CFPB Looks Here to Stay: What Does the Future Hold?

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends most of her time in India and other parts of Asia researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as writes occasional travel pieces for The National.

A divided three-judge panel of the U.S. Court of Appeals for the D.C. Circuit in PHH Corporation v Consumer Financial Protection Bureau on Tuesday held that the Consumer Financial Protection Bureau (CFPB) “is unconstitutionally structured.” In addition, the court also concluded that in pursuing an enforcement action against a mortgage lender, PHH Corp., the CFPB violated bedrock due process principles when it misconstrued its statutory authority and attempted to impose its mistaken interpretation retroactively. The court vacated the CFPB ruling and remanded the case to the agency for reconsideration consistent with its opinion rejecting the agency’s interpretation of what the law requires.

The opinion was authored by Judge Brett Kavanaugh, a George W. Bush appointee, who is somewhat of a separation of powers aficionado. His more than 100 page opinion displayed his erudition on this and other issues. The opinion is replete with rhetoric about the agency’s alleged abuses of the agency, in terms that the National Review could– and in fact did– applaud, declaiming, “The Court has now made the director, Richard Cordray, accountable, which means that the President must direct and control the CFPB and its director. He has a lot to do to rein in this rogue agency, as the findings in the rest of the case indicate – the Bureau not only overstepped its powers, it breached due process, and ignored the statute of limitations, in its action against PHH.”

But rhetoric aside, the court’s decision was actually quite narrow. Since 1935, the Supreme Court has recognized that Congress can create independent agencies that exercise executive power. One necessary factor making these agencies independent is that the President can only remove their heads for cause, not at will. This means that independent agencies are neither supervised nor directed by the President (at least in theory). These agencies have typically been headed by a commission structure, so as to check the untrammelled exercise of power by the agency’s head. The CFPB structure creates an independent agency, with a single agency head who can only be removed for cause.

It’s worth pointing out that initially the structure of what eventually became the CFPB was designed to resemble that of other agencies. Kavanaugh’s opinion summarizes this history (see pp. 5-6). In a 2007 article, then-Harvard Law School professor (and current Senator from Massachusetts) Elizabeth Warren, originally proposed a financial protection agency, envisioning it as another traditional, multi-member independent agency. Likewise, the Obama administration’s 2009 proposal for what became the odd-Frank legislation contemplated a traditional, multi-member independent agency, and this vision was also the one the House passed in its version of the bill. Those who proposed and support the agency wished to make it free from regulatory capture and to insulate it from some of the extreme pressures Congress can exert– such as squeezing budgets– to limit agency independence and effectiveness.

Judge Kavanaugh’s principal concern is:

But Congress ultimately departed from the Warren and Administration proposals, and from the House bill. Congress established the CFPB as an independent agency headed not by a multi-member commission but rather by a single Director.

Because the CFPB is an independent agency headed by a single Director and not by a multi-member commission, the Director of the CFPB possesses more unilateral authority – that is, authority to take action on one’s own, subject to no check – than any single commissioner or board member in any other independent agency in the U.S. Government. Indeed, as we will explain, the Director enjoys more unilateral authority than any other officer in any of the three branches of the U.S. Government, other than the President.

At the same time, the Director of the CFPB possesses enormous power over American business, American consumers, and the overall U.S. economy. The Director unilaterally enforces 19 federal consumer protection statutes, covering everything from home finance to student loans to credit cards to banking practices. The Director alone decides what rules to issue; how to enforce, when to enforce, and against whom to enforce the law; and what sanctions and penalties to impose on violators of the law. (To be sure, judicial review serves as a constraint on illegal actions, but not on discretionary decisions within legal boundaries; therefore, subsequent judicial review of individual agency decisions has never been regarded as sufficient to excuse a structural separation of powers violation.)

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.

After laying out the issue, the court then discussed history and relevant legal precedents. Kavanaugh further noted:

In this case, the single-Director structure of the CFPB represents a gross departure from settled historical practice. Never before has an independent agency exercising substantial executive authority been headed by just one person.

