This article was written by Ashley Taylor, Mary Zinsner, and Reade Jacob, and originally published on the Troutman Sanders LLP Consumer Financial Services Law Monitor. It is republished here with permission. 

On March 17, the U.S. Department of Justice submitted a brief to the D.C. Circuit asserting that the Consumer Financial Protection Bureau’s single-director structure violates the Constitution’s separation of powers in the CFPB v. PHH Corporation case.

CFPB’s Single Director Structure

The Democratic-controlled 111th Congress created the CFPB as part of the Dodd-Frank Act in the wake of the 2008 financial crisis. Since then, the CFPB has acted as a watchdog over the consumer-finance industry, including loans, credit cards, and other financial products and services offered to consumers. The CFPB is headed by a single director who is appointed by the president, with the advice and consent of the Senate, for a term of five years. Under the law, the director may only be removed by the president “for cause.”

Proponents of the bureau argue that it provides “a single point of accountability for enforcing federal consumer financial laws and protecting consumers in the financial marketplace” and that Congress structured the agency under a single director, removable “for cause” only, in order to make the CFPB a powerful, centralized, independent force for protecting consumers in the financial marketplace.[1]

Critics of the bureau argue that the CFPB is “destructive and dangerous” in large part due to the fact that the director is unaccountable to “Congress, the president, voters, and the democratic process.”[2] Jeb Hensarling, R-Texas, congressman and chairman of the powerful House Financial Services Committee and vocal critic of the CFPB, has argued that the bureau’s unconstitutional structure has harmed consumers by allowing it to “act unilaterally to eliminate access to credit options and increase consumer costs.”[3] 

PHH Case

The constitutionality of the bureau’s governing structure came to a head in October 2016 when a divided three-judge panel for the U.S. Court of Appeals for the District of Columbia held that the “for cause” removal of the bureau’s director is unconstitutional. In PHH Corp. v. Consumer Financial Protection Bureau, Circuit Judge Brett Kavanaugh wrote that “the CFPB, lacks that critical check and structural constitutional protection, yet wields vast power over the U.S. economy.”[4] The decision marked the first time that a court ruled against the CFPB on the constitutionality of the bureau’s structure.

Importantly, the three-judge panel opted not to dismantle the bureau in light of its unconstitutional structure, but instead remedied the defect by striking the “for cause” portion of the law. This ruling would allow the president to supervise the director, and remove him or her without cause.

The CFPB requested an en banc review of the October ruling before the entire D.C. Circuit. On Dec. 22, the solicitor general filed a brief supporting the CFPB request for en banc review, arguing that the court erred in its constitutional analysis. En banc review was granted, the earlier ruling vacated, and the D.C. Circuit set a hearing for May 24, 2017. By vacating the ruling, the D.C. Circuit removed the possibility of President Trump firing CFPB Director Richard Cordray during the pendency of the case on the basis of the three-judge panel’s ruling. The D.C. Circuit ordered full briefing from the parties, including the DOJ, on three specific issues pertaining to important constitutional and statutory issues at stake. 

The Trump Administration Weighs in on the Constitutionality of the CFPB

On Friday, March 17, the DOJ urged the entire D.C. Circuit to agree with the three-judge panel’s conclusion that the CFPB’s structure is unconstitutional. According to the DOJ’s brief, “a removal restriction for the Director of the CFPB is an unwarranted limitation on the President’s executive power.” The DOJ, however, stopped short of asking the court to eliminate the agency as a result of the constitutional defect. Instead, the DOJ sided with the three-judge panel’s decision that the proper remedy “is to sever the provision limiting the President’s authority to remove the CFPB’s Director, not to declare the entire agency and its operations unconstitutional.” The DOJ’s position that the D.C. Circuit should strike the “for cause” removal restriction rather than declare the entire agency and its operations unconstitutional is a signal that the Trump administration prefers a reformed CFPB rather than no CFPB at all.

