The latest volley in ongoing debates over the constitutionality of the Consumer Financial Protection Bureau is a federal judge in New York's ruling that the Bureau’s current configuration and structure is unconstitutional.

The case, in the U.S. District Court for the Southern District of New York, involved legal actions pursued by the CFPB and the Attorney General for the State of New York against defendants RD Legal Funding and its affiliated entities.

The RD entities are companies that offer cash advances to consumers waiting on payouts from settlement agreements or judgments entered in their favor. The CFPB and NYAG allege that they misled consumers into entering cash advance agreements that were represented as valid and enforceable sales but, in reality, functioned as usurious loans that were void under state law.

The Bureau asserted that, in doing so, the defendants violated provisions of the Consumer Financial Protection Act. The NYAG independently asserted that RD Legal Funding are liable under New York law for the same actions and events that form the basis of the CFPA.

For their part, the defendants moved to dismiss the complaints, arguing that the CFPB is “unconstitutionally structured and therefore lacks the authority to bring claims under the CFPA. It also contended that the Court lacks federal jurisdiction because the RD Legal Funding entities are not “covered persons” under the CFPA and do not come within the Act’s jurisdictional purview. 

In her opinion, U.S. Senior District Judge Loretta Preska ruled that: “Because the CFPB’s structure is unconstitutional, it lacks the authority to bring claims under the CFPA and is hereby terminated as a party to this action.” She later added that the CFPB “lacks authority to bring this enforcement action because its composition violates the Constitution’s separation of powers.”

“The NYAG, however, has independent authority to bring claims under the CFPA,” Preska wrote. “The Court concludes that NYAG has alleged plausibly claims under the CFPA and under New York law.”

The opinion “further emboldens the states to ‘fill the void,’ especially the NYAG which had been vocal in that regard,” says Allison Schoenthal, head of the consumer finance litigation practice at law firm Hogan Lovells.

“It’s also interesting that the defendants sound, from the opinion, to have put the NYAG’s claims on the backburner, focusing on the CFPB,” she added. For example, the opinion stated that: “Vexingly, Defendants do not address the NYAG’s independent authority to bring claims in federal district court under the CFPA, without regard to the constitutionality of the CFPB’s structure.”

“It then notes that the defendants only argue the NYAG’s jurisdiction over the transactions at issue in a two-sentence footnote,” Schoenthal says.

“This decision is fascinating regarding the constitutionality of the CFPB’s structure, but do not underestimate your state regulators and the AGs offices. They will be taking over where the CFPB has cut back, and they have the authority and weapons to do so,” she warned.

The decision conflicts with previous judicial rulings and could set the stage for ultimate consideration by The Supreme Court.

An en banc ruling handed down in January by the U.S. Court of Appeals for the D.C. Circuit, unlike the latest opinion, said that the agency’s structure was constitutional and that its director can only be removed by the president for inefficiency, neglect of duty or malfeasance in office. The 6-3 ruling upends a 2-1 ruling in 2016 by a three-judge panel of the same court.

In 2015, the CFPB fined New Jersey mortgage services company PHH Corp. for alleged violations of the Real Estate Settlement Procedures Act. In a lawsuit challenging the $109 million fine, PHH asserted that the agency had neither the regulatory jurisdiction nor constitutional authority to impose the penalty.

PHH scored a victory of sorts in October 2016 when the 2-1 ruling by the Court found that the CFPB, as currently composed, is unconstitutional.

The Court, at that time, sided, in large part, with PHH’s assertion that the CFPB’s structure violates Article II of the Constitution because it operates as an independent agency headed by a single director. To constitutionally comply, 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.

The majority opinion, in a fairly scathing rebuke written by Judge Brett Kavanaugh, said “the single-director structure of the CFPB represents a gross departure from settled historical practice.”

For its part, the CFPB requested, and was granted, an en banc rehearing before the full bench of the appellate court’s judges.

Writing for the majority, Judge Cornelia T.L. Pillard argued that the CFPB’s structure was a product of its necessity, created in the aftermath of a global financial meltdown.

“Congress’s solution was not so much to write new consumer protection laws, but to collect under one roof existing statutes and regulations and to give them a chance to work,” she wrote. “Congress determined that, to prevent problems that had handicapped past regulators, the new agency needed a degree of independence. Congress gave the CFPB a single Director protected against removal by the President without cause.”

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