintain account records regarding borrowers, send periodic statements advising borrowers about amounts due and outstanding balances, receive payments from borrowers, allocate those payments among various loans and loan holders, answer borrowers’ questions, report to creditors and investors, and strive to prevent default by delinquent borrowers via so-called “diversion aversion assistance.”

For each loan it backs, the Department of Education selects a servicer, to be changed only upon the occurrence of certain specified conditions. Currently, the DOE contracts with eight private servicers.

As the conduits between borrowers and lenders, servicers often are the most visible targets for overburdened borrowers and zealous regulators. Bills come under their letterheads and collection calls originate in their offices. As such, in recent years, servicers have increasingly become the subject of lawsuits based on state consumer protection laws as well as regulatory action by state actors.

On March 12, in order to address the concerns of servicers, lenders, borrowers, and state regulators, the DOE posted a formal notice contending that, under its interpretation of federal statutory and regulatory law, the DOE alone possesses the power to regulate student loan servicers.

The DOE acknowledged the notice was motivated by the fact that several states recently had “enacted regulatory regimes that impose new regulatory requirements on servicers of loans” under the DOE’s Direct Loan Program. Other states had imposed disclosure requirements on loan servicers for loans made under the Higher Education Act of 1965 (“HEA”), and some states had adopted regulations addressing servicing for the Federal Family Education Loan (“FFEL”) Program.

In the DOE’s view, such regulations – and claims based thereon – “are preempted because . . . state[s have] sought to proscribe conduct Federal law requires and to require conduct Federal law prohibits.” “This is not a new position,” the DOE argues in the notice.

This position echoes the DOE’s interpretation of regulations governing the FEFL Program, issued on October 1, 1990, as well as its stated position in Chae v. SLM Corporation, 593 F.3d 936 (9th Cir. 2010). (SLM Corporation, more commonly known as Sallie Mae, spun off its loan servicing operation and most of its loan portfolio into a separate, publicly traded entity called Navient Corporation on April 30, 2014. Navient is the largest servicer of federal student loans and acts as a collector on behalf of the DOE.)

In Chae, the Ninth Circuit reaffirmed its earlier conclusion that “field preemption does not apply to the HEA.”  In other words, federal education policy regarding private lending to students was deemed not so extensive as to occupy the entire regulatory field.

The Ninth Circuit also concluded, however, that (1) the HEA expressly preempted the plaintiffs’ allegations that a student loan servicer made fraudulent misrepresentations in its billing statements and coupon books, and (2) conflict preemption prohibited the plaintiffs from bringing their remaining business, contract, and consumer-protection law claims because, if successful, they would create an obstacle to the achievement of congressional purpose.

Apparently, “[t]he statutory design, its detailed provisions for the FFELP’s operation, and its focus on the relationship between borrowers and lenders persuade[d]” the appellate panel in Chae “that Congress intended to subject FFELP participants to uniform federal law and regulations,” a conclusion from which conflict preemption naturally followed.

With such precedents in mind, the DOE is now seemingly preparing to take on the more activist states on behalf of the servicers that it fought during the Obama Administration.

The Senate’s latest banking bill primarily focuses on overturning large chunks of the DoddFrank Wall Street Reform and Consumer Protection Act. Somewhat unexpectedly, on March 8, the Senate’s Banking, Housing, and Urban Affairs Committee approved the addition of two bipartisan proposals that provide help to some of the nation’s forty-four million student loan borrowers to this larger package. Mirroring legislation previously introduced by Senators Gary Peters (D-Mich.) and Shelley M. Capito (R-W.Va.) (and once more sponsored by these two congresspersons), these proposals would adjust how private student loan lenders treat a co-signer’s death or bankruptcy and how they report defaults to the big three credit bureaus. Due to the support of senators from both sides of the aisle, one observer reckoned that “this legislation is probably going to move.” In fact, the two proposals, as incorporated into the Senate’s banking bill, now head for consideration by the entire Senate.