The DOJ brief differs markedly from the brief of the U.S. Solicitor General filed pre-election under the Obama administration, which sided with the CFPB and asked the court to grant rehearing en banc. The DOJ brief is also at odds with the CFPB, which argues the agency structure is constitutional and urges a ruling affirming the constitutionality of the CFPB. It is the stark contrast between the position of the CFPB and DOJ provoking the most discussion on the DOJ brief. Indeed, the gap highlights the concerns addressed by the D.C. Circuit in its initial PHH opinion. The current structure of the CFPB leaves the director in an unfettered position of power, with its single director terminable only for cause and untouchable in its policy and enforcement decisions by the executive branch and Congress. The DOJ brief speaks out against the current structure and argues that it is unconstitutional. That, coupled with a judicial climate of concern regarding overreaching by President Trump with respect to executive order travel ban, makes the disparate views and interplay of several branches of government in the case a fascinating study on checks and balances.

What will be most disappointing to Republicans and President Trump, and which is entirely possible given the issues the D.C. Circuit requested to be briefed, is an outcome which avoids the constitutional issues and decides the case on the basis of the statutory provisions of the Real Estate Settlement Procedures Act (“RESPA”), the statute at issue in the underlying CFPB enforcement proceeding. Courts have long adhered to the doctrine of constitutional avoidance, which promotes disposition of cases on issues other than constitutional questions. It is entirely possible, if not very likely, that the court will decline to rule on the constitutional issues at stake and decide the case on RESPA or administrative law grounds. 

Regulatory Landscape Under Trump-Controlled CFPB

In the meantime, Cordray remains in office and it is business as usual at the CFPB. A decision by the D.C. Circuit to abandon the three-judge panel’s decision and leave the CFPB and statutory language in place will mean that there will be renewed calls for Trump to fire Cordray for cause. A Trump-appointed CFPB director will likely seek to dismantle the actions taken by the CFPB during Director Cordray’s tenure. It is also likely that a Trump-appointed CFPB director would elect to pursue a more laissez faire regulatory scheme than Cordray’s CFPB. For example, Rep. Hensarling has called for a Trump-appointed CFPB director to push reforms such as limits on class action “lawsuits wherein plaintiff law firms get fortunes but injured financial consumers get pennies.”

A Trump-controlled CFPB would largely leave a regulatory “vacuum” in the consumer financial services space. State attorneys general, however, have publicly indicated that they plan to significantly increase their presence and police the financial services industry even if the CFPB is weakened. It is therefore likely that, even under Trump’s CFPB, enforcement actions against companies in the financial services space will continue, but primarily at the state rather than the federal level.

This will be particularly true in states where attorneys general have historically been active in bringing consumer enforcement actions, such as New York, New Jersey, Illinois, Connecticut, Massachusetts and California. These state regulators would likely play an increasingly active role in enforcing state and federal law against companies in the consumer financial services space.

Over the last 15 years, state attorneys general have grown adept at collectively utilizing their resources to bring major multistate investigations. State attorneys general will look to build on this foundation, and we anticipate increased enforcement actions aimed at business in industries like debt buying and collecting, auto finance, service-member lending, payment processing, credit reporting, cybersecurity, information governance and privacy.

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[1] Motion to Intervene By Attorneys General of the States of Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Mississippi, New Mexico, New York, North Carolina, Oregon, Rhode Island, Vermont and Washington, and the District of Columbia, Phh Corp. et. al. v. Consumer Financial Protection Bureau, No. 15-1177 (D.C. Cir. Jan. 23, 2017).

[2] Jeb Hensarling, Op-Ed., How We’ll Stop a Rogue Federal Agency, Wall. St. J., Feb. 8, 2017, https://www.wsj.com/articles/how-well-stop-a-rogue-federal-agency-1486597413.

[3] Press Release, Representative Jeb Hensarling, Chairman Hensarling: CFPB Mission Important, But No Bureaucracy Should Evade Checks and Balances (Mar. 17, 2017).

[4] PHH Corp. v. Consumer Fin. Prot. Bureau , 839 F.3d 1 (D.C. Cir. 2016).


Tags: CFPB

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