John L. Culhane, Jr., Partner - PowerPoint Presentation

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John L. Culhane, Jr., PartnerConsumer Financial Services GroupBallard Spahr LLP215.864.8535culhane@ballardspahr.com

Regulatory Round up Federal Efforts Impacting Student Loan Servicing and CollectionsNCHER Spring ConventionJune 7, 2017Clearwater Beach, FL

Copyright 2017 by Ballard Spahr LLP

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Overview – A Hostile ClimateRepublican administrations usually oppose federal regulation, but this one has been particularly hostile During the campaign candidate Trump promised on numerous occasions to dismantle Dodd-FrankLikewise candidate Trump promised to role back federal regulationsRecall that Steve Bannon said that this administration’s goal is “deconstruction of the administrative state”The attack on federal regulations has been waged in the executive, legislative, and judicial branches

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Executive Action

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Executive – Memos & Executive OrdersThe “Regulatory Freeze” Memo (January 20, 2017) Memo from Reince Preibus, Assistant to the President and Chief of Staff Told agency heads to refrain from sending rules to the Office of the Federal RegisterLikewise told agency heads to withdraw any rules that had been submitted but had not yet been publishedAlso told agency heads to postpone the effective date of any rules that had been published but had not yet taken effect

Independent agencies “encouraged” to participate in the regulatory freeze

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Executive – Memos & Orders (cont.)Executive Order 13771 – Reducing Regulation and Controlling Regulatory Costs (January 30, 2017)The so-called “two for one” orderRequires an agency to identify two regulations to be repealed for each new regulation proposedSets a “zero incremental cost” limit on all new regulations, including repealed regulationsRequires the Director of OMB to set a total amount of incremental costs for each agency for the next fiscal yearIndependent regulatory agencies again “encouraged” to comply with these standards

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Executive – Memos & Orders (cont.)Executive Order 13772 – Core Principles for Regulating the United States Financial System (February 3, 2017)Order requires Treasury to consult with FSOC, including CFPB, and report on compliance with core principles, including:Empowering Americans to make independent financial decisions and informed choicesFostering economic growth and vibrant financial markets through more rigorous regulatory impact analysisMaking regulation efficient, effective, and appropriately tailored Restoring public accountability within Federal financial regulatory agencies

and rationalizing the regulatory framework

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Executive – Memos & Orders (cont.)Additional Executive Orders and Presidential MemorandaExecutive Order 13777 – Enforcing the Regulatory Reform Agenda (February 24, 2017)Executive Order 13781 – Comprehensive Plan for Reorganizing the Executive Branch (March 13, 2017)Executive Order 13789 – Identifying and Reducing Tax Regulatory Burdens (April 21, 2017)Presidential Memorandum regarding Dodd Frank Orderly Liquidation Authority (April 21, 2017)Presidential Memorandum regarding Financial Stability Oversight Council (April 21, 2017)

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Legislative Action

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Legislative – Congressional Review ActCRA requires every agency to report on almost every ruleMust include a copy, a summary, and the proposed effective dateMust also include a cost-benefit analysisRule cannot take effect until the later of Sixty legislative days after receipt by Congress Sixty days after publication in the Federal RegisterCongress can pass a joint resolution of disapprovalDisapproval blocks the rule absent a Presidential veto

Congress can still override any veto (not an issue here)

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Legislative – CRA (cont.)Disapproval precludes issuance of any similar ruleRule may not be reissued in substantially the same formNo gloss on “substantially the same” New rule may not be issued unless separately authorized by lawActions under the CRA are not subject to judicial reviewDisapproval by Congress is not reviewableAn agency’s failure to comply may not be reviewable

Two circuit courts have rejected CRA challenges to rulemakingOne federal district court has upheld a CRA challengeJoint statement by Congressional sponsors favors court review

