Federal Court Deems CFPB to be “Unconstitutionally Structured”

PHH Challenges CFPB's Enforcement Action

Under the Dodd-Frank Act—federal legislation passed in response to the 2008 financial crises—the CFPB was created and tasked with enforcing consumer protection laws. In 2014, the CFPB initiated an enforcement action against PHH, a large home mortgage lender. The CFPB alleged that PHH improperly referred customers to insurers who then bought mortgage reinsurance from a PHH subsidiary. The CFPB alleged that this violated Section 8(a) of the Real Estate Settlement Procedures Act (RESPA), which prohibits kickbacks. The CFPB director ordered PHH to pay $109 million in disgorgement and enjoined PHH from entering into future insurance arrangements of this kind.

The CFPB's application of Section 8 of the RESPA differed from previous interpretations, which permitted these types of insurance arrangements. The CFPB applied the new interpretation of Section 8 retroactively against PHH based on conduct that had occurred as far back as 2008. PHH sought to vacate the CFPB's action on constitutional and statutory grounds.

Specifically, PHH asserted that the CFPB's status as an independent agency headed by a single director violates Article II of the Constitution. PHH also argued that the agency's retroactive application of the newly interpreted Section 8 of the RESPA was contrary to law and violated PHH's due process rights. Lastly, PHH claimed that the CFPB did not comply with RESPA's three-year statute of limitations to bring an enforcement action.

CFPB's Structure Deemed Unconstitutional

The appellate court held that the CFPB was "unconstitutionally structured" and vacated the order against PHH. After reviewing the purpose and history of Article II of the U.S. Constitution, which states, in part, that "[t]he executive Power shall be vested in a President of the United States of America," and examining the structure of other independent agencies, the court held that "[t]he CFPB marks a major departure from the settled historical practice requiring multi-member bodies at the helm of independent agencies."

To remedy this constitutional flaw, the court did not invalidate the entire Dodd-Frank Act but instead severed the for-cause provision and allow the President to remove the director at will. The court also decided that the CFPB's new interpretation and retroactive application of Section 8 of the RESPA violated PHH's due process rights and that the CFPB had to adhere to the RESPA's three-year limitation for actions to enforce Section 8.

ABA Leaders Surprised by Decision

ABA leaders agree that this decision is important. "This is a potentially blockbuster case," declares William Funk, Portland, OR, vice chair for the Constitutional Law and Separation of Powers Subcommittee of the ABA Section of Administrative Law & Regulatory Practice. "Any decision that strikes down as unconstitutional Congress's choice for how to structure an agency is an important one, because the courts are overriding a legislative determination about the best way to enforce the laws and because the universe of such decisions is relatively small," explains Margaret B. Kwoka, Denver, CO, vice chair for the Constitutional Law and Separation of Powers Subcommittee.

The appellate court's reasoning is also intriguing to ABA leaders. "The concern is that the president's power not be infringed. Here, though, the D.C. Circuit admitted that a single-headed independent agency does not deprive the president of any more control than an independent agency headed by a multi-member body," notes Kwoka. "Rather, the court was concerned that a single person controlling an independent agency threatens to lead to arbitrary decisionmaking and infringement on individual liberty, because the structure lacks the internal checks that may come with multiple decisionmakers. This is a new rationale, and one that strays from the constitutional text at issue," observes Kwoka.

However, "two aspects weaken the force of this decision. First, the court also concluded that the agency lacked statutory power to impose the fine at issue, and thus there is a wholly independent basis for reversing the agency's decision here," states Kwoka. "As such, if the D.C. Circuit decides to hear the case en banc, it could uphold the decision on the narrower statutory ground. And the Supreme Court could decide not to hear the case for that very reason," continues Kwoka. Moreover, "[i]f the en banc court reaches the constitutional issue and comes out the way the panel did, then the case will definitely go to the Supreme Court. It might go there even if the en banc court finds the 'for cause' removal limitation constitutional," predicts Funk.

"[I]f this decision stands, it may well chill Congress from creating another agency with this structure in the future," counsels Kwoka.

Onika K. Williams is an associate editor for Litigation News.

Keywords: constitution, administrative law, Dodd-Frank, RESPA

Related Resources

• PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (D.C. Cir. 2016)
• Free Enter. Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477 (2010).
• Humphrey's Executor v. United States, 295 U.S. 602 (1935).
• U.S. CONST. art. II, § 1.
• Dodd-Frank Wall Street Reform and Customer Protection Act (2010).
• 12 U.S.C. § 2601(b)(2), Real Estate Settlement Procedures Act (RESPA) "Prohibition against kickbacks and unearned fees."
• Lindsay Breedlove, "Rule 23's Implicit Ascertainability Requirement: A Brewing Class Action Controversy," The Woman Advocate (May 24, 2016).

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