The first proposal bars a lender from declaring a default or accelerating a private education loan when a co-signer dies or declares bankruptcy and obligates a private lender to release the co-signer from a student loan debt, if any remained, upon a student’s death. Per the second proposal, if a financial institution offers a loan rehabilitation program in which a borrower demonstrates the ability to make timely monthly payments and the ability to repay the relevant loan, the borrower may compel the lender to remove any default from their credit report. In a notable constriction, a borrower would only be able to use this option once per loan. As to the latter, one observer, Betsy Mayotte, founder and president of the Institute of Student Loan Advisors, commented: “From a fairness perspective, it makes sense to make this no longer an option for future private student loans.” In defending these bills, Sen. Peters observed that [d]efaulting on a private student loan can have long-term economic effects, making it harder for a borrower to find a job, rent an apartment, or buy a car.” Sen. Capito added, “It is essential students are able to recover from defaulted student loans without permanently harming their financial future.” If left untouched, both changes would only apply to private student loans (PSLs) or agreements struck at least 180 days after the bill’s passage.

Both of these proposals would award borrowers of PSLs with greater protections than they currently enjoy as a matter of law. Yet, even if Congress enacts these changes, federal student loans, defined as those educational loans for which the federal government serves as the sole lender rather than merely the guarantor, would still boast more mitigatory features and allow for more flexibility than most PSLs. Although 90% of higher education loans are public and therefore eligible for loan rehabilitation, this private market remains substantial, currently totaling $9.9 billion and encompassing more 850,000 defaulted loans.


State in the House: Bill Passed Committee, but Vote Not Scheduled

Introduced by Rep. Virginia Foxx (R-N.C.), the Promoting Real Opportunity, Success, and Prosperity through Education Reform (PROSPER) Act cleared the Committee on Education and the Workforce of the United States House of Representatives on December 13, 2017. It did so despite claims by Democrats—and the Association of Public and Land-grant Universities—that they had been shut out of the process.

Among other pertinent provisions, the PROSPER Act:

  • adopts a single definition of “institution of higher education,” eliminating for most purposes the distinctions between public and private nonprofit institutions and proprietary institutions;
  • effectively requires the Department of Education to treat programs that are not correspondence courses and that satisfy the current definition of “distance education” programs the same as traditional brick-and-mortar programs;
  • prohibits the DOE from defining any term in the Higher Education Act of 1965 (“HEA”), through regulation or otherwise;
  • repeals the borrower defense regulations promulgated by the DOE on November 1, 2016;
  • bars the DOE from developing, administering, or creating a ratings system for institutions of higher education;
  • expands the ways by which institutions may show that they are financially responsible for purposes of Title IV program participation;
  • forbids the DOE from prescribing the specific standards that an accreditor is required to implement and defers such standards to the discretion of each accrediting agency;
  • simplifies the Free Application for Federal Student Aid (“FAFSA”);
  • eliminates loan origination fees for all student borrowers;
  • eliminates the Public Service Loan Forgiveness Program for new borrowers; and
  • caps annual loan limits for various categories of students.

According to its supporters, the PROSPECT Act would improve higher education in at least two major ways. First, it focuses resources on helping Americans with the greatest financial need. Second, it expands the choices for students who need financial aid rather than steering them overwhelmingly towards community colleges.

While opponents have praised certain aspects of the bill, from its simplification of the FAFSA and linking of accreditation with outcomes for students, they have also criticized its limitations on student financial aid, removal of protections for students, and failure to incorporate rigorous data collecting requirements. Opponents also cite a February 7 report by the Congressional Budget Office that claimed that college students would lose $15 billion in federal student aid over the next decade if the PROSPER Act becomes law.

As of March 8, the full House has not voted on the PROSPER Act.

The text, as well as other legislative resources, including speeches from both sides, can be found here.

State in the Senate: Hearings and Debates

In contrast to the House, the process in the Senate has involved somewhat more give-and-take in considering the companion bill to the PROSPER Act. The Senate version was proposed by Health, Education, Labor and Pensions Committee Chairman Sen. Lamar Alexander (R-Tenn.), a former Secretary of Education. By February 6, his Committee had held four hearings on the problems posed by the rising cost of higher education and the nation’s increasingly troubled borrowers.

As in the House, partisan fault lines quickly emerged. However, unlike the House committee, a more robust debate has occurred. Like his House colleagues, Alexander has endorsed the “Bennett hypothesis” (named after former Secretary of Education William Bennett), which faults growing federal student aid for mounting college costs. For Alexander, the bottom line is simply, “How can we get the Federal Government out of the way so that we can meet our students’ needs?”

Alexander has urged his colleagues to focus on revisions to simplify the student aid process and redirect money to Pell Grants for low-income students.

In response, Committee Democrats expressed approval of streamlining grants and loans, but with the caveats that the total amount of aid must be preserved and that quality protections must be put in place for students and taxpayers.

