The PHH Case, Part II: Retroactivity and Liability Exposure Continued

In my last post, I talked about the possibility that enforcement by the Bureau is a change in law that shouldn’t have retroactive effect. That is to say, conduct that predated the change in law shouldn’t be subject to it. The last post assumed that July 21, 2011, was the date of the change; so according to this retroactivity theory, conduct earlier than that date wouldn’t incur liability to the Bureau. (As I also noted, the same conduct might expose a person to enforcement from other corners. For example, the Department of Housing and Urban Development could, on July 22, 2011, have sued PHH on the same theory the Bureau eventually used. No guessing here how that suit would have turned out.)

In this post I’ll talk about an even later date: July 16, 2013. As seasoned Bureau-watchers know, that was when the Senate confirmed Director Cordray. While a confirmation of the agency head would be important for any agency, it was particularly significant for the Bureau because of the staged way in which the agency came into existence and assumed its powers. The Bureau existed as of July 21, 2010, when the Dodd-Frank Act was enacted. For the first year of its existence, it engaged only in managerial operations: hiring employees, preparing budgets, negotiating service contracts, etc. The substantive regulatory provisions of the Consumer Financial Protection Act became effective on a date chosen by the Treasury Secretary, which the statute called the “designated transfer date.” That ended up being July 21, 2011. Also on that date, a range of pre-existing regulatory functions already being performed by other agencies transferred to the Bureau. But there was no Director yet. Under section 1066 of the Act, the Treasury Secretary exercised the Bureau’s authorities “under this subtitle” until the Senate confirmed a Director.

“This subtitle,” the one to which section 1066 refers, is subtitle F. That subtitle describes the transfer of pre-existing functions; it does not encompass the Bureau’s new authorities. There are various ways to read section 1066. One could take it to mean that the Treasury Secretary would be acting “under this subtitle,” but exercising all the Bureau’s authorities. Or one could accept that “under this subtitle” modifies “authorities,” so that the Treasury Secretary could only exercise subtitle F authorities. I’m not sure I agree with that second reading. But the Inspectors General of the Treasury Department and of the Federal Reserve adopted it, and the Bureau has not to my knowledge disagreed. (On April 22 this year an administrative law judge opined that under section 1066 the Treasury Secretary was able to exercise all the Bureau’s administrative enforcement authority. However, the reasoning seems dubious, and it seems unlikely the Director would adopt it. The opinion observes, correctly, that section 1061(a) defines “consumer financial protection function” to include “all authority to . . . issue orders” under “any Federal consumer financial law.” But section 1061(a) doesn’t actually confer any authority; the only powers that section 1061 actually provides are those consumer financial protection functions that already existed at predecessor agencies.)

So it seems reasonable to assume that under the prevailing view of section 1066, the Bureau was unable to exercise the new authorities created by the Consumer Financial Protection Act until it passed the section 1066 trigger. One could also debate when that happened, but for illustrating the ideas in this post I’ll assume the trigger is exactly what section 1066 purports to say: Senate confirmation.

So, on July 15, 2013, the Bureau could sue to enforce RESPA section 8—that was a transferred authority under subtitle F—but it couldn’t enforce through an administrative proceeding. HUD never had the option of administrative proceedings, and the Bureau’s ability to use them comes from subtitle E. In the last post, I identified two ways in which Bureau enforcement could constitute new law that shouldn’t operate retroactively. First, the Bureau is a new plaintiff with priorities and incentives different from its predecessor agencies. Second, and really more importantly, the Director as an adjudicator is different from a court. Following through that idea from the last post, if the Bureau commenced an administrative enforcement proceeding on July 17, 2013, that proceeding oughtn’t to cover conduct from before July 16. (At this point it might be worth repeating a caveat from the last post. There are arguments on either side of this issue, and I don’t know how it would really come out.)

Defendants and respondents in Bureau enforcement cases have been quite alert to the significance of section 1066. But many of the arguments have not quite hit the point straight on, in part because they are excessively constitutionalized. Respondents and defendants have argued, for example, that the Bureau didn’t have standing under Article III until it had a Senate-confirmed Director; or that the Appointments Clause precluded the Bureau from exercising new authority until the Senate confirmed an agency head. Arguments like these are a bit discomforting, because it’s not uncommon for this or that agency in the federal government to be run by someone filling a vacant seat on an acting basis. If some aspect of the Constitution would preclude the Bureau from doing some of its work while it lacked a Senate-confirmed head, wouldn’t the same argument block other agencies too? As a constitutional matter there wouldn’t seem to be anything different about the Bureau just because it was new.

As a matter of statutory interpretation, by contrast, the newness of the Bureau was perhaps quite important. Congress chose to phase in the new agency in several steps, beginning (as explained above) with the first in which the Bureau existed but had no regulatory authority at all. It would be within the prerogative of the legislature, I’d think, to set things up so that for some time the Bureau could only exercise the existing authorities, and then eventually could (among other things) enforce all federal consumer financial laws by administrative order. The question is simply one of statutory interpretation: Is that in fact how the Dodd-Frank Act works?

To answer that question, how to read section 1066 is obviously quite important. Set against that, the fact that various subtitles besides subtitle F were “effective” as of the designated transfer date in 2011 seems less significant. To be sure, various provisions in subtitle C made certain conduct unlawful as of that date. And it would be odd to interpret the Dodd-Frank Act to immunize that conduct unless and until the Bureau received a Senate-confirmed Director. But it didn’t; under section 1042 states were able to sue immediately on the transfer date; and they could obtain remedies provided by section 1055 (in subtitle E, the general enforcement subtitle). The fact that the section 1066 trigger depended on administrative action (nominating a Director) also doesn’t seem too important. After all, the Consumer Financial Protection Act made the effective date of many of its provisions depend on administrative action, namely the Treasury Secretary’s choice of the designated transfer date.

The Director did eventually ratify the Bureau’s pre-confirmation actions. But that also doesn’t necessarily resolve the issue. The prerequisites for a ratification are generally that the person had the authority for the act at the time of ratification, and would have had the authority had she been in place when the act originally occurred. One purpose for these requirements seems to be to protect individual rights; “[t]he intervening rights of third persons cannot be defeated by [a] ratification.”  One would think the rules for ratification would also protect against retroactivity.  If Bureau administrative enforcement of a given law is indeed a change that shouldn’t apply retroactively, it’s not clear that the Director could simply ratify administrative proceedings from before his confirmation.

The bottom line of the arguments here would be: For many federal consumer financial laws, the Consumer Financial Protection Act did not permit the Bureau to engage in administrative enforcement until it had a Senate-confirmed Director; when that point came, the Director became a potential decisionmaker for administrative enforcement proceedings; that change in decisionmaker is a substantial change in law that should not apply to conduct from before the confirmation. So if the Bureau wants to impose liability for conduct before July 16, 2013, it needs to sue in court.

In the PHH case, that conclusion would have erased all but perhaps $2 million of the $109 million in disgorgement that the Director ordered. We can expect respondents to take serious effort to make some version of this argument work.


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