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 decisionmaking and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency. The overarching constitutional concern with independent agencies is that the agencies are unchecked by the President, the official who is accountable to the people and who is responsible under Article II for the exercise of executive power. Recognizing the broad and unaccountable power wielded by independent agencies, Congresses and Presidents of both political parties have therefore long endeavored to keep independent agencies in check through other statutory means. In particular, to check independent agencies, Congress has traditionally required multi-member bodies at the helm of every independent agency. In lieu of Presidential control, the multi-member structure of independent agencies acts as a critical substitute check on the excesses of any individual independent agency head – a check that helps to prevent arbitrary decisionmaking and thereby to protect individual liberty.

The court decided that existing legal precedent could not be stretched this novel agency structure and therefore held hold that the CFPB is unconstitutionally structured.

The Court’s Remedy

The plaintiffs, PHH, were clearly swinging for a grand slam here, and argued that because of the constitutional deficiencies in the CFPB’s structure, the Dodd-Frank statute should be struck down. No kidding. Or as a fallback position, that the CFPB should be demolished. From the opinion:

PHH contends that the constitutional flaw means that we must 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.

But the court rejected such draconian relief and instead remedied the constitutional violation narrowly by severing the provision that the CFPB director could only be removed for cause from the remainder of the statute. This means that henceforth, the director of the CFPB serves at the will of the President. This will certainly allow the President greater authority to shape the rule-making and enforcement agenda of the agency, for if in future the President’s agenda for consumer financial protection conflicts with that of the CFPB, the President can remove the bureau’s director and appoint someone presumed to be more compliant.

Is this so serious? Let’s see what Senator Warren says on this issue. She originally came up with the idea for the agency. The New York Times quotes her as saying “the ruling makes a small, technical tweak to Dodd-Frank and does not question the legality of any other past, present, or future actions of the CFPB.” As the court itself noted, “[its] targeted remedy will not affect the ongoing operations of the CFPB.”

Yves called this decision a stealth win for the agency in her post earlier this week, Appeals Court Ruling That CFPB’s Structure Is Unconstitutional: A Stealth Win?, drawing on analysis by Adam Levitin. Crucially, the agency retains its budgetary independence, with funding provided by the Federal Reserve, and thus not subject to the annual appropriations whims of Congress. Failure to fund and support agencies such as the Securities and Exchange Commission and the Commodity Futures Trading Commission are among the reasons they’re ineffective.

Missing the Point

Some of the media reporting on this issue overstated the scope of the court’s ruling, and what it implied. Reporting in the Wall Street Journal, Brent Kendall and Yuka Hiyashi wrote, “A federal appeals court delivered a strong rebuke to the government’s new consumer-finance watchdog, declaring the agency’s unusual independence to be unconstitutional, and ordering its powers be curbed.”

Such a lead sentence promises much more than the rest of the article delivers. It’s surely important to understand that original proposals for the agency did not contain the unusual director structure, as the opinion explains. So this structure may not necessarily be integral to the CFPB’s independence and effectiveness. The three-judge panel did not throw out Dodd-Frank, did not dismantle the CFPB, nor did it invalidate the budgetary provisions necessary to its independence and effectiveness.

So Much For Judicial Restraint

Those on the conservative side of the spectrum often trumpet the virtues of judicial restraint. The heyday of these denunciations of so-called judicial activism date from decisions concerning racial discrimination, gender discrimination, voting rights, prisoner rights, abortion and contraception, and busing, to name a sampling.

But these same clarions are often silent when the judicial activism concerns a business-friendly result, as it does here. In fact, in this case, the court did not have to reach the constitutional issue at all. Once the court decided the case based on statutory grounds, under the the well-settled doctrine of constitutional avoidance, the court should not have considered the constitutional issues.

You don’t have to rely on me for this. Judge Karen Henderson outlined sound reasoning for avoiding the constitutional issue in her partial concurrence and partial dissent to the majority opinion (beginning on page 104). First she notes that “In no uncertain terms, PHH has asked this Court to vacate the CFPB’s order, outlining three distinct reasons why it is entitled to that relief. As my colleagues ably demonstrate, PHH’s statutory arguments are sufficient to accomplish its goal” and writes that she concurs with this reasoning. She continues:

But my colleagues don’t stop there. Instead, they unnecessarily reach PHH’s constitutional challenge, thereby rejecting one of the most fundamental tenets of judicial decisionmaking. With respect, I cannot join them in this departure from longstanding precedent.

