Legal Insights: Supreme Court CFPB Funding Case

Late last week, the U.S. Supreme Court upheld a ruling that the Consumer Financial Protection Bureau (CFPB) was constitutionally-funded, and that funding of the Bureau is in compliance with the Appropriations Clause of the U.S. Constitution.

The case, Consumer Financial Protection Bureau v. Community Financial Services Association of America, tested the Appropriations Clause of the U.S. Constitution that reads: “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.”

“The Bureau’s funding statute satisfies the requirements of the Appropriations Clause,” said Clarence Thomas, Associate Justice for the U.S. Supreme Court in an opinion for the court. “The statute authorizes the Bureau to draw public funds from a particular source—’the combined earnings of the Federal Reserve System’—in an amount not exceeding an inflation-adjusted cap.”

The initial dispute with the CFPB began with a 2017 case involving the Law Offices of Cristal Moroney PC, a New York-based debt collection law firm, who attempted to get around a civil subpoena issued against them by the CFPB.

And despite the CFPB’s goal to protect consumers from unscrupulous practices by financial institutions, the Bureau has been placed under the microscope since its establishment on July 21, 2011 in the wake of the financial crisis of 2007-2008. Created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB was designed by current U.S. Sen. Elizabeth Warren, then a professor at Harvard Law School.

And with last week’s ruling, MortgagePoint turned to the legal experts from the Five Star Institute’s Legal League, a professional association of financial services law firms positioned to drive progress in the mortgage servicing industry, for their reaction to the ruling. MortgagePoint had the opportunity to speak with Stephen M. Hladik, a Principal at the law firm of Hladik, Onorato & Federman LLP and Chair of the Legal League, and Ryan Bourgeois, a Partner in the Foreclosure Department of the firm of the BDF Law Group and a member of the Legal League’s Advisory Council.

Legal League Chair Stephen Hladik

Hladik brings to his role as Chair of Legal League experience as a former Deputy Attorney General in charge of the Harrisburg office of the Pennsylvania Bureau of Consumer Protection. Prior to joining Hladik, Onorato & Federman LLP, Hladik was the Pennsylvania Managing Attorney for one of the nation’s largest creditor’s rights firms, practicing mortgage foreclosure and bankruptcy law. He is admitted to practice before the Supreme Courts of Pennsylvania, New Jersey, Colorado, New Mexico, and Michigan, the U.S. Court of Appeals for the Third Circuit and the U.S. District Courts for the Eastern, Middle and Western Districts of Pennsylvania, New Jersey, Colorado, New Mexico, and Puerto Rico. He is a member of the Montgomery County, Pennsylvania, New Jersey, Federal and American Bar Associations. He also served two terms as the Co-Chair of the Business, Banking and Corporate Counsel Committee of the Montgomery County Bar Association.

Legal League Advisory Council Member Ryan Bourgeois

Bourgeois attended Texas Christian University, earning a Finance Degree in 2002. He received his Juris Doctor Degree from Southern Methodist University Dedman School of Law in 2005. He was also the Submissions Chair for the Southern Methodist University Computer Law Review Association. He is licensed to practice before the U.S. District Courts for the Northern District of Texas, and is licensed with the State Bars of Texas, Georgia, and Colorado. He is a member of the Texas, Georgia and Colorado Bar Associations, Dallas Bar Association, as well as the American Bar Association.

Could you give us a brief snapshot of the importance of this case and what was at stake for the mortgage servicing industry in particular?
Hladik: The main item settled by this case is that the funding structure of the CFPB is constitutional, and meets the requirements of the appropriations clause. The second part of the significance is that any of the pending regulations issued by the CFPB that were challenged on the basis of the constitutionality of the agency are now settled as well. There may be other legal challenges to various pending regulations, but the argument that such regulations are invalid due to the agency being unconstitutional is now decided.

Bourgeois: Should the Court have determined that the CFPB’s funding was unconstitutional, then all of the regulations and enforcement actions of the CFPB could have been declared void. This would have caused confusion throughout the industry as to how servicers and law firms should comply with the statutes the CFPB was responsible for interpreting. This was actually the MBA’s greatest concern. In their amicus brief, they took no position on the constitutionality of the CFPB, but requested the court preserve the issued regulations pending a new funding mechanism being created by congress.

Are there any significant current court cases that will be impacted or invalidated by this ruling?
Hladik: In several cases, defendants were challenging the cases against them by arguing that the CFPB was unconstitutional by virtue of its funding mechanisms. This case has decided that issue, and it can no longer be a basis for defense.

What other impacts will this ruling have on the mortgage servicing industry and related industries?
Hladik: With this issue settled, the CFPB now has the ability to proceed with new regulations and regulation by enforcement, and I anticipate the CFPB will be gearing up by hiring more enforcement attorneys and staff.

Bourgeois: Several enforcement actions were on hold or stalled in settlement negotiations pending resolution of this issue. Those cases can now move forward in the ordinary course of resolution.

Is there any other relevant information or insight you think are important for our readership to know or consider about this topic?
Hladik: With constitutional challenges to the CFPB now put to rest, the CFPB is now emboldened to embark on more regulation and enforcement.

Bourgeois: Even though the court has ruled the CFPB constitutional, the Court also undertook another case, Loper Bright Enterprises v. Raimondo, which challenges a legal doctrine called the Chevron Deference. This doctrine places great deference to an agency’s interpretations of agency rules. The court in oral arguments appeared ready to limit this doctrine which could place all agencies including the CFPB’s interpretations of federal law under greater scrutiny by the courts. The ruling in this case will also be important to watch.

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Eric C. Peck

Eric C. Peck has 25-plus years’ experience covering the mortgage industry, most recently serving as Editor-in-Chief for National Mortgage Professional Magazine. He graduated from the New York Institute of Technology, where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books, and has served as Copy Editor for
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