When the order from the Consumer Financial Protection Bureau hit Mike Donovan’s desk, he thought there must be some mistake.
Donovan does not run a bank or a financial services firm. His Virginia-based company, Nexus Services, specializes in securing bonds for detained immigrants. Nevertheless, the CFPB issued Nexus a “civil investigative demand” (CID) for voluminous documents, including all of its client information. Asserting its authority through the rationale that Nexus’ bond services are a form of credit, the bureau did not allege any specific wrongdoing in its demand, although it insinuated that Nexus may employ deceptive practices to land clients.
Civil investigative demands are routinely issued by government regulators, but the bureau’s request struck Donovan as a fishing expedition far afield from the traditional financial services outfits on which the CFPB presumably focused. So Nexus Services took a rare step: It decided to fight the consumer bureau in court, in a case that is still under review.
“These guys are bullies,” Donovan said. “They are probably the most abusive government agency I’ve ever seen. They were creating an investigation to have an investigation.”
In an emailed statement, the bureau said its investigations follow the Dodd-Frank financial-reform law and “may arise from multiple sources, including but not limited to consumer complaints, industry whistleblower tips, inter-agency referrals, market intelligence, and through the Bureau’s supervision activities.” These can lead to “one or more” civil investigative demands, the statement added.
Envisioned by now-Sen. Elizabeth Warren of Massachusetts, the bureau provided the government with broad new authority to regulate the financial sector in the aftermath of the Great Recession. It was part of Dodd-Frank, signed into law by President Obama in 2010 over the objections of conservatives who have attacked it as unconstitutional because it was insulated from congressional oversight and funded without congressional approval.
With its original director, Richard Cordray, having left in November to run for governor of Ohio as a Democrat this year, the bureau’s civil investigative demands are coming under fresh scrutiny as it adapts to the regulation-averse Trump administration. It’s not clear just how many such demands the bureau made – they are not public records unless challenged by the recipient – but acting director Mick Mulvaney is reportedly reviewing both their frequency and their sweep.
The CFPB, then, stands now as a case study in contrasting approaches to administrative government, first with a stern hand from the left and then with a freer hand from the right – approaches that play out far beyond hard-and-fast laws and in entirely new regulatory territory.
Critics hope reining in the bureau will signal a victory in the Trump administration’s battle against regulatory zeal, including what they decry as legislating through regulatory language – a practice not limited to the consumer bureau in the Obama years.
Asked about the charges of heavy-handedness, John Czwartacki, an adviser at CFPB, said, “Acting Director Mulvaney takes any such charge very seriously.”
In its brief history, the CFPB has employed deliberately vague language in civil investigative demands, citing myriad parts of the law in an attempt to expand its regulatory footprint, according to attorneys, the U.S. Chamber of Commerce and some consumer groups. Critics also contend that the bureau has often directed its fire at progressive bêtes noires, such as the for-profit educational sector, making it seem more of an antagonist than a referee in narrowly proscribed financial matters.
Nexus Services has proved a lightning rod for some immigrant rights groups. They accuse the company of inadequately explaining the costs associated with their bonding service. Under the terms of agreements with Libre by Nexus, the company branch that handles immigrant bonding, the immigrants must pay a monthly fee while being monitored by a GPS device. Immigration activists believe the costs are too steep for and poorly understood by those detained. Donovan disputes these charges, insisting his company performs a valuable service for both the immigrants and taxpayers.
Regardless, the nation’s broken immigration system was not a concern when Congress drafted the Dodd-Frank legislation that created the CFPB. But, as is common in Washington, the vague language used to craft that law gave regulators wide latitude and the bureau emerged in the Obama administration as a powerful force in the regulatory state.
“There’s strong evidence that the CFPB was pursuing Obama administration tactics and priorities, even if it was not directly coordinating with other Obama-run agencies,” said John Berlau, a scholar with the conservative Competitive Enterprise Institute. As an example of such connections, Berlau pointed to Operation Choke Point, a 2013 Justice Department initiative during which the CFPB pursued payday lenders while prosecutors focused on banks dealing with those businesses or gun retailers.
“Like other Obama regulators, the CFPB attempted to make law through administrative maneuvers,” Berlau told RCI. “Yet the CFPB’s abuses of process exceeded even those of other Obama administration bureaucracies due to the bureau’s unique lack of accountability.”
