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posted by Adam Levitin

A couple of weeks ago there appeared a remarkable memo written by Mick Mulvaney (who claims to be the Acting Director of the CFPB) to the CFPB staff. The Financial Institutions practice group at Davis Polk, one of the top financial institution practices nationwide, seems to have elevated the ideas expressed in the memo into what one might call “Mick-Mulvaney-Think.”

The basic idea behind Mick-Mulvaney-Think is “a deep commitment to the rule of law as a philosophical concept and as an important brake on agency discretion in the administrative state.” In other words, agencies should not undertake any discretionary actions, but only enforce clear violations of express statutory prohibitions. There are two problems with this idea.

First is factual claim that the administrative state, and particularly the CFPB, exercises runaway discretion. It's silly to argue about the administrative writ large, but in regard to the CFPB, it really doesn’t. The CFPB is an entity bound by a lot of detailed statutory restrictions, not to mention internal processes. State with enforcement:  it’s pretty hard to point to “envelope pushing” or runaway enforcement. The CFPB has brought around 130 cases over seven years. That's around 20 cases per year, which really isn't very many. Virtually all of those cases are based on allegations of “unfair” or “deceptive” behavior, long staples in the law under the FTC Act and state UDAP statutes. In some 27 cases the CFPB has also alleged “abusive” acts and practices, but in all but one instance the same behavior was also alleged to unfair or deceptive. When one looks at the facts alleged in the complaints in these cases, they aren’t radical theories of liability. Mostly the CFPB is alleging garden variety fraud and lack of fair dealing/good faith in contractual relationship.  Not surprisingly, no one has yet pointed to a single out-of-control CFPB enforcement action.

The same is true with rulemaking. Yes, the arbitration and payday rulemakings have met a lot of opposition. But the arbitration rulemaking was only applying more broadly what Congress already requires for mortgages and student loans, and Congress clearly contemplated such a rulemaking in Dodd-Frank. Similarly, the payday rulemaking would impose a less stringent limit than roughly half the states do—those states don’t allow payday loans at all. And it’s not as if these rulemakings were not supported by volumes of evidence (indeed, a common complaint is about how darn long the rule makings are—although that’s all background material, not the actual rules). 
To the extent that there’s a legitimate complaint about “envelope pushing,” it’s about the use of regulatory guidance as a means of implementing policy. This is a problem that exists throughout the bank regulation system, but the only really controversial guidance from the CFPB is its indirect auto lending guidance that tells indirect lenders that the CFPB expects them not to permit dealers to engage in discriminatory markups on auto loans. Given that some indirect auto lenders have already entered into agreements with state attorneys general to the same extent, it doesn’t seem so radical. Moreover, the alternative to such guidance would seem to be not having guidance. It doesn't necessarily mean a rulemaking. Instead, it could just mean enforcement actions. Regulatory guidance is a way of giving market participants fair warning of what might land them in trouble.  If on thinks of it as a courtesy, then it's a feature, not a bug. Of course, if regulatory guidance substitutes for rulemaking, then it's more problematic, but it's far from clear that it really does.

The second problem with Mick-Mulvaney-Think is that its cramped conception of what “rule of law” means. Rule of law is not a world of bright-line rules that make clear to everyone what is legal and what isn’t. That’s a really juvenile view of law of which students are disabused by the end of a semester of law school. Rules are themselves often fuzzy. Consider the Consumer Financial Protection Act itself. It defines a “consumer financial product or service” as including leases “that are the functional equivalent of purchase finance arrangements." What the hell is that? The students in my Sales & Leases classes know that there’s no clear line between lease and security interest. So here’s a fuzzy rule.  

More critically, “Law” consists of more than just rules. It also includes standards. In this regard it’s ironic that the Mulvaney Memo quotes extensively from “A Man for All Seasons,” in which Sir Thomas More makes a passionate defense of rule of law over expedience. But let’s remember that Sir Thomas More was the Chancellor, which meant that among other things he was in charge of the courts of equity.

Courts of equity filled in the gaps in the law. They did so through summary, inquisitorial (not adversarial) procedure. Courts of equity existed to cover situations that neither Parliamentary statutes nor the common law had thought to address, but which nevertheless seemed unjust. If there was a wrong, but the law provided no adequate remedy, one could still seek the King's justice from the Chancellor.

Federal and state courts in the United States still exercise equity powers today. Doctrines such as fraud, good faith, and unconscionability sound in equity, not law. More importantly, though, equity has been codified in key places, most notably section 5 of the Federal Trade Commission Act, which prohibits “unfair and deceptive acts and practices” and section 1036 of the Dodd-Frank Act, administered by the CFPB, which prohibits “unfair, deceptive, and abusive acts and practices.” Those statutory prohibitions are standards. There are statutory limitations on what is “unfair” and “abusive”, and the FTC has a policy statement regarding what it considers “deceptive”, but these remain standards. One cannot say with absolute certainty if some acts or practices will transgress these prohibitions. And that is probably the way it should be.

The fuzziness of standards keeps the “Bad Man” described by Oliver Wendell Holmes, Jr. from going up to and possibly over the line. Put another way, standards, ensure that the “Bad Man” doesn’t “push the envelope.” Without such standards, it’d be easy for lawyers in figuring out ways to structure around rules—the end result would be that the bright line rules would be functionally meaningless. A rules-based regime can encourage creative bad behavior, while a standards-based regime means that Congress isn’t pressed to detail every possible bad act in advance. Given Congressional dysfunction, that’s a darn good thing.

There’s no question that the fuzziness of standards (or even of some rules) can complicate business planning. But that’s what good counsel is for, and there are plenty of things the CFPB can do to clarify the scope of its UDAAP power, including rulemakings, regulatory guidance, and enforcement actions.

While I’m on this soap box, let me tie it into the CFPB seemingly dropping its investigation into the Equifax data breach. The CFPB lacks any express statutory authority over data breaches. Yet that’s also the case for the FTC. Yet the FTC has successfully brought UDAP actions for inadequate data security (and its authority has been upheld by courts in the process). The drafting of the Consumer Financial Protection Act is certainly broad enough to permit such a result. The CFPA's UDAAP prohibitions cover acts and practices “in connection with” the offering of a consumer financial product or service.” That’s pretty broad. But the logic of Mick-Mulvaney-Think is to shy away from using such broad grants of discretion. Taken to its logical conclusion, Mick-Mulvaney-Think would mean that the CFPB would never again bring a UDAAP action, but only enforcement actions for violations of the enumerated consumer laws. How that would be consistent with Congressional direction is beyond me. But let's wait and see if the CFPB bring another UDAAP case any time soon. 


Adam, great post. One observation. Mulvaney is clearly wrong about one thing. Thomas More did not write that quote about flattening all the laws to get at the devil himself. Robert Bolt did. I love that movie, but it always amazes me that lawyers want to put those words in the historical Thomas More's mouth. Indeed, the historical More might have flattened the laws to get at Mulvaney himself -- well depending on what More thought of Mulvaney's religious sensibilities.

Thank you, Adam. This is a fabulous response to that outrageous blog post.

It's the standard, interpretational line from that side of the spectrum, both administratively and constitutionally: If it isn't expressly stated right there in black and white, the government doesn't get to.

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