Judge Henderson notes:

Although courts remain resolute in “our duty as the bulwar[k] of a limited constitution against legislative encroachments,” at the same time we recognize “a well- established principle governing the prudent exercise of this Court’s jurisdiction that normally the Court will not decide a constitutional question if there is some other ground upon which to dispose of the case.” [citations omitted]

I refer interested readers to the full text of the dissent for her comprehensive analysis of why addressing the constitutionality of the CFPB structure isn’t necessary in this case. Her bottom line conclusion is:

Because resolution of the constitutionality of the Bureau’s structure is unnecessary in providing PHH full relief and because the Supreme Court’s removal jurisprudence does not lead to a contrary result, I believe we should stay our hand.

In a piece headlined The D.C. Circuit’s gratuitous ruling on CFPB constitutionality, Alison Frankel zeroed in on the gratuitousness of the majority decision and gave prominent play tto the Henderson dissent. Her pithy summary of the majority’s response:

The majority opinion addressed Judge Henderson’s constitutional avoidance argument, asserting that because PHH called for dismantling the CFPB as unconstitutional, the relief it sought was broader than what the court’s statutory ruling could provide. “For that reason, we have no choice but to address the constitutional issue,” Judge Kavanaugh wrote. “In our view, failing to decide the constitutional issue here would be impermissible judicial abdication, not judicial restraint.” (The majority said it was showing judicial restraint by not insisting the CFPB be converted into a multi-commissioner independent agency, which would require the CFPB to shut down temporarily while the court created new offices and lawmakers filled them. “All of that ‘editorial freedom’ would take us far beyond our judicial capacity,” the opinion said.)

Business interests have been gunning for the CFPB (as, indeed, for all other forms of regulation, including climate change rules). The WSJ reported that the American Financial Services Association, the National Association of Home Builders and the U.S. Chamber of Commerce  each filed amicus briefs in the CFPB case. And since the structure of the CFPB directorship is unusual, it was inevitable that this structure would be subject to a constitutional challenge. But just because the challenge is made, there are sound reasons why the court did not have to address the constitutional issues in this case.

Possible Appeal?

The CFPB will probably choose to appeal this ruling. It has the option of asking for a full en banc review by the D.C. Circuit Court of Appeals, or petitioning for certiorari to the United States Supreme Court. Both of these appeals are discretionary, and each court has the option of declining further review.

Adam Levitin argues that eschewing the U.S. Supreme Court option at the moment and asking for review by the D.C. Circuit Court of Appeals is the more prudent strategy:

The smart move for the CFPB would seem to be to seek en banc review, in that the particular three-judge panel in this case was an unusually conservative panel that is not representative of the DC Circuit overall. The reason not to go directly to the Supreme Court is that if the court splits 4-4, then the lower court ruling stands. Accordingly, it seems better to try and get a favorable ruling en banc from the DC Circuit that could then be reviewed by the Supreme Court than have an unfavorable DC Circuit panel ruling reviewed by the Supreme Court. To be sure, there is some risk to the CFPB from appealing–it could lose with a broader remedy on appeal, but that seems very unlikely. This is probably as bad as it gets, and as noted above, it’s really not so bad.

I would add that  Republican presidents appointed each member of the three-judge panel, whereas the full D.C. Circuit now contains a majority appointed by Democratic presidents. For a more complete analysis of the constitutional issues that will come into play here if a court accepts a further appeal, see D.C. Circuit Review – Reviewed: A Primer on Today’s CFPB Decision.

Where Does This Leave the CFPB?

Whether or not the CFPB chooses to pursue an appeal, the decision leaves the agency in full control of its regulatory and enforcement agenda. At the top of the regulatory agenda are two long-standing issues, with the agency soon expected to produce final payday lending regulations and final regulations concerning mandatory arbitration clauses. As I posted recently in Business Groups Aim to Strong-Arm CFPB on Arbitration:

Business interests have launched a pre-emptive broadside against the Consumer Financial Protection Bureau’s (CFPB) long-awaited regulations covering the use of forced arbitration clauses in consumer financial contracts.   Financial institutions use such clauses to require consumers to use arbitration procedures to resolve a dispute, rather than allowing them bring class action or other types of lawsuits.

