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CFPB Structure Declared Unconstitutional

  • Written by T. Steel Rose, CPA, ACS Editor

rose steelThe U.S. Court of Appeals for the District of Columbia Circuit ruled the structure of the CFPB unconstitutional in October. Judge Brett M. Kavanaugh ruled the structure of the agency as a “concentration of enormous executive power in a single, unaccountable, unchecked director.” In its 2-1 decision, the court said the agency’s structure, “represents a gross departure from settled historical practice,” referring to multi-member oversight used to keep independent agencies in check.

The ruling said the CFPB structure, “not only departs from settled historical practice, but also 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.” However, Kavanaugh’s remedy was nothing more than a change in the “for-cause removal restriction.” Prior to the ruling the president could only remove the CFPB director for cause. While the president is still the only one who can remove the director, Kavanaugh’s ruling dictates that the director may now be removed by the president at will, meaning for any reason whatsoever.

Kavanaugh issued his opinion on PHH Corporation v. Consumer Financial Protection Bureau. The court ruled the CFPB had to re-review the enforcement action it took against PHH. PHH objected to the CFPB’s allegations it violated the Real Estate Settlement Procedures Act when it referred customers to mortgage insurers who in turn bought reinsurance from one of its units. The judges ruled the lender was within the law. The CFPB said its administrative action did not need to respect a three-year statute of limitations on the alleged violations. The court did not agree. The final ruling dictated reversal of the $109 million disgorgement award issued by CFPB Director Richard Cordray as well as the three separate legal holdings. While this ruling by the nation’s second most powerful court will not halt the CFPB’s operations, it is the first major legal challenge to the CFPB’s power.

Kavanaugh stated in his 100+ page opinion, “the CFPB is the first of its kind and a historical anomaly…Indeed, within his jurisdiction, the director of the CFPB can be considered even more powerful than the president.”

U.S. Sen. Elizabeth Warren from Massachusetts and one of the first administrators of the CFPB released a statement saying, “This split decision — which bizarrely relies on a mischaracterization of my original proposal for a new consumer agency — will likely be appealed and overturned. But even if it stands, the ruling makes a small, technical tweak to Dodd-Frank and does not question the legality of any other past, present or future actions of the CFPB.”

Warren, who was rejected by Republicans as the CFPB’s first director, lashed out at the ruling saying, “continued Republican efforts to transform the agency’s structure or funding should be seen for what they are: attempts fostered by big banks to cripple an agency that has already forced them to return over $11 billion to customers who have been cheated.” This statement is contradicted by fact. Plaintiff, PHH, is not a big bank nor will this action cripple the agency’s current functionality. PHH is a New Jersey mortgage lender asking the court to review the $109 million it was fined by the CFPB for allegedly accepting kickbacks from mortgage insurers.

PHH’s pleading for the CFPB to halt its operations until Congress passes legislation reforming its structure was rejected. “With the for-cause provision severed, the president now will have the power to remove the director at will and to supervise and direct the director,” Kavanaugh wrote. Cordray currently has a five-year term lasting through 2018.

Since this ruling was a the three-judge panel, and there are 17 judges on the Court of Appeals, the CFPB may request the entire appeals court to conduct an “en banc” review of the case, meaning a review with all of the judges. Another possibility is before or after such review the ruling may be appealed to the U.S. Supreme Court.

The D.C. District Court also has before it another case challenging the CFPB’s structure and operations, which had been held in part by that court pending the decision to be handed down in the PHH case. State National Bank of Big Spring v. Lew, No. CV 12-1023 (ESH), 2016 WL 3812637, at *1 (D.D.C. July 12, 2016). State National Bank in Big Spring, Texas, filed a motion for summary judgment in its case to seek a declaration that the establishment of the CFPB, as well as Cordray’s appointment as its director, are unconstitutional.

In July, the Court of Appeals issued an appellate opinion saying State National Bank has standing to challenge the constitutionality of the CFPB and Cordray’s recess appointment.