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Legislative – CRA (cont.)Fourteen resolutions of disapproval have been passed and signed into law by President TrumpA wide range of agency rules have been rejected to date, including the broadband privacy ruleOne Dodd Frank rule issued by the SEC has been rejectedDisclosure of government payments to energy companiesTwo Department of Education rules have been rejectedAccountability and state plan provisions under the ESSAStandards for teacher preparation under the HEA

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Legislative – CRA (cont.)A GSA rule banning arbitration has been rejectedGSA rule required federal contracting officers to make sure that contractors did not mandate arbitration for certain claimsSome rules thought to be targets have not been rejectedDepartment of Education borrower defense to repayment rule was not rejectedNo CFPB rule has been rejected so far; resolutions to reject the prepaid card rule were introduced in February but did not pass

S.J. Res. 19H.J. Res. 62 and H.J. Res. 73

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Judicial Action

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Judicial – The PHH CaseD.C. Circuit court panel rules on October 11, 2016 that the CFPB is unconstitutional because “too independent”CFPB has authority to conduct investigations, bring enforcement actions, and impose fines and penaltiesCFPB is insulated from Congressional influence because its budget is automatically funded by the Federal ReserveCFPB is insulated from Presidential influence because the Director has a five-year term and is removable only “for cause”Remedy is to sever “for cause” and allow the President to remove the Director at will

Remedy seems to make the CFPB an executive agency

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Judicial – The PHH Case (cont.)On November 18, 2016, CFPB files petition with the DC Circuit seeking en banc review of the decisionAt the invitation of the DC Circuit, on December 22, 2016, the DOJ files a brief in support of the CFPB’s petition DC Circuit grants CFPB petition seeking en banc review on February 16, 2017, vacating the panel decisionOn March 3, 2017, DOJ files an “unopposed” motion for leave to submit an amicus brief by March 17, 2017PHH brief filed on March 10, 2017 argues that the CFPB should be completely dismantled

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Judicial – The PHH Case (cont.)Amicus brief filed by DOJ on March 17, 2017 reverses course and argues thatThe CFPB’s structure makes it unconstitutionalThe “for cause” removal provision should be severed from the statuteThe court has the discretion to reach the constitutional issue and should do so DOJ describes the change as resulting from further review of the panel decision and reconsideration of the issues

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Judicial – The PHH Case (cont.)Oral argument in DC Circuit held on May 24, 2017Predictions based on the oral argument have been mixedCase has interesting implications for CFPB litigationSection 1054 of Dodd Frank generally requires the CFPB to notify the Attorney General when bringing a civil suitSection 1054 may require the CFPB to notify the Attorney General if sued over any regulation it issues Section 1054 also appears to give the Attorney General veto power over CFPB petitions for Supreme Court review

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CFPB Reaction

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CFPB ReactionOnly direct public statements are made by Director Cordray during a WSJ forum on January 24, 2017Cordray says that the change in administrations “shouldn’t change the job at all”Cordray signals continued aggressive enforcement by the CFPB – “Our pace needs to be steady and vigorous”Cordray expresses some uncertainty as to whether the rulemaking freeze applies to the CFPB

No real public statements thereafter but a track record indicating extreme caution in rulemaking

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CFPB Reaction – Disparate ImpactCFPB Bulletin No. 2013-02 indicates that CFPB will apply the disparate impact theory to indirect auto lendingFrom that point on CFPB applies the theory and Congressional Republicans seek to “repeal the guidance”Blog post by Patrice Ficklin on December 16, 2016 seems to indicate that the CFPB is moving away from the issueBut 2016 Fair Lending Report says that CFPB intends to look at discrimination in student loan servicingUnclear if CFPB will use a disparate treatment analysis

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CFPB Reaction – Disparate ImpactGAO is looking at whether the guidance is a CRA rule and, if so:CFPB might have to withdraw the guidance or follow notice and comment rulemaking proceduresPrivate plaintiff might sue challenging the effectiveness of the guidance due to CFPB’s failure to comply with CRARepublican lawmakers might introduce a resolution of disapproval