Alexander, who has long worked with the Committee’s Democratic leader, Sen. Patty Murray (D-Wash.), saw a consensus emerging over the need for “simpler, more effective regulations to make it easier for students to pay for college and to pay back their loans; reducing red tape so administrators can spend more time and money on students; making sure a degree is worth the time and money students spend to earn it; and helping colleges keep students safe on campus.”

While Alexander is aiming for an April markup of the bill, which would allow Senate Majority Leader Mitch McConnell (R-Ky.) to bring legislation to the Senate floor in the first part of the year, observers are less optimistic. “The likelihood of it passing before 2020, I would put at very minimal,” said Barmak Nassirian, director of federal relations and policy analysis at the American Association of State Colleges and Universities. “I’d put it as close to zero as I would any likelihood.”

Nassirian’s viewpoint is representative of that of many observers: Although everyone seems to agree that the current state of student lending is a problem, no one can agree on a solution. Meanwhile, disagreements about gatekeeping, costs, and quality continue to fester.

Two major groups within the financial industry began the month of March with renewed advocacy for structural modifications to the student loan program managed by the U.S. Department of Education, which currently issues about 90% of student loans. 

First, in early March, the Consumer Bankers Association, a trade organization representing financial institutions offering retail lending products and services, issued a press release renewing a campaign for the institution of student loan caps on individual graduate students and parents of undergraduates. 

This position was not a novel one. In fact, in critiquing the Higher Education Act reauthorization bill introduced last December, the CBA had pushed for the same elimination of graduate PLUS loans and caps on parent loans. Only such removal, the CBA argued, would check college tuition costs by controlling colleges’ access to federal funds through student loans, as these caps too often “crowd out the private market and limit options for families.” 

The Federal Reserve Bank of New York agreed that there was a correlation between federal lending and the cost of college. In one study, that institution concluded that every dollar increase in federal loans adds between $0.25 and $0.63 to the price of tuition. Additionally, in a 2016 working paper, researchers from the National Bureau of Economic Research similarly faulted tuition increases based on the belief that students could cover rising costs through more federally-backed borrowing. 

Second, around the same time, a group of investors began lobbying for legislation to provide a clearer legal framework for “income-share agreements. Conceived by Milton Friedman in 1955, Oregon legislators first codified ISAs in 2013 when they passed “Pay It Forward,” a bill authorizing a state-funded ISA for students attending Oregon public universities. ISAs were further popularized in 2016 by former Indiana governor and current Purdue University president Mitch Daniels. A description of the Purdue program can be found here and here. 

The typical ISA allows private investors to provide money upfront to cover tuition in exchange for a portion of a student’s income following completion of their studies. In effect, ISAs allow students to sell “shares” of their future earnings. Because ISA contracts are by definition income-based, they can be an attractive alternative to other forms of student loans, especially private loans. 

With student loan debt now exceeding $1.4 trillion, dethroning auto loans and credit cards as the second largest source of household debt in the United States this year, the marketplace for ISAs had grown increasingly crowded. Providers like Lumni, Upstart, and Venmo have begun to pitch their own take on these arrangements. Some of these entities offer aid for non-institutional providers, such as coding boot camps, while others focus on students in traditional higher education programs. For example, Lumni, a for-profit firm that offers ISAs throughout South America, has inked contracts with over 7,000 students since 2002 and realizes a 10-15% rate of return. 

Though supported by the New America Foundation and the American Enterprise Institute, the two bills introduced in 2017 in Congress to formally recognize and regulate ISAs did not make it out of committee. The same was true for predecessor bills in 2014 and 2015.

On February 21, the United States Department of Education, led by Secretary Elizabeth Dee DeVos, issued a memorandum indicating it was considering stepping into the debate over the standard used to determine whether a student loan can be discharged under the Bankruptcy Code.  The request for public comment appears aimed in part at revisiting allowing the discharge of debts when they create “undue hardship” for the debtor.

Public Input Requested by Department of Education

In the memorandum, the DOE asked for public input on:

  • who typically requests elimination of student loan debt in Chapter 7 (liquidation) proceedings;
  • factors to be considered in evaluating “undue hardship” claims asserted by student loan borrowers in bankruptcy;
  • the weight to be given to the undue hardship factors;
  • whether the existence of two tests to evaluate undue hardship claims results in inequities among borrowers seeking discharge; and
  • how all of these considerations (and possibly others) should weigh into whether loan holders should discharge debts for undue hardship.

