Structure of CFPB Ruled Unconstitutional

The U.S. Court of Appeals for the District of Columbia on Tuesday ordered a restructuring of how the Consumer Financial Protection Bureau (CFPB) operates within the executive branch, calling the Bureau’s structure “unconstitutional.”

New Jersey-based mortgage lender PHH Corp. had challenged a $109 million fine handed down by CFPB Director Richard Cordray, becoming the first organization to challenge an enforcement action handed down by the CFPB.

Judge Brett Kavanaugh in the D.C. Circuit Court of Appeals ruled that the CFPB will be allowed to continue operating as an agency and perform its duties as it has been, but that it will be an executive agency similar to other executive agencies such as the Department of Justice and Department of Treasury that are headed by a single person.

“This new agency, the CFPB, lacks that critical check and structural constitutional protection, yet wields vast power over the U.S. economy,” the ruling stated. “In light of the consistent historical practice under which independent agencies have been headed by multiple commissioners or board members, and in light of the threat to individual liberty posed by a single-Director independent agency...We therefore hold that the CFPB is unconstitutionally structured.”

The court’s ruling gives the president the power to supervise the CFPB’s director and remove him from that position at will; the court also asked the CFPB to review the decision in the PHH Corp. case.

"In essence, the Director is the President of Consumer Finance. The concentration of massive, unchecked power in a single Director marks a departure from settled historical practice and makes the CFPB unique among traditional independent agencies.”

The Bureau was created in July 2011 out of the Dodd-Frank Act. While Democrats have defended the Bureau’s structure and pointed to the more than $11 billion returned to consumers that the Bureau has deemed financially harmed, the CFPB has been harshly criticized by Republicans who believe it to be an overreaching agency whose power is unchecked.

The court’s ruling noted the power of the Bureau’s director, stating that, “In short, 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. It is the Director’s view of consumer protection law that prevails over all others. In essence, the Director is the President of Consumer Finance. The concentration of massive, unchecked power in a single Director marks a departure from settled historical practice and makes the CFPB unique among traditional independent agencies.”

The court further stated that the Bureau's determining when, how, and against whom to bring enforcement actions “occurs in the twilight of judicially unreviewable discretion. Those discretionary actions have a critical impact on individual liberty.”

CFPB spokesperson Moira Vahey said in reaction to Tuesday's D.C. Circuit Court decision: “The Bureau respectfully disagrees with the Court’s decision. The Bureau believes that Congress’s decision to make the Director removable only for cause is consistent with Supreme Court precedent and the Bureau is considering options for seeking further review of the Court’s decision. In the meantime, as the court expressly recognized, the Bureau will continue its important work. Congress has charged the Bureau with ensuring that the markets for consumer financial products and services are fair, transparent, and competitive and with protecting consumers in these markets from unlawful practices. Today’s decision will not dampen our efforts or affect our focus on the mission of the agency.”

House Financial Services Committee Republicans praised the court's decision, while the Democrats on the Committee derided it:

#CFPB structure ruled unconstitutional: Director Cordray, H.R. 1266 could fix that for you -> #fiveperson#bipartisanpanel

— Randy Neugebauer (@RandyNeugebauer) October 11, 2016

#RELEASE - @MaxineWaters: @CFPB Works for Consumers Despite Conservative Efforts to Dismantle It - https://t.co/RfEBHMeqh3

— Financial Services (@FSCDems) October 11, 2016

Credit unions, which have long sought relief from the CFPB's regulatory regime, praised the court's decision.

“I applaud the ruling from the U.S. Court of Appeals for the D.C. Circuit regarding the PHH case against the Consumer Financial Protection Bureau, in that it will establish a meaningful check and balance and bring needed accountability to the Director’s role,” said Credit Union National Association (CUNA) President/CEO Jim Nussle. “This ruling confirms CUNA’s concern that the structure of the CFPB is flawed and that an unchecked, independent director who answers to no one can’t lead to good public policy.  CUNA continues to support a five-person commission for the CFPB instead of its current structure.”

PHH had originally been fined $6.4 million by an administrative law judge in November 2014 for accepting kickbacks in the form of reinsurance premiums paid to a PHH subsidiary by mortgage insurers, a violation of the Real Estate Settlement Procedures Act (RESPA). The administrative law judge ruled that PHH was responsible only for payments accepted on mortgage loans that closed on or after July 21, 2008; Cordray expanded that penalty to $109 million in June 2015, saying that PHH was in violation of RESPA for every kickback payment the company accepted after July 21, 2008 even, if the loans closed before that date.

PHH immediately appealed the decision and the arguments were heard in the D.C. Court of Appeals in April 2016. PHH’s petition with the court stated: “Never before has so much authority been consolidated in the hands of one individual shielded from the president’s control and Congress’s power of the purse.” This, PHH claimed, put the CFPB director’s power and tenure at odds with the U.S. Supreme Court’s Free Enterprise Fund v. Public Company Accounting Oversight Board decision from 2010.

CFPB defended itself and the $109 million disgorgement in a filing with the D.C. Circuit Court, claiming the penalty was a “small fraction” of the kickbacks and that the $109 million was merely money that the company should have never received to begin with, and therefore in essence not a penalty.

Click here for a copy of the D.C. Circuit Court’s ruling from Tuesday.