The power and independence of the Consumer Financial Protection Bureau (“CFPB”), the federal agency created by the Dodd-Frank Act to facilitate reform in the financial services sector, may be threatened as a result of two significant recent events.
1. D.C. Circuit Court finds CFPB unconstitutional as structured.
In PHH Corporation v. Consumer Financial Protection Bureau, the U.S. Court of Appeals for the District of Columbia Circuit overturned the CFPB’s $109 million penalty against PHH Corporation (“PHH”) on constitutional grounds. The CFPB accused PHH, a mortgage lender, of illegally referring borrowers to mortgage insurers in exchange for improper kickbacks in violation of the Real Estate Settlement Procedures Act. PHH objected to the CFPB penalty and challenged the constitutionality of the CFPB’s single-director structure.
A majority of the D.C. Circuit Court panel agreed with PHH and held that the CFPB was unconstitutional as structured. The court ruled that the remedy for the CFPB’s unconstitutional single-director structure is to provide the president with the power to remove the CFPB’s director at will. Previously, the director of the CFPB could be removed only for cause.
In the ruling, U.S. Circuit Judge Brett Kavanaugh explained that, unlike other executive agencies, the CFPB had a “novel” structure in which a single person heads the agency, but is not accountable to the president of the United States. The court observed that executive agencies usually fall into one of two structural buckets. In one bucket are federal agencies, such as the Federal Communications Commission, the National Labor Relations Board, and the Federal Trade Commission, that have several commissioners (usually three to five, including a chair) who work together to make decisions on behalf of the agency. To remove one of the commissioners before his or her term expires, there generally must be cause for the dismissal. In the other bucket are single-director agencies, such as the Treasury Department, that are run by a single director. In those instances, however, the president can remove the director at will.
The CFPB did not previously fall into either bucket. Instead, Judge Kavanaugh noted that the head of the CFPB effectively “operates unilaterally without any check on his . . . authority” and that “substantial executive authority” is vested in a “single person.” Judge Kavanaugh opined that the structure “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.” Judge Kavanaugh further observed that “when measured in terms of unilateral power, the Director of the CFPB is the single most powerful official in the entire U.S. Government, other than the President. Indeed, within his jurisdiction, the Director of the CFPB can be considered even more powerful than the President.”
Nevertheless, rather than shut down the CFPB, as PHH urged, the court elected a narrower remedy of allowing the president to remove its director at will. The CFPB has subsequently requested an en banc review of the three-judge panel’s decision. In the event the CFPB is unsuccessful in pursuing an en banc review, the CFPB must file a written request to the U.S. Attorney General requesting the authority to appeal the decision to the Supreme Court.
2. 2016 election raises additional questions for future of CFPB.
The CFPB’s appeal process is likely to take on added significance in the wake of the election of Donald Trump as the next president of the United States. Although President-Elect Trump has not yet provided any specifics on his intentions with regards to the CFPB or the ongoing PHH litigation, Republicans have traditionally been hostile to the powers of the CFPB. As a result, President Trump’s administration could elect to abandon any CFPB appeal efforts. Conceivably, the Justice Department could simply decline to pursue an appeal to the Supreme Court.
Whether President Trump will choose to remove Richard Cordray from his position is also at stake. Although the effect of the PHH ruling is stayed pending the CFPB’s re-hearing request, President Trump may choose to simply remove Mr. Cordray, knowing that the president has legal cover from the D.C. Circuit Court’s decision. That decision could set in motion a separate challenge from Mr. Cordray challenging the removal.
The CFPB will also now need to consider how aggressive it intends to be in its enforcement activities in light of a Republican Congress that will be backed by a Republican president. Legislation could, for instance, be enacted to change or curtail the CFPB’s structure or power, especially in light of the D.C. Circuit decision.
Although it is unclear how these circumstances will inevitably play out, it will be interesting to monitor how the three branches of government deal with the power of the CFPB moving forward.
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