Rapid-Fire Petition Denials by the CFPB: Unconstitutionality an Insufficient Basis to Stop Investigations

The result of such denials was not just academic; as a practical matter, they have paved the way forward for the Bureau to continue its investigatory work over the constitutional objections asserted by regulated entities. 

I. In an Administrative Proceeding, Unconstitutionality is an Insufficient Basis to Challenge a CID

Three separate cases are similar in the Bureau’s rejection of the constitutionality argument. First, on December 26, 2019, the Bureau issued an order denying the petition, filed by Equitable Acceptance Corp. (EAC), to set aside a Civil Investigative Demand (CID) on the basis that the Bureau’s structure is unconstitutional, or in the alternative, to delay the CID until the Supreme Court’s ruling on the issue in a case in which it recently granted certiorari. According to its petition, EAC provided student-loan borrowers with financing to fund document-preparation services in connection with their effort to participate in the U.S. Department of Education’s student loan debt-relief programs.

The CID to EAC, which was issued on October 23, 2019, contained 10 requests for documents, 57 separate questions in 10 interrogatories, 17 separate questions in one request for a written report, and 8 topics for investigational hearing. The CID also stated that the purpose of the investigation was to determine whether loan consolidation companies, debt relief service providers, or associated persons had violated the Dodd-Frank Act’s prohibition of Unfair Deceptive Abusive Acts and Practices and the Telemarketing Sales Rule.

In response, EAC petitioned the Bureau to set aside or modify the CID on the basis that the Bureau’s structure is unconstitutional because, under the statute, the President may not remove its director except for cause. In the alternative, EAC asked the Bureau to stay the CID’s deadlines until the Supreme Court has ruled on the same question in Seila Law v. CFPB.

Second, on November 20, 2019, the Bureau issued a third-party CID seeking documents and written responses from FedChex, a collection agency. FedChex petitioned for the CID to be set aside on several bases, the most significant of which was that the structure of the Bureau is unconstitutional and the question of the Bureau’s constitutionality is currently pending before the Supreme Court of the United States. The Bureau denied the petition arguing, in part, that the administrative process for petitioning to modify or set aside CIDs is not the proper forum for raising and adjudicating challenges to the constitutionality of provisions of the Bureau’s statute.

Third, and similarly, on December 5, 2019, the petitioner in Law Offices of Crystal Moroney (Moroney) sought to set aside a CID, asserting a constitutional defect in the Bureau’s structure, rendering the Bureau without legal authority. Specifically, Moroney argued, as other entities have previously, that the Bureau’s structure violates Article III of the Constitution, which vests executive power in the President of the United States because Title X of Dodd-Frank establishes the Bureau as an “independent bureau” thus insulating it from the constitutionally requisite checks and balances by the Executive and Legislative branches.

Ultimately, the Bureau issued three Orders, dated December 26, 2019, January 26, 2020, and February 10, 2020, denying the constitutionality argument in all three petitions. The Bureau found that the administrative CID petition process is not the proper forum for raising and deciding constitutional challenges to provisions of the Bureau’s statute.

II. Additional Justifications for Denying the Petitions to Set Aside the CID’s.

Attorney-Client Privilege. In FedChex, FedChex also argued that the CID should be quashed in its entirety (not merely revised to delete certain requests) because it sought attorney-client privileged information. The Bureau disagreed, citing the regulation’s requirement that a privilege log must be provided documenting material that a party believes is privileged prior to filing its petition.[1] Here, Director Kraninger found that FedChex had failed to provide a privilege log, and ruled that its argument was procedurally improper. The order further held that FedChex’s petition was devoid of an explanation regarding the specific bases for privilege, and offered only a “blanket claim” of privilege, which failed to demonstrate the CID should be quashed on these grounds.

Procedural Prerequisites to Meet-and-Confer. Additionally, under the Bureau’s rule on investigations, the Bureau may refuse to “consider petitions to set aside or modify a civil investigative demand unless the recipient has meaningfully engaged in the meet and confer process described in this subsection and will consider only issues raised during the meet and confer process.”[2] In Moroney, the Bureau argued that the challenge should have been raised during the meet and confer. Similarly, in EAC, the Bureau found that EAC had failed to engage “meaningfully” with Enforcement staff and thus had not satisfied its obligation to confer reasonably with Bureau staff.

Statute of Limitations Defense. In Moroney, the petitioner also argued that the applicable period in the second CID far exceeds any statute of limitations for the claims identified in the statement of purpose section therein. The Bureau took issue with the fact the petitioner had not first attempted to negotiate the modifications with the Enforcement staff. While it did not grant the Petitioner’s request, it did invite the Petitioner to properly present to Enforcement staff its request to modify.

In FedChex, the petitioner requested that the date range for information sought by the CID be narrowed, because the Bureau was barred from seeking earlier material by the statute of limitations in the Dodd-Frank Act.[3] The Bureau did not find this argument persuasive, concluding that FedChex had misread the limitations provision and, more importantly, the Bureau is not limited to gathering information only from the time period in which conduct may be actionable. Instead, a CID may seek any information relevant to potentially actionable violations of law.

III. Conclusion

The pattern of petition denials makes one thing clear: as regulated entities move forward in responding to CID’s issued by the Bureau, the constitutionality issue—while legally (and intellectually) provocative—has had little tangible impact on the pragmatic reality for a business grappling with any given investigation. In the future, the Supreme Court, as well as federal appellate and district courts nationwide, will continue to address constitutional challenges to the removability of the Bureau’s Director. But as long as the Director declines to wield the alleged constitutional defect to stop investigations from moving forward (as the above cases indicate), the constitutionality debate currently provides no practical solution to businesses facing the compliance requirements of a CID.

Arent Fox’s Consumer Financial Services team will continue to monitor developments in this area. If you have any questions, please contact Jenny Lee, Shelby A. Cummings, or the Arent Fox professional who usually handles your matters.

[1] 12 C.F.R. § 1080.8(a) (privilege claims may be asserted in response to a CID by providing a proper privilege log that conforms to the rule); id. at 1080.8(b) (any CID recipient withholding information solely due to privilege must comply with the rule requiring privilege logs, and do so in lieu of filing a petition). 

[2] 12 C.F.R. §1080.6(c)(3).

[3] 12 U.S.C. § 5564(g)(1).