Will the CFPB stay unconstitutional?

On October 11, 2016, the United States Court of Appeals for the District of Columbia ruled that the CFPB’s structure is unconstitutional. This blog has been following litigation challenging the constitutionality of the CFPB since the CFPB’s creation.

In PHH Corp. v. CFPB, those challenging the CFPB argued that because the CFPB is headed by a single director, Richard Cordray, it is effectively a fourth branch of government that is not subject to control by the executive and legislative branches. Unlike other independent agencies—SEC, FCC, FTC, and NLRB—the CFPB’s ability to act is not constrained by multi-member boards. The CFPB director also cannot be removed after being appointed by the president. As a result, the CFPB’s director is vested with “enormous power over American business, American consumers, and the overall U.S. economy.”

The D.C. Circuit concluded that this concentration of power without direct oversight is an extraordinary delegation of authority without any constitutional precedent. The D.C. Circuit noted that history and tradition play important roles in defining the authority of the executive and legislative branches. The D.C. Circuit concluded that the lack of any historical precedent for an agency like the CFPB is fatal to the CFPB’s leadership structure.

The Court was concerned about the risk that the CFPB director might abuse his power and act in arbitrary ways. That concern, perhaps, was heightened because of the facts of this case. The entity challenging the CFPB’s authority—PHH Corporation, a mortgage servicer—received a $109 million enforcement order from the CFPB.

Historically, independent agencies like the FCC, FTC, SEC, and NLRB have always been headed by multiple individuals who are often appointed by different presidents. The multi-member boards serve as a check on the arbitrary use of power because internal disagreements limit the reach of agency action.

Contrary to PHH’s wishes, however, the D.C. Circuit declined to “shut down the entire CFPB (if not invalidate the entire Dodd-Frank Act) until Congress, if it chooses, passes new legislation fixing the constitutional flaw.” Instead, the D.C. Circuit concluded that all it had to do to remedy the constitutional defect is to allow the president to remove the CFPB director at will. This will make the CFPB akin to the cabinet level departments like the Departments of Treasury and Justice where the president can remove the department heads at any time.

The Court’s decision is much narrower than what many who challenge the CFPB’s existence were hoping for. The Court’s ruling means that both the CFPB and PHH Corporation likely have a reason to appeal to the United States Supreme Court. PHH will continue to argue that the CFPB should be ruled unconstitutional and dismantled. The CFPB will likely argue that there is no constitutional reason why its director needs to be subject to presidential removal.

The recent election also raises uncertainty about the CFPB’s future. Republicans have long sought to repeal the Dodd-Frank Act, and with congressional majorities they may have the necessary power to do it. At a minimum, if the D.C. Circuit’s ruling is not reversed, then President-Elect Trump would have the authority to appoint his own CFPB head who will likely take a different approach to financial regulation than Richard Cordray. This blog will continue to monitor ongoing litigation against the CFPB.  

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

- John Lande