Federal Appeals Court Declares CFPB Structure Unconstitutional
The U.S. Court of Appeals for the District of Columbia Oct. 11 deemed the structure of the Consumer Financial Protection Bureau (CFPB) unconstitutional because of it being led by a single director, calling the bureau a “gross departure from settled historical practice” in which independent agencies are led by commissioners or board members, according to the court’s decision.
“Never before has an independent agency exercising substantial executive authority been headed by just one person,” wrote Circuit Judge Brett Kavanaugh. “The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked director 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.”
Despite the harsh rhetoric in the decision, the court will allow the CFPB to continue operating. However, the court has eliminated the proviso in the Dodd-Frank law, which created the CFPB, that the agency’s director, currently Richard Cordray, can only be removed for just-cause. “The President now will have the power to remove the director at will, and to supervise and direct the director,” according to the court. The court also noted that the CFPB will now operate “as an executive agency akin to other executive agencies headed by a single person, such as the Department of Justice and the Department of the Treasury.”
The CFPB disagrees with the court’s decision, and believes that legislators’ decision to make the director removable only for cause is consistent with Supreme Court precedent, according to Moira Vahey, CFPB spokesperson. The agency also said it’s considering options for seeking further review of the court’s decision.
The decision stems from a $109 million enforcement action issued by the CFPB in 2015 against mortgage servicer PHH Corp., alleging kickbacks in exchange for real estate referrals, which is in violation of the Real Estate Settlement Procedures Act (RESPA). A judge decided against PHH and assessed the company a $6.4 million penalty. PHH and the CFPB appealed the decision on different grounds. However, under provisions of the Dodd-Frank Act, the appeal was reviewed by Cordray, who increased the penalty from $6.4 million to $109 million. Later in 2015, PHH Corp. was granted a stay pending appeal of the enforcement action. Not only did PHH’s appeal get a stay from the enforcement action, but it also challenged the constitutionality of the bureau under the Separation of Powers Doctrine.
The federal appeals court Oct. 11 threw out the $109 million order against PHH, sending the matter back to the CFPB for review.