The “Brunner Test” for Undue Hardship

Since 1978, § 523(a)(8) of the Bankruptcy Code has exempted any student loan debt from discharge unless its repayment would “impose an undue hardship on the debtor and the debtor’s dependents.”

This standard is applied using a test adopted by the U.S. Court of Appeals for the Second Circuit in 1987, in Brunner v. New York State Higher Education Services Corp.  Under Brunner, once a creditor establishes the existence of an educational debt, a debtor can only prove an “undue hardship” by demonstrating:  (1) an inability to maintain, based on current income and expenses, a “minimal” standard of living for themselves and their dependents if forced to repay the loans; (2) additional circumstances indicating that this state of affairs is likely to persist for a significant portion of the relevant loans’ repayment period; and (3) their good faith efforts to repay the loans. If a debtor fails to establish all of the factors under the test, the court will deny a request for discharge due to undue hardship under § 523(a)(8).

Arguments on Changing the Brunner Test

Critics of the Brunner test assert that it was developed during a radically different era.

In 1987, under the Bankruptcy Code, the relevant time period for examining whether a debtor had made good faith efforts to repay a student loan was limited to seven years, and the number and kinds of student loan debts covered by § 523(a)(8) were relatively few. In 1998, Congress removed the seven-year look-back time limit, and in 2005 redefined “educational debt” to include many more private student loans.

In light of these changes over the years, critics say continued use of the Brunner test is unduly harsh, essentially requiring proof of unending poverty and barring discharge of numerous types of private loans that were not in the court’s mind when Brunner was decided. On the other hand, opponents of a change to the standard say that Congress could easily incorporate a less harsh and rigid definition of “undue hardship,” but no such change has ever been made.

Likely Responses to Any Change in Discharge Standards

If the comments elicited by this memorandum prompt the Trump Administration to support a revision of § 523(a)(8)’s “undue hardship” test, borrowers who meet the new standard (which is likely to be less onerous than the Brunner test) will rejoice.

At the same time, basic theories of economics suggest that a change to the discharge standard may result in an increase in interest rates for student loans and heightened standards for issuance of such loans, as lenders respond to an increase in uncollectable debt. Lenders also will need to prepare to fend off new challenges in the country’s 94 bankruptcy courts, with little jurisprudence for guidance in determining how any new standard should be applied.

Interested parties may submit comments through the Department of Education’s website.

The FTC has just issued its annual report, the Consumer Sentinel Network Data Book, aggregating data on the 2.68 million consumer complaints that it received in 2017. This number is down from a peak in consumer complaints during 2015 – 3.04 million complaints – and last year’s total of 2.98 million.

According to the FTC’s report, the top ten categories are as follows:

Debt Collection


Identity Theft


Imposter Scams


Telephone/Mobile Services


Banks and Lenders


Prizes, Sweepstakes


Shop-at-Home/Catalog Sales


Credit Bureaus, Information Furnishers, Report Users




Television/Electronic Media


The Consumer Sentinel Network is an online database of consumer complaints maintained by the FTC. Other federal and state law enforcement agencies contribute to the database, including the Consumer Financial Protection Bureau and the offices of 20 state attorneys general, including Alaska, Colorado, Hawaii, Idaho, Indiana, Iowa, Maine, Massachusetts, Michigan, Mississippi, Montana, Nevada, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Washington, and Wisconsin. Private-sector organizations contributing data include all North American local offices of the Better Business Bureau.

Any federal, state, or local law enforcement agency can obtain access to the database by entering into a confidentiality and data security agreement with the FTC. Certain international law enforcement authorities are also allowed access.

A few points regarding the data in the report bear mentioning. First, “unverified reports filed by consumers,” regardless of merit and whether the complaint was remedied by the company, were counted as complaints. Second, even though debt collection topped the report in terms of the percentage of complaints received, the total number of debt collection complaints represents a very small portion (0.005%) of consumers who had contact with the debt collection industry during 2017. Finally, while the FTC uses the term “complaint” in its press release and makes numerous references to “complaints” in the new annual report, the report states that it refers to “consumer reports” rather than “complaints,” given that “[o]ften, people make these reports after they have experienced something problematic in the marketplace, avoided a loss, and decided to alert others.”