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CFPB Reaction – Debt CollectionAdvance notice of proposed rulemaking is published in the Federal Register on November 12, 2013SBREFA proposal for third party collection is released to small business representatives on July 28, 2016CFPB promises to issue a SBREFA proposal for first party collection “in the next several months”Initial posting of CFPB Fall 2016 semiannual regulatory agenda calls for pre-rule activities through February 2017CFPB portion of Unified Agenda in Federal Register pushes the date for action to “sometime”

in 2017

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CFPB Reaction – Debt CollectionPre-rule activities continue with new consumer surveyNotice published in the Federal Register on June 5, 2017Survey of 8,000 individuals regarding disclosure formsFocus on consumer comprehension and decision making in response to disclosure formsCFPB estimates screening 17,750 individuals before conducting its survey

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CFPB Reaction – ArbitrationRulemaking proceeding arguably begins on April 27, 2012 with CFPB request for information regarding clausesCFPB releases its preliminary study based on responses to RFI on December 12, 2013Final report to Congress required by Dodd-Frank issued on March 1, 2015SBREFA framework circulated to small business representatives on October 7, 2015Proposed rule issued on May 24, 2016 with August 22, 2016 comment deadline

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CFPB Reaction – Arbitration (cont.)Speculation that final rule will be issued so that 60-day period for CRA review will expire prior to inaugurationInitial posting of CFPB Fall 2016 semiannual regulatory agenda gives a February 2017 date for a final ruleCFPB portion of Unified Agenda in Federal Register pushes the date back to sometime in the Spring of 2017

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CFPB Reaction – Student Loan ServicingCFPB publishes a request for information on student loan servicing on May 21, 2015On September 29, 2015, CFPB issues a report, based on the comments, critical of student loan servicing practicesCFPB, Treasury and the Department of Education release the Joint Statement of Principles on student loan servicingOn May 3, 2016, CFPB publishes a request for information about communications to borrowers about alternative repayment options

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CFPB Reaction – Student Loan ServicingCFPB consults on the Mitchell Memo issued by the Department of Education on July 20, 2016Memo identifies “best practices” for federal student loan servicingCFPB Fall 2016 semiannual regulatory agenda says that CFPB will continue to evaluate potential rulemakingPotential rulemaking is identified as a long-term action with no specific milestones or timetables disclosed On February 23, 2017, CFPB issues a request for information on its student loan servicing market monitoring initiative

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CFPB Reaction – Student Loan ServicingOn April 3, 2017, Department of Education dramatically changes course in statement issued by Betsy DeVos Department withdraws the Mitchell Memo about federal loan servicing standardsDepartment apparently also withdraws from the Joint Principles previously announced

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Thank you!

Panelist John L. Culhane, Jr.PartnerConsumer Financial Services Group

215.864.8535culhane@ballardspahr.com

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Panelist – John L. Culhane, Jr.Partner at Ballard Spahr and a member of the firm’s Consumer Financial Services, Mortgage Banking, Bank Regulation and Supervision, Higher Education, and Privacy and Data Security Groups as well as its Marketplace Lending Task Force, Fair Lending Task Force, TCPA Task Force, and Military Lending Act Task Force

Compliance practice emphasizes counseling clients on the development and implementation of innovative loan, leasing, and payment programs, and includes counseling on fair lending, servicing and collection issuesRegulatory practice includes preparing clients for banking agency and CFPB targeted fair lending and full spectrum compliance examinations as well as assisting in the defense of consumer class actions, attorney general investigations, and agency enforcement actionsNamed a top consumer financial services lawyer by Chambers USA, 2015 & 2016Charter member of the American College of Consumer Financial Services LawyersFormer Chair of the Subcommittee on Fair Lending of the ABA Committee on Consumer Financial ServicesDMEAST #29747777v1