Acting leadership at the Consumer Financial Protection Bureau (CFPB) has appealed the D.C. District Court’s decision to impose a preliminary injunction against further actions it deems as tantamount to an effort to eliminate the agency, as claimed in a lawsuit filed by the National Treasury Employees Union (NTEU).
On April 3, the D.C. Circuit Court of Appeals issued a temporary stay on the injunction.
“The purpose of this administrative stay is to give the court sufficient opportunity to consider the emergency motion for stay pending appeal and should not be construed in any way as a ruling on the merits of that motion,” the stay order said.
The likelihood of the D.C. Circuit Court of Appeals ultimately overturning the lower court’s decision is up for debate, but it could also prove moot should the Senate vote to confirm former Federal Deposit Insurance Corp. (FDIC) Board member Johnathan McKernan as CFPB director, according to Garris Horn LLP Managing Partner Richard Horn and Husch Blackwell Partner Mike G. Silver, speaking to Dodd Frank Update.
Horn, a former CFPB senior counsel, said the merits of the case against the bureau hinge on whether the bureau’s acting leadership broke the law with its mass firings, mass contract terminations, work stoppage and other actions cited in the union’s lawsuit.
“It’s an interesting question of administrative law, which is essentially, how much the courts can restrict an agency head from making discretionary operational decisions at an agency,” Horn said. “As long as the acting leadership is complying with applicable law in terminating employees and contracts, and still in some appreciable manner fulfilling the statutory mandates, I’m not sure the courts can compel anything more, absent Administrative Procedure Act (APA) violations. The district court’s preliminary injunction arguably goes too far by requiring the acting leadership to take certain affirmative actions, like rehiring staff, and this question could come up in the appeal.”
Silver, also a former senior counsel at the bureau, noted how “painstakingly” thorough Judge Amy Berman Jackson was in laying out the “veritable tick tock of the events leading up to the critical date of Feb. 14, when the apparent mass RIF (reduction in force) was set to happen,” during the court proceedings.
“It was evident from listening to her questions and comments at the hearings that she intuitively ‘got’ the issues at stake – the fact that the government was representing that there was ‘nothing to see here,’ yet there was voluminous contemporaneous evidence that was not the case,” Silver said.
The Dodd-Frank Act requires the CFPB to maintain certain offices and functions related to consumer protection, including collecting and reporting loan data mandated by the Home Mortgage Disclosure Act (HMDA) and responding to consumer complaints filed in its database. So, theoretically, if the bureau can prove it is committed to carrying out those statutorily-mandated tasks and is not violating any other statutes – such as labor laws protecting the rights of federal employees.
“The arguments before the court are that they’re not conducting the statutorily mandated functions, that they’re not operating the XYZ offices, that they’re having mass firings in violation of civil service laws,” Horn said. “Basically, they’re saying that, for all intents and purposes, what the acting leadership is doing is shutting down the agency.”
However, if McKernan becomes director and operates the bureau in a lawful manner, as he said he intends to do, it could actually change the factual merits of the case, Horn said. And if there is one thing McKernan made clear during his Senate confirmation hearing in February, it’s he is committed to following the law.
“Right now, the appeal is based on the preliminary injunction so the merits are still before the court. There’s a factual record,” Horn explained. “But the facts can change if there’s a new director. And I think, with regard to the actual merits of the case, once there’s a new director, there might not really be a case anymore.”
Silver also recognized that the factual merits of the case seem to stack the odds against the federal government, making McKernan’s anticipated confirmation as CFPB director pivotal for the agency and the case.
“With Jonathan McKernan set for confirmation sometime in April, it is possible that this incredibly fraught period for the CFPB and their staff will end with a whimper, not a bang,” Silver said. “That’s not to say there hasn’t been real upheaval and cost. The agency will suffer a brain drain from talented, long-time staff leaving due to the uncertainty. McKernan may want to further downsize.”
While it is important to ensure they are following federal statutes, Horn said the job of running executive agencies should not fall to the court system. And, if the bureau were to get a new permanent director committed to operating the agency in line with the Dodd-Frank Act statute, it could, in theory, resume normal operations, relatively speaking.
“I think the industry should expect that we’re going to have a CFPB. That’s not going to change without legislation,” Horn said. “Based on the hearing, McKernan seems to be in favor of reasonable financial regulation. I know a lot of folks were cheering when the ‘CFPB R.I.P.’ tweets were coming out, but it seems like that’s not going to happen after he’s confirmed. We’ll have to see how quickly the appeal of the preliminary injunction plays out, but the industry shouldn’t expect that the CFPB will be deleted any time soon, if at all.”
There are still ways the CFPB could slow-walk agency functions without technically violating Dodd-Frank Act requirements, Horn said. The agency has already stated it plans to not enforce its payday lending rule.
“I am cautiously optimistic that the CFPB will soon revert to a more than barely functioning agency,” Silver added. “It won’t be as aggressive as under [former Director Rohit] Chopra, but it won’t be five men and a phone either.”
Such an approach likely would not be popular with Democrats or many consumer advocates but would be less likely to incur the types of allegations the bureau faces with its preliminary injunction appeal.