Nevertheless, the FTC and state attorneys general have long used consumer complaints to identify victims and potential targets for investigations. Importantly, Mick Mulvaney, President Trump’s appointee as CFPB Acting Director, has indicated that the CFPB will continue to use complaints in setting its priorities.

In the last few years, the right to privacy has been hotly debated in the United States. What critics do not understand or appreciate is that the next technological paradigm is completely dependent on improvements both to the quality and quantity of data.

As connected things (IoT) explode in popularity, they make things such as augmented reality (AR) and autonomous vehicles possible. And as interconnectivity grows, so do the opportunities. The companies that fail to leverage those opportunities may find themselves falling behind their competitors.

In venturing into these emerging paradigms, companies should stay informed of recent enforcement actions, cases, and laws to determine how their role within new ecosystems may be impacted.

This publication attempts to cover the ongoing evolution of the legal landscape for data-based products, so that organizations can continue to succeed in their development of data-based products.

Click here to download the report

On February 12, 2018, the Consumer Financial Protection Bureau (“CFPB”) released its strategic plan for 2018 through 2022. The plan, which will take two years to implement, calls for placing new restrictions on the CFPB’s enforcement authority. “The proposed reforms would impose financial discipline, reduce wasteful spending, and ensure appropriate congressional oversight,” according to a statement also released on that date. Mick Mulvaney, acting interim director of the CFPB, stated that the Bureau’s new direction will provide “clarity and certainty to market participants.”

Under the proposal, which also is included in President Trump’s 2019 budget plan, the CFPB would be funded by Congress rather than the Federal Reserve. This change would arguably give lawmakers more oversight and influence over the agency’s priorities – a common complaint from critics of the CFPB. The CFPB’s 2019 budget also would be capped at its 2015 level – $485 million – compared to a projected $630 million this year.

In its strategic plan, the CFPB lays out revised mission and vision statements:

Mission: To regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws and to educate and empower consumers to make better informed financial decisions.

Vision: Free, innovative, competitive, and transparent consumer finance markets where the rights of all parties are protected by the rule of law and where consumers are free to choose the products and services that best fit their individual needs.

The CFPB also lists three long-term strategic goals and objectives that will drive the Bureau’s mission:

Goal 1: Ensure that all consumers have access to markets for consumer financial products and services.
Goal 2: Implement and enforce the law consistently to ensure that markets for consumer financial products and services are fair, transparent, and competitive.
Goal 3: Foster operational excellence through efficient and effective processes, governance, and security of resources and information.

Regarding the CFPB’s enforcement goal, the Bureau notes that an important objective of the Dodd-Frank Act is to ensure federal consumer laws are enforced consistently for banks and nonbanks alike. Nonbank entities include “mortgage companies, payday lenders, private education lenders, and larger participants in other markets as defined by rules issued by the Bureau.” According to the CFPB, because “[i]ndustry structure is always changing . . . so too will the number of institutions that fall under the Bureau’s supervisory authority.”

In terms of the CFPB’s rulemaking authority, the plan lists several strategies which are particularly relevant to the financial services industry, including:

  • Conducting empirical assessments to evaluate the effectiveness of significant Bureau rules in achieving the purposes and objectives of the Dodd-Frank Act and the CFPB’s specific goals.
  • Engaging in rulemaking where appropriate to address unwarranted regulatory burdens.
  • Carefully evaluating the potential benefits and costs of contemplated regulations.
  • Promoting practices that benefit consumers, responsible providers, and the economy as a whole.

In addition, the Strategic Plan notes the importance of the CFPB keeping pace with changing technology. “In recent years, evolving technologies have driven rapid change in the consumer financial marketplace,” states the plan. “The swift pace of change can provide benefits, opportunities, and risks to both consumers and institutions. The Bureau must keep pace with the evolution of technology in consumer financial products and services in order to accomplish its strategic goals and objectives.” This is especially important to debt collectors and mortgage servicers who communicate with consumers through electronic means that did not exist when the Fair Debt Collection Practices Act was first approved in 1977.

The 16-page strategic plan deviates considerably from the draft of the report that was released last October prior to Mulvaney assuming leadership of the CFPB. The revised strategic plan echoes Mulvaney’s previous statements that the CFPB would dampen aggressive enforcement and regulatory actions that he viewed as the hallmark of the previous administration. As the report states, the CFPB will now operate “with humility and moderation.”

