D.C. Circuit Finds CFPB Structure Unconstitutional
On October 11, 2016, Judge Brett Kavanaugh, writing for the United States Court of Appeals for the D.C. Circuit, vacated an administrative enforcement order brought by the Consumer Financial Protection Bureau (“CFPB”) against PHH Corp. (“PHH”) for violations of Section 8 of the Real Estate Settlement Procedures Act (“RESPA”). PHH Corp. v. CFPB, No. 15-1177 (D.C. Cir. Oct. 11, 2016). The Court held, in relevant part, that the structure of the CFPB—an independent agency with power concentrated in a single director who is unaccountable to the President of the United States—represented an unconstitutional delegation of unchecked executive authority. As a remedy, the Court held that the President must have the power to remove, direct, and supervise CFPB’s director, but otherwise permitted the CFPB to continue its work. Accordingly, the immediate practical impact of the decision will be limited, but over the long term the CFPB may begin to answer more directly to the political leanings of the Executive Branch, rather than Congress.
The CFPB was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). It enforces federal consumer protection statutes covering, among others, home finance, student loans, credit cards, and banking practices and is headed by a single director. The Court held that the CFPB was unconstitutional as currently constructed because (1) it is an independent agency, meaning that it does not serve under the direction of the Executive Branch; but (2) it is headed by a single director, whereas all other independent agencies are headed by panel of directors (or commissioners). By being headed by a single director who could only be removed by the President “for cause”, the Court observed that the CFPB could operate essentially unchecked. The Court concluded that this posed a materially greater risk of arbitrary decision making, abuse of power, and threats to individual liberty than is posed by other independent agencies, and that such a structure is unconstitutional. The Court remedied this constitutional violation by severing the “for cause” provision in Dodd-Frank that limited the President’s ability to remove the CFPB director, meaning that the President now has the power to remove the CFPB’s director at will and that the CFPB is less “independent” than originally envisioned by Congress.
Because the Court’s remedy did not invalidate the CFPB itself, the Court also addressed the statutory issues raised by PHH in challenging the $109 million order against it. The Court held that (1) the CFPB misinterpreted Section 8 of RESPA, (2) the CFPB violated PHH’s due process rights by retroactively applying this new interpretation; and (3) the three-year statute of limitations under Section 8 of RESPA applies to all CFPB enforcement actions. Accordingly, the Court vacated the order against PHH and remanded the case for further proceedings before the CFPB.
This decision was highly anticipated, given the contentious battles that preceded the passage of Dodd-Frank and the formation of the CFPB. However, while a clear win for PHH, it will likely have limited practical impact for the future. Before the decision, the CFPB director served for a five-year term. Now that the director serves at the pleasure of the President, the President can remove the director promptly upon taking office, instead of waiting a year or two for the director’s term to conclude. What is arguably of greater consequence is the fact that the Court rejected a request to rule that the CFPB must be eliminated altogether pending a revised mandate from Congress. The Court took a narrow approach to resolving the constitutional violation, which left the CFPB, and the regulatory environment for financial institutions in general, largely intact.