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CFPB Narrowly Escapes Shutdown in D.C. Circuit Court Ruling

CFPBThe Consumer Financial Protection Bureau narrowly escaped a constitutional challenge today in a ruling handed down from the United States Court of Appeals for the District of Columbia Circuit. Although the court found the CFPB is “unconstitutionally structured,” the defect, according to the court’s opinion, did not warrant its dissolution.

A link to the opinion is available here: Link to Opinion.

The case arose from a CFPB enforcement action against PHH Mortgage alleging it had violated Section 8 of the Real Estate Settlement Procedures Act. The CFPB ultimately imposed a $109 million penalty against PHH, which resulted in this appeal. The decision vacates the penalty, reverses the CFPB’s administrative ruling and remands the case back to the CFPB.

The decision provides a significant blow to the CFPB, offering a path to challenge past CFPB actions. It also holds that the CFPB’s enforcement actions are subject to statutory limitations periods, a position the CFPB has resisted.

PHH’s Constitutional Challenge to the CFPB’s Structure

One of the challenges made by PHH was to the constitutionality of the CFPB. Because it is an independent agency, it is unaccountable to the president and its structure offers no checks or balances to the unbridled discretion of the sole director, which PHH argued violates the separation of powers doctrine.

Executive agencies like the CFPB are considered “independent” because the agency heads can only be removed by the president “for cause.” As a result, the agencies are not supervised or directed by the president. Examples of such agencies are the Federal Communications Commission, the Federal Trade Commission and the Securities and Exchange Commission. Not only are they able to make rules, but they can also conduct enforcement actions against private citizens, and “pose a significant threat to individual liberty and the constitutional system of separation of powers and checks and balances.”

CFPB’s Director Was Accountable to No One

Although the CFPB director’s decisions are subject to judicial review, this does not remedy a separation of powers violation posed by the single director structure of an independent agency like the CFPB. Likewise, there is no historical precedent for a single director, independent agency.

The court found that the unique structure of the CFPB creates a “greater risk for arbitrary decisionmaking and abuse of power, and a far greater threat to individual liberty,” as opposed to the traditional commissioner structure. Because the CFPB’s director may only be removed by the president “for cause,” the structure provides no check on his powers and he remains unaccountable to the president or any other person.

A 1935 U.S. Supreme Court decision permitted the creation of independent agencies so long as their structure prevents a single person from exercising authority that is neither supervised nor accountable. Having multiple commissioners as agency heads, as is the case with the FCC, FTC and SEC, provides such a check. Although the agency heads are not accountable to or supervised by the president, the commissioner structure makes each commissioner accountable to and checked by their fellow commissioner.  No single person can unilaterally exercise unsupervised authority free from accountability to any other person.

As the opinion notes, no independent agency has ever been headed by a single person – until the CFPB was created.

CFPB Survives Shutdown but is No Longer an Independent Agency

The court declined PHH Mortgage’s request to declare the CFPB void as unconstitutional. Instead, it struck from the Dodd-Frank Act (which created the CFPB) the provision that only permitted the director to be removed “for cause.” In so ruling, the CFPB’s director can now be removed by the president “at will,” essentially stripping the CFPB of its independent status. Now the CFPB will function like other single director agencies, such as the State Department, Department of Justice and Department of Treasury. Because these agency heads can all be removed by the president at-will, they remain accountable to the president and under the president’s supervision.

In declining to declare the CFPB itself as unconstitutional, the court reasoned that by removing the “for cause” provision, the remaining provisions of Dodd-Frank could remain “fully operative as a law.” The court also found that Congress would have preferred the remaining provisions of Dodd-Frank remain in effect. The ruling allows the CFPB to continue its operations, albeit no longer as an independent agency.

Impact on the CFPB

No one expects President Obama to remove Director Cordray as a result of the decision. However, since the CFPB director has a five-year term and Director Cordray’s term will roll into the next president’s term, the new president can now remove the director for any reason which would not have been the case prior to today’s ruling.

The decision also confirms what many have believed; that the CFPB’s structure provided no accountability to any elected official.

