Updates from the Courts

In Seila Law LLC v. Consumer Financial Protection Bureau (CFPB), the United States Supreme Court held that the CFBP’s single-director is unconstitutional. The challenge was based on the fact that the CFPB is led by a single director and removable by the President only for cause. The Plaintiff alleged that structure was a violation of separation of powers.

The Supreme Court, in a 5-4 decision, agreed with the Plaintiff. The Court concluded that CFPB’s structure lacked the necessary presidential oversight. The Court emphasized that the Constitution “scrupulously avoids concentrating power in the hands of any single individual” other than the President. According to the Court, the CFPB’s single-Director structure “contravenes this carefully calibrated system by vesting significant governmental power in the hands of a single individual who is neither elected by the people nor meaningfully controlled (through the threat of removal) by someone who is.”

The Court did not, however, strike the Dodd-Frank Act. Rather, it severed the for-cause removal provision from the law.

On a related note, the Court also recently agreed to hear a case regarding the constitutionality of the Federal Housing Finance Agency’s (FHFA) structure (Collins v. Mnuchin). As with the CFPB director, the statutory scheme only allows for removal of the FHFA director “for-cause.”

In late June, the Court declined to take up the case of American Bankers Association (AmBA) v. National Credit Union Administration (NCUA). The Court was asked to review the D.C. Circuit Court of Appeals case regarding the reasonableness of the NCUA’s interpretations of “local community” and “rural district” in its 2016 field of membership rule. Accordingly, the Court of Appeals ruling that largely upheld the rules stands as the law.

In the Final Rule, NCUA defined any “Combined Statistical Area,” or portion of such an area, as a “local community,” so long as the area’s population does not exceed 2.5 million people. Every Combined Statistical Area includes multiple “CoreBased Statistical Areas.” NCUA also increased the size cap for “rural districts” to 1 million people. The D.C. Circuit upheld the agencies rules and interpretation of them.

In arguing for review, the AmBA pointed out that sprawling regions containing dozens of cities and counties automatically qualify as single local communities, as do narrow strips of land connecting cities hundreds of miles apart. AmBA also argued that NCUA’s interpretation of rural district is unreasonable. Under that interpretation, five entire states each qualify as “rural district[s],” as do vast multistate regions in which nearly all of the population lives in major metropolitan areas.

Numerous lawsuits have been filed around the country by brokers and accountants seeking an agents’ fee from the lender issuing a PPP loan. One such lawsuit has been filed in Arkansas federal district court.

The fundamental allegation in the lawsuits is that the PPP provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) required lenders to pay an agent’s costs out of the fees lenders receive from the Small Business Administration (SBA). The relevant SBA rules states that “[a]gents may not collect fees from the borrower or be paid out of the PPP loan proceeds.” The rule also states that “[a]gent fees will be paid by the lender out of the fees the lender receives from SBA.” This language serves as the foundation for the lawsuits.

Banks have pushed back by filing motions to dismiss arguing that neither the CARES Act nor the SBA rule require reimbursement by the lender. Rather than creating an obligation, the rule simply caps how much the agent may recover, the banks argue. Without an agreement between the agent and the bank, there is no legal obligation to pay the agent anything

During a House Financial Services Committee (HFSC) oversight hearing on June 30, 2020, Treasury Secretary Steven Mnuchin made statements consistent with the arguments put forth by defendant banks. He explained that his department’s guidance thus far has said that banks “could pay agent fees out of the fees that they received”—not necessarily that they must. Mnuchin additionally explained that the intent was not to make such reimbursement automatic, but for it to “be based upon a contractual relationship between the agent and the bank.”

As of the date of the writing of this summary, one federal district court in Florida has agreed with the defendant banks and dismissed the Plaintiff’s claims against the lenders. The Court held: “Here, it is undisputed that neither Plaintiff nor the borrowers executed Form 159, nor did they have agreements with Defendants regarding payment for the work Plaintiff performed in assisting borrowers in obtaining PPP loans through Defendants. Accordingly, Defendants have no legal obligation under the CARES Act or the IFR to pay Plaintiff an “agent fee” for helping the borrowers get PPP loans from Defendants . . . “

The litigation will continue to play out in the coming months, but the initial battles seem to be going well for the lenders.