Professor Sickler’s forthcoming article, Bankruptcy’s Adjunct Regulator featured on Duke’s FinReg blog
Bankruptcy and consumer finance laws operate in independent silos. Many consumer advocates view bankruptcy as a remote and specialized field, while bankruptcy proponents tend to view bankruptcy as a complete and exhaustive system. Our forthcoming paper, Bankruptcy’s Adjunct Regulator (Florida Law Review), bridges these fields with a comprehensive study of how the Consumer Financial Protection Bureau (CFPB) can support the consumer bankruptcy system.
Our earlier work responds to a concern that certain large creditors routinely under-comply with bankruptcy law and procedure. The bankruptcy system, which is premised on a litigation-based model of regulation, relies on parties involved in a case to affirmatively raise creditor non-compliance before the court. Yet much bankruptcy-related misconduct generates harms too small to justify the expense of individual litigation. When a large, institutional creditor deploys a business practice that exploits these vulnerabilities for economic gain, it can undermine the integrity of the bankruptcy system as a whole.
Moreover, bankruptcy’s existing structural protections are not well suited to address this kind of system-wide harm on a collective basis. For example, bankruptcy judges have been found to exceed their authority when they order collective remedies. And while the U.S. Trustee Program, the watchdog of the bankruptcy system, has had some success in obtaining settlements from large, institutional creditors, its information-gathering capacity is limited.
The CFPB and Consumer Bankruptcy
Enter the CFPB, which has expansive statutory authority to regulate consumer debt collection. Its rulemaking, supervisory, and enforcement powers reach most entities involved in consumer financial services markets. The CFPB is thus well positioned to address system-wide business practices that harm consumers and the bankruptcy system as a whole, at least where those practices also violate the federal laws it is charged with enforcing. We argue that the CFPB should use its existing authority to enhance the regulation of the consumer bankruptcy system.
Consider the example of chapter 13 debtors and mortgage servicers: Debtors who have a regular income and meet certain statutory requirements can keep their homes and other property by committing to a three-to-five-year repayment plan under chapter 13 of the Bankruptcy Code. Thus, many chapter 13 debtors continue to interact with their mortgage servicers over the course of the bankruptcy case.
The CFPB’s mortgage regulation reflects careful attention to the bankruptcy dimensions of its mortgage servicing practices. For example, the CFPB promulgated rules under the Truth in Lending Act (TILA) that require mortgage servicers to send modified periodic statements to borrowers in bankruptcy. The CFPB also ensures, through its periodic supervision of mortgage servicing, that mortgage servicers have internal policies and procedures in place so that they can comply with bankruptcy laws and procedural rules. This supervision has uncovered significant payment processing non-compliance affecting borrowers in bankruptcy, leading the CFPB to commence an enforcement action against Ocwen, a large non-bank mortgage loan servicer.The CFPB’s regulation of mortgage servicers in bankruptcy provides a model for how the CFPB might regulate other types of bankruptcy-related debt collection.
Our proposal is modest in that it does not require a pivot in priorities or diversion of resources from the CFPB’s core mission. Instead, we suggest that the CFPB build out its bankruptcy-related oversight using existing data collection and analysis tools, and then share the fruits of that oversight with the U.S. Trustee Program to identify and implement bankruptcy-specific priorities.
The CFPB has vast intelligence gathering capabilities, which it can use to collect and analyze market-wide information about bankruptcy-related misconduct. This, in turn, can crystalize issues that bankruptcy’s existing regulators have difficulty discovering on a case-by-case basis.
The CFPB’s consumer complaint database is one such data source. The CFPB already analyzes the complaint data for regulatory purposes, specificallyto inform supervision, rulemaking, and enforcement priorities. It also shares complaint data with state and federal agencies. We recommend that the CFPB study consumer complaints to identify patterns of potential misconduct, paying particular attention to bankruptcy’s various trigger points—areas in which a creditor’s risk of noncompliance may be high. Trigger points might include the proof-of-claim process, servicing of debt in chapter 13 cases, and post-discharge debt servicing and reporting. Ongoing and periodic reviews of the data might reveal patterns of bankruptcy-related misconduct by certain creditors or across a particular market.
The CFPB, in consultation with the U.S. Trustee Program, should then use the information gathered to set bankruptcy-specific examination priorities. The CFPB’s Examination Manual already directs examiners to gather information on several key areas that implicate bankruptcy, such as mortgage servicing, debt collection, and credit reporting.The CFPB could consult with the U.S. Trustee Program to develop these areas with more precise questions or to add additional topics. By embracing these aspects of examination and sharing the products of examination with bankruptcy enforcers, the CFPB can leverage its supervision authority to uncover more bankruptcy non-compliance than is currently detected.
If these phases uncover misconduct requiring either entity-specific or market-wide regulatory responses, the CFPB could pursue targeted enforcement and rulemaking agendas related to bankruptcy. Additionally, or alternatively, the U.S. Trustee Program could leverage this information to enforce bankruptcy laws within the confines of bankruptcy’s existing remedial scheme. Indeed, throughout this process, the CFPB should consult with bankruptcy’s other stakeholders, including case trustees, debtors’ attorneys, consumers and industry groups, to refine the focus of its activities and to avoid overreaching.
Challenges For This Proposal
This proposal is not without challenges. For instance, disputes continue to arise in the trenches of litigation about whether federal consumer finance laws can apply in bankruptcy cases.As we discuss in other writings, the Supreme Court jurisprudence on this point is clear—federal statutes with overlapping application should be harmonized wherever possible. Applying this principle, many courts have held that federal consumer protection laws such as the Fair Debt Collection Practices Act (FDCPA) and TILA, among others, can potentially remediate bankruptcy-related harms. Thus, the CFPB can regulate many bankruptcy-related activities under its existing authorities without conflicting with the Bankruptcy Code. Indeed, the Supreme Court recently had the opportunity to foreclose the application of the FDCPA in consumer bankruptcy cases, and declined to do so, preserving a circuit-level division of authority on that narrow issue. But recently, some jurisdictions have overread dicta from Midland Funding to inappropriately foreclose application of FDCPA claims to some kinds of bankruptcy-related conduct. 
The other challenges to this proposal are political and perhaps constitutional. First, the CFPB’s regulatory activity has contracted dramatically under current leadership, making calls for enhanced regulation politically infeasible at the present time. Second, the CFPB has long faced criticism that its unique leadership structure is unconstitutional. Recently, the CFPB joined the Department of Justice in a brief asking the U.S. Supreme Court to consider whether the agency’s single-director – removable only-for-cause – leadership structure is constitutional. The Court will hear that case in 2020.
Amid this shifting landscape, several things are constant. First, bankruptcy laws and consumer protection laws will continue to intersect. And second, certain repeat players will continue to profit from gaps in bankruptcy’s regulatory regime. As the future of the CFPB comes into clearer focus, we hope that Bureau leadership will recognize its regulatory potential in bankruptcy.