Delivering a major setback to an agency that has, until now, successfully batted away challenges to its authority, a 2-1 ruling Tuesday by the U.S. Court of Appeals for the D.C. circuit says that the Consumer Financial Protection Bureau, as currently composed, is unconstitutional.
The ruling in the matter of PHH Corporation, et al v. CFPB invalidates a provision in the Dodd Frank Act, when it created the agency, which established a director who is removable only for cause. The President, the majority justices said, must have the authority to remove the CFPB’s director at will.
The decision addresses a legal challenge filed by New Jersey mortgage services company PHH Corp. It challenged a $109 million enforcement action brought against it by the CFPB for alleged violations of the Real Estate Settlement Procedures Act, arguing that the agency had neither the regulatory jurisdiction nor constitutional authority to do so.
According to PHH, the CFPB’s structure violates Article II of the Constitution because it operates as an independent agency headed by a single director. To comply with Article II, it argued, the agency’s Director must be removable at will by the President, meaning that the CFPB would operate as a traditional executive agency; or if structured as an independent agency, it must be structured as a multi-member commission.
A three-judge appellate panel of the U.S. Court of Appeals for the District of Columbia heard arguments in April and their Oct. 11 split decision endorsed PHH’s arguments. The majority opinion, in a fairly scathing rebuke written by Judge Brett Kavanaugh, says that “the single-director structure of the CFPB represents a gross departure from settled historical practice.”
“Never before has an independent agency exercising substantial executive authority been headed by just one person,” it says. “The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency.”
The opinion stops short of calling for an immediate dismantling of the agency. “What is the remedy for that constitutional flaw? PHH contends that the constitutional flaw means that we must shut down the entire CFPB (if not invalidate the entire Dodd-Frank Act) until Congress, if it chooses, passes new legislation fixing the constitutional flaw,” the justices wrote. “But Supreme Court precedent dictates a narrower remedy.” The solution, in their eyes is to “simply sever the statute’s unconstitutional for-cause provision from the remainder of the statute.”
“Here, that targeted remedy will not affect the ongoing operations of the CFPB. With the for-cause provision severed, the President now will have the power to remove the Director at will, and to supervise and direct the director,” the opinion adds. “The CFPB therefore will continue to operate and to perform its many duties, but will do so as an executive agency akin to other executive agencies headed by a single person, such as the Department of Justice and the Department of the Treasury.”
The President now will be a check on and accountable for the actions of the CFPB as well. “Because the director alone heads the agency without presidential supervision, and in light of the CFPB’s broad authority over the U.S. economy, the director enjoys significantly more unilateral power than any single member of any other independent agency…Indeed, other than the President, the director of the CFPB is the single most powerful official in the entire United States Government, at least when measured in terms of unilateral power. That is not an overstatement,” the ruling says.
The majority judges dug in even deeper on the assertion of unilateral power: “Indeed, within his jurisdiction, the Director of the CFPB can be considered even more powerful than the President. It is the director’s view of consumer protection law that prevails over all others. In essence, the director is the President of Consumer Finance. The concentration of massive, unchecked power in a single director marks a departure from settled historical practice and makes the CFPB unique among traditional independent agencies.”
Questions that now need to be resolved include how the mandated structural changes will be made, what the ruling means for past enforcement actions and potential legal challenges, and whether the CFPB itself will pursue a legal challenge.
“While the constitutional questions raised by the D.C. Circuit are leading headlines right now, it’s important to recognize the remedy the court outlines still allows the CFPB to continue to operate,” says Maria Earley, a partner with law firm Reed Smith and former CFPB enforcement attorney. “What’s really a game changer here is the fact that the Court rejected the CFPB’s assertion that no statute of limitations applies to matters brought in administrative court. The Bureau has threatened to sue in administrative courts, where it argued there is no applicable statute of limitations, as a major point of leverage against banks and other financial institutions.”
The National Association of Federal Credit Unions was the only financial services trade association to oppose subjecting credit unions to CFPB authority under Dodd-Frank; it also supports pending legislation that would move the bureau from a single director to a five-person commission. In response to the ruling, President and CEO Dan Berger urged “an immediate moratorium at the CFPB on any rulemaking not already implemented.”
“The Bureau should also consider ceasing and desisting all rulemakings until the legality is resolved,” he said in a statement.
“This is a great day for limited government and the constitutional separation of powers,” says Sam Kazman, general counsel for the Competitive Enterprise Institute a conservative think tank involved in a similar lawsuit challenging the CFPB’s constitutionality. “Today’s ruling will play a major role in providing proper accountability for this rogue agency. It also opens the door for CEI’s district court case, State National Bank of Big Spring v. Lew, to move forward, challenging the constitutionality of other aspects of CFPB.”
In 2012, CEI, the 60 Plus Association, and State National Bank of Big Spring, Texas, filed a lawsuit challenging the constitutionality of the agency and Cordray's recess appointment as director. They were later joined as plaintiffs by the Republican attorneys general of 11 states. Key elements of the lawsuit include: that the agency lacks effective checks and balances to assure the public of accountability; that Congress exercises no “power of the purse” over the CFPB, because the agency’s budget—administered essentially by one person—comes from the Federal Reserve; the President cannot remove the CFPB director except under limited circumstances; and judicial review of the CFPB’s actions is limited, because Dodd-Frank requires the courts to give extra deference to its legal interpretations.
In an August 2013 opinion, Judge Ellen Segal Huvelle of the U.S. District Court for the District of Columbia ruled that the plaintiffs had no standing on these and other claims. In July 2015, however, the U.S. Court of Appeals for the District of Columbia Circuit overruled her decision and allowed the lawsuit to proceed. The case has been on hold in district court awaiting a ruling in the PHH case. State National Bank filed an amicus brief on the constitutional issues in PHH.
Consumer advocates and civil rights groups are striking a far different posture and calling the decision an unnecessary blow to the CFPB. “As the CFPB’s work to stop the Wells Fargo’s fraud demonstrated once again, the CFPB is doing exactly what Congress established it to do: serve as an effective enforcer of fair rules of the road to prevent unfair deceptive and abusive financial practices, practices that led to the financial crisis and cost trillions of dollars in lost homes, lost jobs, and lost wealth,” says Lisa Donner, executive director of Americans for Financial Reform. “Precisely because the CFPB is achieving that mission, Wall Street banks, predatory lenders, and their allies have worked determinedly to undermine and defang it, including by compromising its decision making structure, independence, and authority. Compromising the CFPB’s independence would be a huge gift to Wall Street greed and a loss for consumers.”