That lack of accountability was one of the reasons a three-judge panel on the D.C. Circuit Court of Appeals ruled the CFPB an unconstitutional entity in October 2016 – a decision that awaits an en banc ruling from the Appeals Court. In the meantime, critics hope Mulvaney will rein in the bureau’s regulatory reach.
“Contrary to past CFPB leadership’s assessment, the ability to issue civil investigative demands is not boundless,” the U.S. Chamber of Commerce wrote in a statement to RealClearInvestigations. “Time and again the CFPB used its CID power to pursue fishing expeditions, both at financial institutions and other organizations beyond the Bureau’s jurisdiction.”
Like other agencies issuing CIDs, the consumer bureau is required to state the laws it believes the recipient may be violating. But the bureau’s own manual tells staff to craft their demands with deliberately vague and sweeping language, lawyers knowledgeable about bureau methods say. “As a matter of practice,” former CFPB attorney Ori Lev and a colleague, James K. Williams, wrote last April, “… the CFPB has typically provided this information in extremely broad terms that provided investigation objects with little insight into what conduct the CFPB believes may have violated the law.”
The two men, who now defend recipients of CFPB investigative demands in their private practice, quote the bureau’s regulatory manual: “The general approach of the model language is to describe the nature of the conduct and the potentially applicable law in very broad terms to preserve the Bureau’s ability to request a broad spectrum of information in any CIDs issued in the investigation, particularly since the direction and scope of the investigation might change.”
This intentionally broad frame, the attorneys wrote, allows the bureau “to change the focus of the agency’s investigation based on what it learns from the materials it obtains.”
When Nexus Services received its civil investigative demand last August, it found itself in a quandary. In theory, the CID’s initial private classification is designed to protect the company, according to attorneys familiar with the process. But it also contains a built-in incentive to comply. If a company seeks relief, the demand and objection become public records along with the adverse publicity of being perceived as a CFPB target.
And the bureau is not above reminding its targets of that fact, according to Donovan. When he and his legal team sat down with CFPB representatives, he said they tried to intimidate him into meeting their demands.
“I don’t think [the threat] was veiled,” Donovan said. “They said, ‘We’re going to publish all this stuff about you on our website.’ It was extortion, as if the best thing to do is to comply because you didn’t do anything wrong.”
In any event, filing an objection to the bureau’s investigative demands is mainly an exercise in futility. Of the roughly three dozen CID petitions the bureau has on its website, which experts said is not the complete record of companies who have objected, only one was granted “in part.”
RealClearInvestigations on Dec. 18 filed a Freedom of Information Act request to disclose all such demands from the CFPB, but on Jan. 4 the bureau replied that “we were unable to identify or locate any responsive records at this time.”
One company that took the issue all the way to court and won was the Accrediting Council for Independent Colleges and Schools.
In June 2015, while the Obama administration’s efforts to clamp down on the for-profit education sector were in full swing, the CFPB hit the council with a civil investigative demand. Foreshadowing the action against Nexus, Cordray’s lieutenants reasoned that because for-profit schools were deeply entwined in loans, they fell under the bureau’s regulatory umbrella and that, by extension, so did their accrediting agency.
The D.C. Circuit Court of Appeals rejected that argument. “The laws enforced by the CFPB do not ‘address, regulate, or even tangentially implicate the accrediting process of for-profit colleges,” Senior Judge David B. Sentelle wrote.
The Obama administration eventually neutralized the council in a different way, with then-Secretary of Education John B. King Jr. stripping it of accrediting privileges in Dec. 2016, one month before he left office.
Former CFPB attorney Lev said he had hoped the council decision might push the bureau to reconsider its belief that “it should push as far and wide as it can,” when issuing civil investigative demands. Yet after reviewing some half-dozen CIDs his clients have received since then, Lev told RCI, “I haven’t seen a substantial change since April."
Still, Mulvaney put a 30-day hold on bureau activity after Trump appointed him acting CFPB director (he's also director of the Office of Management and Budget). Some saw that as an encouraging sign that the bureau might temper its approach going forward, a change Donovan said cannot come too soon.
“We have a right to not be smothered by government regulatory agencies," Donovan said. "They were using the power of the federal government with reckless disregard, and trying to make political points off the backs of our clients.”
Tuesday, Jan. 9, 2018, 4:05 AM Eastern
This article has been revised to reflect the following correction:
An earlier version of this article and an accompanying photo caption misidentified James K. Williams, a private lawyer. He defends targets of the Consumer Financial Protection Bureau, but did not previously work for the bureau.