Since its inception, birthed five years ago by a mandate of the Dodd-Frank Act, critics have found much to hate about the Consumer Financial Protection Bureau. Among their complaints: its broad scope and aggressive enforcement posture; immunity from Congressional oversight of its budget; and an autonomous, politically buffered director who can be removed by the President—and he or she alone — only for “just cause.”

On Oct. 11, a 2-1 ruling by a judicial panel of the U.S. Court of Appeals for the D.C. Circuit agreed with at least one of those grievances, deeming the Bureau, as currently composed, unconstitutional. The decision invalidates the current independent director and gives the President new authority to remove whoever holds the position at will.   

The importance of the case—once you look past the ominous overtones of a loaded word like “unconstitutional”—is in its specifics. It will have a far-reaching effect on the CFPB’s regulatory interpretations and approach to retroactivity and statutes of limitation in enforcement actions. Companies may, in response, need to rethink their dealings with the agency regarding when, how, and for how much they negotiate settlements. And, potentially with dire consequences for the agency, the ruling clears a path for a separate lawsuit espousing an even broader attack on the CFPB’s constitutionality.

The court’s decision in PHH Corporation, et al v. CFPB addresses a legal challenge filed by a New Jersey mortgage services company. It challenged a $109 million enforcement action brought against it by the CFPB for alleged violations of the Real Estate Settlement Procedures Act (RESPA), arguing that the agency had neither the regulatory jurisdiction nor constitutional authority to do so.

“Never before has an independent agency exercising substantial executive authority been headed by just one person,” Judge Brett Kavanaugh wrote, expressing the majority opinion. “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.”

“For financial institutions facing an enforcement matter [the D.C. Circuit decision] takes away a big lever that the CFPB could use to get institutions to settle for what are sometimes unpalatable and unsavory amounts.”
Maria Earley, Partner, Reed Smith

As to the specifics of the case, the court ruled that the CFPB is subject to a three-year statute of limitations on bringing enforcement actions, regardless of whether it does so by filing a complaint in court or issuing an administrative order. The CFPB was also wrong, it said, to interpret RESPA differently than its regulatory predecessors and to then retroactively apply that interpretation against PHH.

“The Court made it clear not only that the CFPB’s interpretation of the Real Estate Settlement Procedures Act was plainly wrong, but that the agency violated PHH’s due process rights when it sought to punish [it] for failure to comply with that new and erroneous interpretation,” says Theodore Olson, a former U.S. solicitor general who, now a partner with law firm Gibson Dunn, represented the plaintiff.

“The CFPB’s numerous and clear legal errors in this case are not surprising given the unconstitutional level of the Director’s insulation from any democratic accountability,” he added. “As the court recognized, the Dodd-Frank Act attempted to give a single individual historically unprecedented power over regulated entities, in violation of the bedrock separation of powers principles enshrined in the Constitution.”

The decision also establishes new ground rules for the CFPB’s enforcement efforts. It “makes clear that the CFPB is bound by the three-year statute of limitations in RESPA, contrary to the agency’s assertion that it may bring enforcement actions whenever it wants to, even 100 years after an alleged violation,” Olson says.

The decision is not necessarily the final word on these matters, as it retains the option to seek en banc reconsideration by the full complement of the appeals court’s judges. A challenge could even wind its way to the Supreme Court. In the meantime, however, the new ruling revives a separate, district court case with its own constitutional challenge.

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 the recess appointment of its director. Republican attorneys general of 11 states joined them as plaintiffs. Claims 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; 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.


The following is from an Oct. 11 opinion by the U.S. Court of Appeals for the District of Columbia in the matter of PHH Corporation v. Consumer Financial Protection Bureau.
Because the CFPB is an independent agency headed by a single director and not by a multi-member commission, the director of the CFPB possesses more unilateral authority—that is, authority to take action on one’s own, subject to no check—than any single commissioner or board member in any other independent agency in the U.S. government. Indeed…the director enjoys more unilateral authority than any other officer in any of the three branches of the U.S. Government, other than the President.
At the same time, the director of the CFPB possesses enormous power over American business, American consumers, and the overall U.S. economy. The director unilaterally enforces 19 federal consumer protection statutes, covering everything from home finance to student loans to credit cards to banking practices. The director alone decides what rules to issue; how to enforce, when to enforce, and against whom to enforce the law; and what sanctions and penalties to impose on violators of the law. (To be sure, judicial review serves as a constraint on illegal actions, but not on discretionary decisions within legal boundaries; therefore, subsequent judicial review of individual agency decisions has never been regarded as sufficient to excuse a structural separation of powers violation.)
That combination of power that is massive in scope, concentrated in a single person, and unaccountable to the President triggers the important constitutional question at issue in this case.
Source: U.S. Court of Appeals for the District of Columbia

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 D.C. Circuit overruled her decision and allowed the lawsuit to proceed. The constitutional aspects of the case have been on hold, awaiting a ruling in the PHH lawsuit.

“Our complaint has to do, not so much with specific agency regulations, as with the functioning of the Bureau,” says CEI’s General Counsel Sam Kazman.

What happens if State National Bank of Big Spring v. Lew is successful? Kazman offers a best-case scenario, at least from his perspective. “I suspect it would invalidate much, if not all, of what the CFPB has done,” he says. “A successful challenge strikes at the heart of just about everything the agency has done and has in the books…Just in terms of watching how someone like [Director Richard] Corday has been acting, I can’t think of another government official who is more in need of more accountability than he is. Some of that is going to be coming from the latest ruling and, hopefully, even more is coming if we succeed.”

Setting aside the still-pending lawsuit, the D.C. Circuit’s most recent decision may not be as dramatic as it sounds, even though “it could possibly undermine some of the other aggressive positions the CFPB has been taking,” says Colgate Selden, counsel in law firm Alston & Bird’s consumer finance regulatory compliance team.