As we reported earlier this month, Mulvaney has indicated that he will reserve administrative enforcement actions for only the most egregious violations of consumer protection law. Mulvaney has further emphasized his intent to rely on formal rulemaking to provide institutions under the CFPB’s purview with notice of “what the rules are before being charged with breaking them.”

The Bureau already has taken measures to apply Mulvaney’s vision, including the recent dismissal of a four-year-old payday lending lawsuit and the announcement that the CFPB would reconsider a controversial rule affecting the payday and auto-title lending industries.

We will continue to monitor the actions of the CFPB and other regulatory agencies for future developments.

Today, the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) issued its en banc decision in the closely-watched PHH Corp. v. Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) matter. In short, the D.C. Circuit upheld the constitutionality of the structure of the CFPB, reversing its 2016 panel decision.


As we previously reported, on October 11, 2016, a panel of the D.C. Circuit held that the Director of the CFPB had too much unilateral, unchecked power. The portion of the Dodd-Frank Act providing that the Director can only be removed by the President “for cause” was deemed unconstitutional. The 2016 panel found that “the CFPB, lacks that critical check and structural constitutional protection, yet wields vast power over the U.S. economy.”

The panel limited the remedy to the problem, however, by striking the “for cause” portion of the law and held that the President supervises the Director, and the President may remove the Director without cause. The Court also declined to shut down the entire CFPB even after finding the Bureau constitutionally flawed.

The case originally began as a bid by mortgage servicer PHH to overturn a $109 million CFPB penalty for violations of the Real Estate Settlement Procedures Act (“RESPA”). But as a result of the 2016 panel decision, the case changed focus to the broader constitutional question.


The D.C. Circuit “granted en banc review to consider whether the federal statute [the Dodd-Frank Act] providing the Director of the [CFPB] with a five-year term in office, subject to removal by the President only for ‘inefficiency, neglect of duty, or malfeasance in office,’ . . . is consistent with Article II of the Constitution.”

On January 31, 2018, the full D.C. Circuit issued its 7-3 opinion reversing the 2016 panel decision. The Court held that the Dodd-Frank Act provision “shielding the Director of the CFPB from removal without cause is consistent with Article II.” In the 68-page opinion, the Court ruled that the original panel’s decision was incorrect in finding that the CFPB’s structure was unconstitutional: “Applying binding Supreme Court precedent, we see no constitutional defect in the statute preventing the President from firing the CFPB Director without cause.”

The Court then held: “Congress’s decision to provide the CFPB Director a degree of insulation reflects its permissible judgment that civil regulation of consumer financial protection should be kept one step removed from political winds and presidential will. . . . Congress made constitutionally permissible institutional design choices for the CFPB with which courts should hesitate to interfere.”


The case is not over. There is a chance that PHH appeals the en banc decision to the U.S. Supreme Court, where the case would take on heightened scrutiny and political ramifications. However, the practical effects of the ruling could be favorable to PHH.

Regardless of whether the case is appealed to the Supreme Court, the October 2016 RESPA rulings of the three-judge panel were reinstated by the en banc Court. As a reminder, the panel was unanimous in holding that Section 8 of RESPA permits captive reinsurance arrangements so long as mortgage insurers pay no more than reasonable market value for reinsurance. And, even if Director Cordray’s contrary interpretation (that RESPA flatly prohibits tying arrangements) were permissible, the panel held, it was an unlawful, retroactive reversal of the federal government’s prior position. Finally, according to the panel, a three-year statute of limitations applies to both administrative proceedings and civil actions enforcing RESPA. According to today’s en banc decision, all of those RESPA rulings have been reinstated. This mean that the CFPB’s prior interpretation was based on an incorrect legal theory and, therefore, the CFPB must revisit the entire case in light of the panel’s rulings.

Critically, in accordance with the prior panel ruling, the CFPB’s prior $109 million fine against CFPB has been effectively vacated and remanded to the CFPB for further proceedings. Given the new administration’s position on the CFPB and the appointment of a new director (Mick Mulvaney), the CFPB’s new ruling may prove different under the correct legal standard and/or the fine may be reduced or eliminated altogether.

Troutman Sanders will continue to monitor this case – and all CFPB-related decisions – for future developments.

The case is PHH Corp. v. Consumer Financial Protection Bureau, 15-1177 (D.C. Cir. October 11, 2016), and the D.C. Circuit’s recent decision can be found here.