The Constitutional Dilemma of the CFPB: Unchecked Power is Abusive

By: Erich Paetsch

Saalfeld Griggs Litigation, Creditors’ Rights & Bankruptcy Practice Groups

Oregon Business Lawyers

In an important decision, the U.S. Court of Appeals for the D.C. Circuit ruled that Congress fundamentally failed to adhere to Article II of the United States Constitution when it created the Consumer Financial Protection Bureau (“CFPB”). PHH Corporation, Et. Al., v. Consumer Financial Protection Bureau, 15-1177, U.S. Court of Appeals, District of Columbia Circuit October 11, 2016. The long awaited decision found that the CFPB was unconstitutionally structured because of the autonomy given to the CFPB director. The CFPB director could only be fired by the U.S. President for cause, and the Court held that this unchecked power in a single individual violates the Constitution.

The CFPB director wields incredible power to enforce nineteen different consumer protection statutes that strongly impact the daily operation of financial institutions. “The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director 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,” the Court found.

Despite the Constitutional defect, the Court did not respond to calls to dismantle the CFPB. Instead, the Court elected to remove the “for-cause” termination requirement for the CFPB director. “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”. In essence, the Court’s decision transforms the CFPB into an executive agency headed by a single person, similar to the Department of Treasury.

In addition to reducing the authority of the CFPB director, the Court also reversed a CFPB decision imposing a $109 million dollar penalty on PHH Corporation, a New Jersey mortgage-servicing company. The CFPB sought to punish PHH Corp. for referring customers to insurers who purchased reinsurance from a PHH subsidiary. The CFPB accused PHH Corp. of an illegal kickback scheme under the Real Estate Settlement Procedures Act (“RESPA”). The Court found that the penalty imposed by the CFPB violated the due process rights of PHH Corp. by reversing a long-standing agency interpretation of RESPA without notice and then retroactively applying its new standard to impose violations.

This is not the first time the position of the director of CFPB has generated legal challenges to the validity of the agency. Richard Cordray was unilaterally appointed by President Obama when Congress was in recess, causing the actions of the CFPB to be legally challenged from its inception. Though Congress subsequently appointed Mr. Cordray, arguably ameliorating the recess appointment challenges, similar same legal arguments might come into focus concerning the D.C. Circuit Court of Appeals decision. The potential for such challenges was impliedly acknowledged by the Court. The Court in footnote 19 of its opinion, stated that “[w]e need not here consider the legal ramifications for past CFPB rules or for past agency enforcement actions.”

The CFPB is evaluating all its options following the opinion. The CFPB may request that the entire D.C. Circuit Court of Appeals review the case instead of the three judge panel that issued the opinion and can appeal the case to the U.S. Supreme Court. Regardless of the election of the CFPB, the case reinforces existing Constitutional precedent limiting the authority of the CFPB director and also making clear that the CFPB cannot, unilaterally and without notice, alter long-standing regulatory and statutory interpretation without adequate notice to those whom it regulates.

Please contact Erich Paetsch or a member of our Creditors’ Rights & Bankruptcy Practice Groups if you have questions about the information in this article.  Erich can be reached at (503) 399-1070 or at epaetsch@sglaw.com.