CFPB may have strong grounds to challenge court ruling

by Ryan Smith14 Oct 2016
Don’t get too comfortable with the recent court ruling that the structure of the Consumer Financial Protection Bureau is unconstitutional – because the agency may have strong grounds for challenging it.

The US Circuit Court of Appeals ruled this week that the CFPB’s structure was unconstitutional because the agency’s director can only be removed for cause. This, the court held, was a violation of constitutional separation of powers because the director wasn’t sufficiently answerable to anyone else.

“The court reached a decision that it was unconstitutional because according to the court, the setup has the director with more power than anyone except the president of the United States – and within the CFPB, more power than the president of the United States, because this person is not answerable to the president or anyone else,” Thomas Rohback, partner with the law firm of Axinn, Veltrop & Harkrider, told MPA.

The court ruled that the president should be able to remove the head of the CFPB for any reason. While the ruling was a setback for the CFPB, Sen. Elizabeth Warren (D-Mass.), one of the architects of the agency, said it really only amounted to a “small, technical tweak.”

“In that regard, I think that’s where Elizabeth Warren is right,” Rohback said. “It’s kind of a ‘so what’ in most instances. There’s still a CFPB, there’s still a Dodd-Frank. The court just said, ‘We’re going to change whether this individual can be removed without cause by the president.’ If that’s the case, then what’s the difference?”

Statutory questions
Where the decision gets interesting, Rohback said, is in the way the court approached PHH’s specific complaint.

“The more interesting part is that the court then goes, because our constitutional ruling will not halt the CFPB’s ongoing operation or the CFPB’s $109 million order against PHH, we must also consider PHH’s statutory objections to the CFPB enforcement action in this case,” he said.

The court ruled that the CFPB had misapplied Section 8 of the Real Estate Settlement Procedures Act. And the fact that it could rule on the statute by itself, Rohback said, calls into question the need for it to rule of the constitutionality of the CFPB at all.

The issue was also raised by a member of the appeals court, Judge Karen L. Henderson, who concurred that the fine against PHH was improperly levied but dissented on the court’s finding about the CFPB’s constitutionality. At issue, Rohback said, was a longstanding judicial principal that constitutional question are only taken up when all other remedies fail.

“It’s a jurisprudential bedrock principal that courts to not reach constitutional issues if they don’t have to,” Rohback said. “(Henderson) is saying all of this analysis about the composition (of the CFPB) and the removability of the director was unnecessary … if all you’re going to do is say, ‘You know what, we think the decision is wrong because you’ve misinterpreted or misapplied Section 8 of the Real Estate Settlement Procedures Act.’”

And the fact that the court considered constitutional issues, when it could (and eventually did) merely rule on the merits of the fine, gives the CFPB a plausible argument to challenge the ruling, Rohback said.

“The learning and the jurisprudence of the Supreme Court over the years is that we reach the constitutional issue if there’s no other way to resolve the decision,” he said. “Here it’s very clear that what the court did is say, ‘We find this to be unconstitutional, but that doesn’t matter because we can fix it. And now we have to get to the statutory issue.’ You could have done that step one.

“From PHH’s perspective, they might look at it and say, ‘Yeah, we think we’ve got the better of this argument on the interpretation of Section 8. We don’t need to go up to the Supreme Court,’” he said. “But it may be that the CFPB wants to do that to establish what is and isn’t right. And I wouldn’t be surprised if the Supreme Court said that the circuit court never needed to get to the constitutional issue.”

Further fallout
That doesn’t mean the agency won’t see fallout from the decision, however. Rohback said it was likely – at least in the short term – that other companies fined by the agency would use the appeals court decision to challenge their penalties.

“I think you’re going to see a lot of people picking up the arguments raised here by the court,” he said. “They may ultimately be unsuccessful, but they’re going to take a lot of these arguments and say, ‘We had a decision here where the director could only be removed for cause. Therefore, it was an institution which in itself was constitutionally infirm – so any decision they made should be vacated.’

“Those are arguments I suspect litigants are going to make. Whether they succeed or not is a very different story, but … you may see a flurry of litigation where people start to challenge CFPB rulings on these grounds. In a way, Elizabeth Warren is right that it may not affect the way the organization runs and makes decisions right now, but that doesn’t mean you might not see a lot more litigation challenging this for now.”



Is TILA-RESPA a good or bad thing long term?