Taking the opposite approach from recent decisions of the U.S. Court of Appeals for the D.C. Circuit, a California federal court upheld the constitutionality of the Consumer Financial Protection Bureau while also ordering the defendant to comply with a civil investigative demand issued by the Bureau.
In November 2016, the CFPB served a CID on a company—already the subject of several investigations by state regulators in California, Iowa, Massachusetts, New York, North Carolina and Washington, as well as a lawsuit filed by the city of Los Angeles—that purchases and sells income streams.
The CFPB explained that the purpose of its investigation was “to determine whether financial-services companies or other persons have engaged or are engaging in unlawful acts and practices in connection with offering or providing extensions of credit or financial advisory services related to transactions involving pensions, annuities, settlements, or other future-income streams in violation of Sections 1031 and 1036 of the Consumer Financial Protection Act of 2010 or any other Federal consumer-financial law. The purpose of this investigation is also to determine whether Bureau action to obtain legal or equitable relief would be in the public interest.”
In total, the Bureau subjected the company to nine interrogatories, two requests for written reports, and ten requests for documents seeking information regarding its structure, investors, marketing, business relationships, bank accounts, collection efforts, financial records, involvement in other government investigations and income-stream-advance transactions.
After the company’s petition to set aside the CID was denied by the CFPB, it filed suit in D.C. federal court to enjoin the Bureau from taking any adverse action against it. The CFPB responded with its own action, asking a California federal court to enforce the CID. The company offered three reasons not to enforce the CID: it sought information outside the Bureau’s jurisdiction, it was overbroad and the CFPB is structurally unconstitutional.
U.S. District Court Judge Josephine L. Staton rejected each argument in turn.
First tackling the limits of the Bureau’s jurisdiction, the court said future-income-stream products could fall within its borders. The company contended that future income streams are not a consumer financial product or service, but “this argument really invites a fact-intensive inquiry into whether the company’s products qualify as loans under the Truth in Lending Act,” the court wrote. Because this “challenge concerns the ‘coverage’ of the applicable consumer financial statutes and the company’s compliance with the law, it cannot raise this issue to prevent enforcement of the CFPB’s administrative subpoena.”
The court also noted that “at least six state regulators and the City of Los Angeles” have found that the products at issue “do constitute loans,” which provides “some ‘plausible’ ground for jurisdiction” over the company’s income-stream-advance transactions.
Turning to the scope of the CID, Judge Staton disagreed with the company that it was overbroad or imposed an undue burden. Nor did the Bureau’s request require the company to provide information outside its possession, custody or control, the court said.
While the CID broadly defined “Company,” “you” and “your,” it also contained an instruction stating: “[t]his CID covers materials and information in your possession, custody, or control, including but not limited to documents in the possession, custody, or control of your attorneys, accountants, other agents or consultants, directors, officers and employees.”
This instruction properly limited the CID, the court said, and yet left the definition broad enough to cover the “complex web of legal entities” through which the defendant operates. “The CFPB convincingly argues that, to avoid [the company] potentially evading compliance with the CID through this network of legal entities, the administrative subpoena must sweep broadly to include information held by the persons and entities identified in the CID’s definition of ‘Company,’ ‘you,’ or ‘your,’ insofar as that information is within [the company’s] possession, custody, or control.”
The CID was neither temporally overbroad nor did it seek irrelevant information, the judge determined. Both challenged requests—a written report and an interrogatory requesting financial data relating to income-stream-advance transactions and bank accounts “held in the name of or for the benefit of the Company”—are “highly relevant to whether it or other entities have engaged in illegal practices,” the court wrote.
Any argument that the CID imposed an undue burden failed for lack of evidence, Judge Staton added. Although the company highlighted the CFPB’s request for “all” of certain types of documents, “crucially absent from [the company’s] opposition is any evidence showing that the administrative subpoena imposes an undue burden, such as a declaration specifying the estimated cost of compliance, the effect of compliance on [the company’s] operations, the number of responsive documents, or some other indication of the burden of complying. [The company’s] bald assertions that compliance would result in ‘significant business consequences’ do not establish an undue burden.”
The court then turned to the question of the CFPB’s constitutionality. The CFPB’s for-cause removal protection does not run afoul of the Constitution because it does not interfere with the President’s exercise of the executive power and appointed duty to take care that the laws be faithfully executed, the court said.
Judge Staton was not persuaded that the single-director structure of the Bureau was any less valid than an agency headed by a commission. There are at least three other active government agencies that share the CFPB’s structure (the Social Security Administration, the Office of Special Counsel and the Federal Housing Financial Agency, with the Office of the Comptroller of the Currency a likely fourth) and the distinction between multimember boards and directors is “overly simplistic,” she wrote.
Congress devised many tools to ensure the Bureau remains accountable, the court added, including annual audits by the Government Accountability Office, a capped budget from the Federal Reserve System, and the power of the Financial Stability Oversight Council to stay or override its rules.
“At bottom, whether to structure an independent agency as a multimember or director-led body depends on the proper weighing of the advantages and drawbacks of each structure,” Judge Staton wrote. “But neither the text of the Constitution nor any Supreme Court precedent supports drawing a constitutional distinction between multimember and director-led independent agencies, so the question is properly reserved for the political branches and the democratic process.”
Even if the CFPB director’s for-cause removal protection were unconstitutional, the CID should still be enforced, the court found. Congress has granted every director-run independent agency the power to issue administrative subpoenas, and a “finding that the CFPB cannot exercise the subpoena power would logically preclude these other agencies from exercising their statutory authority as well,” the court said.
Granting the CFPB’s petition to enforce the CID, Judge Staton ordered the defendant to comply within 15 days.
To read the order, click here.
Why it matters
The California court’s order stands in stark contrast to an opinion from the D.C. Circuit decided in April. In that case, the panel refused to enforce a CID issued by the Bureau to a nonprofit organization that accredits for-profit colleges in the United States and reminded the agency of the limits of its enforcement powers. The panel further described the CID’s Notification of Purpose as “perfunctory” at best and said the Bureau failed to provide the defendant with sufficient notice as to the nature of the conduct and the alleged violation under investigation. Given the range of court reactions to enforcement of CFPB CIDs, entities should carefully consider their response.
This decision also differs from that in the October 2016 decision by a three-judge panel of the D.C. Court of Appeals in PHH Corp. v CFPB, D.C. Cir., Case No. 15-cv-01177, which held that the structure of the CFPB was indeed unconstitutional. That decision is now being reconsidered by the D.C. Court of Appeals en banc, and oral arguments were heard on May 24.