CFPB Structure Is Unconstitutional, Court Rules

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WASHINGTON — The single-director structure of the Consumer Financial Protection Bureau represents an unconstitutional concentration of executive power, a federal appeals court said Tuesday.

But the court stopped short of disbanding the agency, instead giving the president more power to remove its leader.

In a 110-page ruling, the U.S. Court of Appeals for the D.C. Circuit said that executive power vested in the president can be conferred onto heads of lower administrative agencies, but that in doing so there have to be limits to that power. Agency directors may serve at the pleasure of the president, or in the case of independent commissions like the National Labor Relations Board or the Securities and Exchange Commission, directors are limited by the voting power of their fellow board members.

Judge Brett Kavanaugh, writing for the majority, said that the CFPB is the first agency to concentrate administrative powers in an independent single director not removable except for cause.

"That combination of power that is massive in scope, concentrated in a single person, and unaccountable to the President triggers the important constitutional question at issue in this case," Kavanaugh wrote. "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."

As a result, the panel opted to strike the clause in the Dodd-Frank Act that said the CFPB director could be removed "for cause," effectively allowing the president to dismiss the head of the agency at will.

The ruling came as part of an ongoing court battle between PHH, a nonbank mortgage lender, which sued CFPB Director Richard Cordray after the agency issued an order against the firm for $109 million over an alleged kickback scheme. As part of the suit, PHH argued the agency's single-director structure and its funding outside of congressional appropriations were unconstitutional.

But the ruling did not go as far as PHH had sought. Kavanaugh remanded the PHH case back to the CFPB while striking only the "for cause" provision in Dodd-Frank. The ruling did not suspend the agency, nor rule its enforcement actions or regulations to date were unconstitutional.

In the ruling, Kavanaugh said Supreme Court precedent dictates a narrower ruling. Simply striking down the portion of Dodd-Frank that stipulates that the CFPB director may only be dismissed for cause would make the agency constitutional, Kavanaugh wrote.

"To remedy the constitutional flaw, we follow the Supreme Court's precedents…and simply sever the statute's unconstitutional for-cause provision from the remainder of the statute," Kavanaugh said. "Here, that targeted remedy will not affect the ongoing operations of the CFPB. 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."

That the court sided with PHH comes as little surprise — Kavanaugh, an appointee of President George W. Bush, was highly critical of the CFPB's position during oral argument in April, and Judge Arthur Rayment Randolph, a George H.W. Bush appointee, seemed similarly disposed.

But the question was whether the court would opt for as sweeping an interpretation as PHH would have preferred.

Karl Frisch, the executive director of Allied Progress, an advocacy group, said he expects the CFPB will appeal and the decision will be overturned by the D.C. Circuit. He also criticized Kavanaugh for handing down what he described as a partisan ruling.

"What this shows more than anything is that Judge Kavanaugh is in lockstep with conservative lawmakers and the Wall Street interests that have been trying to destroy the CFPB," Frisch said.

In addition to the question on the CFPB's constitutionality, the ruling touched on other lower-profile issues related to the case that may have a more enduring impact.

For example, the panel ruled that the CFPB cannot retroactively apply a new interpretation to the Real Estate Settlement Procedures Act, known as RESPA, which was substantially different from previous interpretations made by the Department of Housing and Urban Development. In addition, the panel said the CFPB has to apply the statute of limitations, which would reduce PHH's liability — and have a huge impact on other fines that the bureau imposes on other companies.

A CFPB spokesman did not immediately return a request for comment.

Judge Karen Henderson, an appointee of President George H.W. Bush, dissented from the opinion, arguing that PHH was on firm legal ground in several of its specific complaints regarding the CFPB's imposition of the $109 million fine. The bureau's interpretation of governing statutes — including a thin interpretation of a statute of limitations and the retroactive application of RESPA — are unlawful and should be struck down, she said.

But she said the court should not have considered the constitutionality question at all because doing so rejects "one of the most fundamental tenets of judicial decision-making," namely that courts should not rule on constitutionality questions unless they absolutely have to.

"PHH can obtain full relief without our addressing the bureau's challenged structure," Henderson said. "I do not believe that it is 'indispensably necessary' to resolve the for cause removal issue here."

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