While the opinion may remove the constitutional defect, it does underscore the extraordinary power still exercised by its director, noting that “the CFPB possesses enormous power over American business, American consumers, and the overall U.S. economy.”

The court considered and rejected as beyond its authority its own restructuring of the CFPB into a commission, but noted, “if Congress prefers to restructure the CFPB as a multi-member independent agency rather than as a single-Director executive agency, Congress may enact new legislation that creates a Bureau headed by multiple members instead of a single Director.” Recent legislation seeks to replace the CFPB director with a bi-partisan commission. The decision may provide fodder to move the legislation through Congress.

Time Does Run Against the King – CFPB Enforcement Actions Subject to Limitations Periods

In several enforcement actions, the CFPB has argued it is not subject to the limitations periods of the statutes it is seeking to enforce. For example, in an enforcement action against a law firm for violation of the federal Fair Debt Collection Practices Act, the CFPB argued the FDCPA’s one-year limitations period did not apply to it because “time does not run against the King.”

This court disagreed, providing a significant blow to future CFPB enforcement actions.

PHH argued enforcement action against many of the alleged violations was time-barred because they occurred outside RESPA’s three-year limitations period. The CFPB argued its efforts against PHH were not barred because the Dodd-Frank Act does not impose a statute of limitations against its efforts to enforce “any” consumer protection statute. Alternatively, it argued no limitations period is applicable to its enforcement of RESPA’s Section 8.  The court disagreed on both points finding that the Dodd-Frank Act incorporated the statutes of limitations of “the underlying statutes enforced by the CFPB in administrative proceedings.” And, specifically, RESPA’s three-year limitations period is applicable to its enforcement actions, whether brought in a court or in a CFPB administrative proceeding.

Impact on PHH

The court reversed the CFPB’s finding that Section 8 of the Real Estate Settlement Procedures Act prohibits any “captive” reinsurance arrangements — the practice of a mortgage lender referring its own borrowers to mortgage insurers who in turn purchased reinsurance from an entity affiliated with the mortgage lender.

The court disagreed with the CFPB’s interpretation of RESPA Section 8 and found that the practice is permissible if the reinsurance were purchased at market rates. It also found the CFPB violated PHH’s due process rights when it retroactively applied its own interpretation concerning the practice that was in direct contradiction to prior guidance issued by the Department of Housing and Urban Development.

On remand the CFPB must demonstrate that the reinsurance rates paid to PHH’s affiliate exceeded reasonable market rates. Simply engaging in the practice is not a violation.

Contesting Constitutionality of the CFPB’s Prior Actions

One might imagine that if the CFPB was unconstitutionally structured, it should void or make voidable, its prior actions, at least those where the director’s authority was required to undertake an action. In this case the court did not reach the issue.

The court avoided the issue of whether the CFPB’s unconstitutional structure was, alone, sufficient to vacate the PHH penalty because it ruled that PHH had not violated the RESPA in the first place. But it ultimately had to address the constitutional argument because it could not remand the case back to the CFPB unless the constitutional defect was corrected. By deleting the “for cause” provision of the Dodd-Frank Act, it solved the dilemma and allowed the remand. It also saved the CFPB from a shutdown.

But the court’s finding that the CFPB was constitutionally defective should provide others with opportunities to challenge CFPB rulings, bulletins and enforcement actions, particularly where they are tied to the director’s authority.

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Donald Maurice provides counsel to the financial services industry, successfully litigating matters in the state and federal courts in individual and class actions. He has successfully argued before the Third, Fourth and Eighth Circuit U.S. Courts of Appeals, and has represented the financial services industry before several courts including as counsel for amicus curiae before the United States Supreme Court. He counsels clients in regulatory actions before the CFPB, and other federal and state regulators and in the development and testing of debt collection compliance systems. Don is peer-rated AV by Martindale-Hubbell, the worldwide guide to lawyers. In addition to being a frequent speaker and author on consumer financial services law, he serves as outside counsel to RMA International, on the governing Board of Regents of the American College of Consumer Financial Services Lawyers, and on the New York City Bar Association's Consumer Affairs Committee. From 2014 to 2017, he chaired the ABA's Bankruptcy and Debt Collection Subcommittee. For more information, see

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