“As I first read the decision, I thought there was going to be a major change. When I got through the constitutional question, I though it actually might be a win for the CFPB because it is constitutionally recognized by the D.C. Circuit with the little change of removing the ‘for cause’ provision for the director,” says Selden, a past member of the Treasury Department implementation team that founded the CFPB and formerly a senior counsel in the Bureau’s Office of Regulations. “I think the panel didn’t want to seem like it was engaged in judicial activism by trying to install a commissioner. The court seemed to think there wouldn’t be much of a change to the Bureau and it would continue working as is.”

If the opinion is affirmed, in its current form, there is no need for new legislation to reconfigure the Bureau. “It is just that now the director can be removed by the next president before the completion of the five-year term,” says Benjamin Diehl, special counsel for law firm Stroock & Stroock & Lavan. “The decision, however, may well prompt additional calls for congressional examination of the CFPB’s decision-making process and administrative structure, and it certainly does not foreclose the need to examine whether a multi-member commission is appropriate. There will continue to be legislative questions about the makeup of the Bureau’s leadership, but this ruling does not mandate or necessitate congressional action.”

Nevertheless, the decision, in its aftermath, could temper the CFPB’s enforcement efforts.

“The Bureau has always been aggressive in its enforcement actions and, if anything, has only been emboldened by recent events involving Wells Fargo and its litigation victory against CashCall,” Diehl says. “It will be interesting to see if the aspects of this opinion that reign in its enforcement power temper that aggressiveness in any way.”

The CashCall decision refers to an August 2016 victory for the CFPB in U.S. District Court for the Central District of California and a ruling that affirmed actions against the online lender for allegedly engaging in unfair, deceptive, and abusive practices.  

“If the CFPB is trying to push a settlement that would force a company to change practices from something that had been permissible under prior guidance issued by another agency, obviously it is not in a position to do that without going through its own rulemaking process,” Diehl says, adding that the decision could “affect not just the CFPB’s mindset, but the mindset of companies that are in discussions with the CFPB or subject to an enforcement action and may “motivate them to push back more.”

The court’s rebuke of both how the CFPB reinterprets existing regulations and its stance that no statute of limitations applies to matters brought in administrative court (rather than in a federal court) is “going to affect what they can bring in terms of enforcement actions and the whole idea of changing the industry through enforcement,” says Maria Earley, a partner with law firm Reed Smith and former CFPB enforcement attorney. Critics have blasted the Bureau for what they see as a tendency to use enforcement actions as a substitute for regulation.

Early’s metaphor for the CFPB’s current approach: “A speed limit is 30 miles per hour and that’s what is posted on the road. They decide, five years later, that everyone who was going 30 miles per hour should really have been going 25 miles an hour, so they go back and look at all the traffic for the past five years and everybody gets a ticket.”

Knowing that the CFPB could, with its own interpretation of a rule, punish a company well beyond an established three-year cut-off presents the risk of fines reaching back 10 years or more, long before the CFPB even existed. That implied threat has motivated many companies to settle—and settle quickly—rather than face that risk. “If you just go back to June 2011, the day the CFPB opened their doors, that’s only five years of exposure, so why not just settle for that when they could go back to 2001?,” Earley says. “Do you want the stick wrapped in barbed wire, or do you just want the plain stick?”

“For financial institutions facing an enforcement matter [the D.C. Circuit decision] takes away a big lever that the CFPB could use to get institutions to settle for what are sometimes unpalatable and unsavory amounts,” she adds. “It is such a strong piece of leverage that the Bureau has had. It is not like they would necessarily threaten you with 10 years of exposure versus five. But you always knew the threat was there, they didn’t even have to raise it. Just the idea that they could do it was enough to scare the pants off of people.”

The prospect of having no statute of limitations in play made corporate decisions even more difficult, especially because litigation is rarely a desirable option. “Most regulated institutions aren’t going to litigate with their primary regulator,” Earley says. “They don’t want to. They don’t want to look like a problem child. They want to demonstrate that there was a mistake and they don’t need to be beaten up in order to fix it.”

“There is a real balance between trying to walk that line of meeting the expectations of your regulator, but also standing up for yourself and your business. It is a delicate dance” she adds. “Having this particular piece of leverage off the table makes for a different conversation when you get to the end of a matter and try to figure out the next step. The statute of limitations decision is going to change some of the private conversations that institutions will have behind closed doors. Are you going to see people really pushing back? Maybe not, but at least that big, huge stick is not there anymore.”

Another important aspect of the D.C. Circuit’s decision comes from its view of how the CFPB applied RESPA in the PHH case, relying upon its own interpretation. “The CFPB has done this in the past,” Earley says. “‘We know the Federal Trade Commission, Federal Reserve, or some other agency had the authority to enforce this statute before, put out a series of bulletins, and offered guidance on how you should comply. We know that you followed them, or at least that’s your position, but we don’t agree and we think this other interpretation makes more sense.’”

“They weren’t as obvious as saying, it was X and now it is Y; it was green and now it is red,” she says. “There are, however, very smart minds within the Bureau thinking about how they can maneuver into positions that look different to all of us but, by the time you hear their explanation, maybe they are not so different.” A matter of interpretation, coupled with bypassing the RESPA statute of limitations, is what inflated a potential $9 million fine for PHH to $109 million and “that’s what made people's heads explode.”

Don’t expect the court’s decision to strike up a parade of companies with past settlements who similarly want to march the CFPB into court. Alston & Bird’s Selden offers a reminder that, by their nature, settlements are voluntary and “more in line with a contract.”

“You would have to prove how this contract was breached,” he says. Except for the highest of monetary penalties, a direct challenge to the regulator may not ultimately be worth the effort.