On Tuesday, October 11, 2016, the D.C. Circuit Court issued its opinion in PHH Corp. v. Consumer Financial Protection Bureau, holding that the Consumer Financial Protection Bureau (CFPB) was unconstitutionally structured. In the majority opinion, Judge Kavanaugh described the position of CFPB Director as, in terms of unilateral authority, “the single most powerful official in the entire U.S. Government, other than the President.” (Maj. Opinion at 27). The Court’s ruling severs the for-cause removal protection provision for the Director from the Dodd-Frank Act, repositioning the CFPB as an executive, rather than independent, agency. Importantly, the Court did not consider the potential legal ramifications of its decision on prior CFPB rules and enforcement actions. (Maj. Opinion, n. 19 at 69).

The opinion notes that there is no clear constitutional answer as to whether an independent agency can be helmed by a single Director removable only for-cause. Judge Kavanaugh explains that the construction of the CFPB is an “historical anomaly” among independent agencies, and that the lack of checks on the CFPB Director’s unilateral authority constitute an impermissible violation of Separation of Powers. (Maj. Opinion at 27).

Judge Kavanaugh distinguishes the CFPB’s construction from other independent agencies helmed by a panel of commissioners (e.g., the FCC and FTC):

1. A Director of an independent agency with both rulemaking and enforcement powers, including the discretion to choose between administrative and judicial enforcement, has virtually unchecked authority if he or she is only removable for cause.
2. Unlike a single Director model, a multi-member commission offers multiple view points, and can hedge against any overreaching or wrongful enforcement attempts by a single member.
3. Similarly, a multi-member decision making body allows for dissents that can serve as a “fire alarm” for actions that go too far in one direction.
4. A multi-member independent agency is better protected from capture, as the capturing party “must capture a majority of the membership rather than just one individual.” (Maj. Opinion at 47, citing Bressman & Thompson, The Future of Agency Independence).
5. In contrast to the staggered terms of multi-member agencies, a single CFPB Director serves a five-year term. Thus, a Presidential administration can inherit a Director and never be able to appoint a replacement.

Judge Kavanaugh uses Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB) as an example of another historical anomaly that was found unconstitutional. The Court in PCAOB found that the “lack of historical precedent for [PCAOB]” was a severe constitutional problem, in particular criticizing the unprecedented two levels of for-cause removal. Free Enterprise Fund v. Pub. Co. Accounting Oversight Board, 561 U.S. 477, 505 (2010). Judge Kavanaugh also highlights the concern of broad unilateral authority housed in an agency with authority to “bring[] law enforcement actions or impose[] fines and penalties against private citizens” further distinguishes the CFPB from other independent agencies, marking it as a “gross departure from settled historical practice.” (Maj. Opinion at 8, 29).

The Opinion vacates the CFPB’s order against PHH, holding that the CFPB’s interpretation of Section 8 of the Real Estate Settlement Procedures Act (RESPA) was facially invalid, that a prior understanding of Section 8 under the Department of Housing and Urban Development made it improper for the CFPB to retroactively apply its novel reading of Section 8 to prior actions by PHH, and that CFPB’s assertions that the Dodd-Frank Act imposed no statute of limitations on CFPB actions were incorrect. On remand, the CFPB may only determine whether, consistent with the three-year statute of limitations under RESPA, the relevant insurers paid more than reasonable market value for reinsurance. Notably, the Opinion does not consider how its changes to the CFPB will affect the agency’s prior rules and enforcement actions. (Maj. Opinion, n. 19 at 69).

In dissent, Judge Henderson argues that the Court unnecessarily reaches the constitutional question, rather than resolving the cases on statutory grounds. Judge Henderson argues that since “PHH can obtain full relief without . . . addressing the Bureau’s challenged structure,” it was not “indispensably necessary” to resolve the issue of for-cause removal, and that the Court should “stay [its] hand.” (J. Henderson, dissenting, at 7-8).

The D.C. Circuit’s opinion will likely be appealed to the D.C. Circuit en banc or the Supreme Court. We will provide updates, including on any resulting impact on current and future CFPB enforcement actions, as they arise.

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