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Fitting end for Cordray's legacy at the CFPB

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Fitting end for Cordray's legacy at the CFPB

Richard Cordray's time leading the Consumer Financial Protection Bureau ended in confusion and litigation in what feels fitting for the first leader of a roughly six-year-old agency.

Cordray submitted his letter of resignation Nov. 24 and named Leandra English deputy director, a position that put her in place to assume the role of acting director. Almost simultaneously, President Donald Trump selected White House Budget Director Mick Mulvaney to serve as acting director of the agency, setting up a power struggle that will be decided by the courts.

Trump relied on the Federal Vacancies Reform Act of 1998 to appoint Mulvaney while English and her lawyers argue the Dodd-Frank Act, enacted in 2010, stipulates the deputy director gets the gig. The laws appear to be in conflict, so English's litigation could settle the question of which law should take precedence.

It will not be the first time the CFPB breaks new legal ground.

Structuring an independent agency

A lawsuit by PHH Corp. alleges the CFPB is unconstitutionally structured with lawyers pointing to separation of powers, a philosophy that underpins much of the U.S. Constitution. A panel of judges at a U.S. Court of Appeals circuit bought the argument and suggested the CFPB could fix the problem by subjecting its director to the president's authority, meaning the agency's powers would be checked by the executive branch. The CFPB successfully won an "en banc" hearing involving nearly all of the circuit court's judges, and a final rule is pending.

Since the CFPB's inception, Republicans have bristled at its unique structure, an independent agency with a single director. Rep. Jeb Hensarling, R-Texas, routinely lambastes the agency as the "single most powerful and least accountable" agency in Washington, D.C. The CFPB is exempt from Congress' so-called power of the purse. The agency is funded not via the congressional appropriations process but by drawing directly from the Federal Reserve. It is also exempt from the executive branch in that the president can only fire the agency's director with cause.

Ultimately, the PHH case will boil down to a fundamental question of whether independent agencies can exist with a single director, potentially building on an 80-year-old Supreme Court decision that specified independent agencies should be immune from a presidential pink slip. Those independent agencies, however, such as the Securities and Exchange Commission, are led by commissions.

Setting standards for Dodd-Frank

Under Cordray's leadership, the CFPB has set the contours of Dodd-Frank's reach. The CFPB filed 198 lawsuits or consent orders that won nearly $12 billion in consumer relief and assessed more than $600 million of civil penalties under Cordray's leadership. The agency's favored target was mortgage violations, accounting for 52 of the 198 actions, according to an analysis by S&P Global Market Intelligence. Other top targets included debt collectors, accounting for 30 enforcement actions, and debt relief scams with 18 actions. These numbers will loom over financial institution decision-making — statute of limitations for consumer law tends to run three to five years, depending on the violation — and represent the benchmark against which Cordray's successor will be measured.

After the financial crisis, legislators expanded a prohibition against unfair or deceptive acts or practices, known as UDAP. Dodd-Frank added the word "abusive," turning the provision into UDAAP. The CFPB would rely on the provision in a number of enforcement actions, including several cases against debt collection agencies as well as a consent order with Wells Fargo & Co. over the bank's unauthorized accounts scandal.

Industry groups complained it was not clear what defined "abusive." Debt collection groups argued the agency had decided standard industry practice was suddenly deemed illegal by the brand-new bureau. Companies and industry groups labeled this sort of action "regulation by enforcement" and suggested the agency should give companies the opportunity to respond to a change in legal policy before facing civil penalties.

Cordray's CFPB was also tasked with writing new regulations. The agency defined the ability-to-repay rule and the qualified mortgage standard as well as an overhaul of the mortgage documentation process. His agency established a consumer complaint portal. The agency also broke new ground with rules governing prepaid accounts and limiting the types of arbitration clauses used in contracts for financial instruments. Industry groups have opposed many or all of these developments, but Trump's presumably industry-friendly replacement will have a tough time undoing it all.

"[Cordray] did set a baseline minimum of the new regulations," said Gerry Sachs, a partner with Venable. "It's more difficult to roll something back that's already in place."