What the D.C. Circuit’s PHH decision means for CFPB rulemaking


In its decision last week in PHH Corporation v. CFPB, the D.C. Circuit ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional.  While the D.C. Circuit (in footnote 19) noted that it “need not here consider the legal ramifications of our decision for past CFPB rules or for past agency enforcement actions,” we have determined that one legal ramification of the decision is greater regulatory oversight for CFPB rulemaking.

To remedy the constitutional defect, the court severed the removal-only-for-cause provision from the Dodd-Frank Act so that the President “now has the power to supervise and direct the Director of the CFPB, and may remove the Director at will at any time.”  As the court stated, the consequence of this structural change is that the CFPB is no longer an “independent agency” and instead “now will operate as an executive agency.”

Unlike independent agencies, executive agencies are subject to the regulatory review process of the Office of Information and Regulatory Affairs (OIRA) within the Office of Management and Budget.  Pursuant to Executive Order 12866, federal agencies, other than those defined as an “independent regulatory agency” by 44 U.S.C. Sec. 3502(5), must submit proposed and final regulations constituting a “significant regulatory action” to OIRA for review prior to publication in the Federal Register.  (The Executive Order incorrectly cites to Sec. 3502(10) which defines “person.”)  A key component of OIRA’s review is an evaluation of the agency’s analysis of a regulation’s anticipated costs and benefits and its determination that the regulation’s anticipated benefits justify its anticipated costs as well as the agency’s identification and assessment of feasible alternatives.  The Executive Order defines a “significant regulatory action” as any regulatory action that is likely to result in a rule that may (a) “have an annual effect on the economy of more than $100 million or more,” (b) “adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, tribal governments or communities,” or (c) raise other coordination, budgetary, or policy issues, such as creating a serious inconsistency with another agency’s action.

If and when the CFPB would become subject to OIRA oversight as an “executive agency” will turn on future developments in the PHH case.  Most immediately, it will turn on whether and when a mandate is issued by the D.C. Circuit and, if issued, whether the mandate is stayed by the D.C. Circuit or the U.S. Supreme Court.  The D.C. Circuit has issued an order directing the Clerk of the Court of Appeals to “withhold issuance of the mandate herein until seven days after disposition of any timely petition for rehearing or petition for rehearing en banc.”  Under D.C. Circuit rules, if a United States agency is a party in a civil case, any party has up to 45 days from the date of judgment (which was October 11 in PHH) to file a petition for rehearing by the panel or a petition for rehearing en banc.  If a request by the CFPB for a rehearing is denied or if the CFPB decides not to seek a rehearing and instead to directly file a petition for a writ of certiorari with the U.S. Supreme Court, the CFPB would need to seek a stay of the mandate from the D.C. Circuit or Supreme Court.  Under U.S. Supreme Court rules, a certiorari petition must be filed within 90 days after entry of judgment by a court of appeals or, if a petition for rehearing is filed, 90 days after the date of denial of the rehearing or subsequent entry of judgment if rehearing is granted.

Notwithstanding that the CFPB is currently defined as “independent regulatory agency” by 44 U.S.C. Sec. 3502(10), if the D.C. Circuit’s decision takes effect, the CFPB should no longer be considered an “independent regulatory agency” for purposes of Executive Order 12866.  It seems clear that any regulations the CFPB has not yet finalized (e.g. currently proposed arbitration and payday loan rules, a future proposed debt collection rule) would qualify as a “significant regulatory action” subject to OIRA review based either on the rule’s annual effect on the economy or its material adverse effect on a sector of the economy.  For example, the CFPB has estimated that its proposed arbitration rule will cause 53,000 providers who currently use arbitration agreements to incur between $2.62 billion and $5.23 billion over a five-year period to deal with 6,042 additional federal and state court class actions that will be filed due to the proposed rule’s elimination of class action waivers.  In addition, the D.C. Circuit’s decision could result in challenges to CFPB final rules, including those that have already become effective, on the basis that such rules were not, but should have been, reviewed by OIRA (e.g. prepaid card rule, larger participant rules).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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