The agency has been deluged with comments on its proposal, many of which are duplicative. Again, I refer to my earlier post as to why the new rules are so important:

The rule contains two key parts. The first would prohibit financial companies from using an agreement that would bar a consumer from participating in a class action concerning a financial product or service covered by the agreement. The second would introduce a modicum of greater transparency into arbitration proceedings, and require financial firms to submit records of arbitration proceedings to the bureau.

Consumer advocates and others concerned about openness have long considered arbitration proceedings problematic as there’s little transparency, records are not made public, past decisions have little precedential value, and there are limited grounds for appeal. In addition, since parties on one side of transactions tend to be repeat customers, this pattern may skew decisions to one side. The lack of transparency in the system means it is impossible to evaluate how fair an arbitration system is.

The Wells Fargo scandal has brought these clauses again to the fore, as the company may rely on their existence to block lawsuits by bank customers challenging the opening of accounts without their consent, among other abuses. There is a certain irony in not being able to sue a company for opening an account without one’s consent based on the existence of a mandatory arbitration clause contained in another account the same consumer has opened.

What Happens If Trump Wins?

If the D.C.Circuit’s decision is not overturned on appeal, a President Trump might elect to toss out director Cordray and replace him with some more business-friendly option. Such a move would certainly restrict the CFPB’s effectiveness.

Yet at the moment, following on from a rather lackluster start, the agency finally seems to be growing into exercising the regulatory authority with which it has been bestowed. We’ll have to wait and see what those final payday lending and mandatory arbitration provisions look like to see whether this is a real perception or merely another financial regulatory illusion.

In fact, most recent criticism of the agency has been that it’s been too lenient, rather than too aggressive, in pursuing its consumer protection mandate. The $190 million settlement it agreed with Wells Fargo over the bank’s egregious cross-selling practices seems inadequate. The outrage of these practices suggest there may be a constituency developing for more effective financial regulation. Dare we hope that the CFPB might start taking more aggressive steps to put the kibosh on outrageous financial industry products and finally provide consumers with the protection we deserve?

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  1. anon

    “Yet a the moment, the agency finally seems to be growing into exercising the regulatory authority with which it has been bestowed, following from a rather lackluster start.”

    Thanks for your work!

    1. Yves Smith

      I think she caught that as or before you commented (as in you might have opened up the page and by the time you go to that part, she had fixed it). But thanks for your help.

      1. Jerri-Lynn Scofield Post author

        Yes, I noticed the typo and fixed it. But thanks for reading my work so carefully and commenting. Really appreciate the help in fixing those errors that it’s so difficult to spot in one’s work– especially when doing time-sensitive reactive blogging.

  2. Matthew G. Saroff

    Is it just me, or did Kavanaugh just declare the structure of the Federal Reserve unconstitutional?

    I think that he just did.

    1. Yves Smith

      As I mentioned in an earlier post, it’s pretty clear the structure of the Fed is unconstitutional (the detailed arguments are in the book The Power and Independence of the Federal Reserve by Peter Conti-Brown). But courts have repeatedly refused to consider those arguments. So 600 person disliked-by-the-right agencies are fair game, but not the Fed.

      1. Jerri-Lynn Scofield Post author

        I should have linked to that post, but elected not to raise the Fed point here as the post was already long and I didn’t want to complicate it further. So very glad Mathew– if I may— that you raised this important point in this comment thread. The NC comment threads do tend to attract those with greater interest in the post or topic.

  3. Science Officer Smirnoff

    Thanks, JLS, on a very important topic.

    Timely of the NYT to offer Greenhouse’s column today, speaking of judicial activism on the right:

    The judge as boogeyman has become the judge as savior — at least when intervening to block executive branch action or to strike down a regulatory requirement in the name of free speech.

    It’s taken her a long time to get to this point of stating the obvious. Perhaps, someday over the rainbow it wouldn’t be too partisan-appearing to refer to John Roberts as the High Court’s Chief Pol. [I leave it to the better angel of your nature to be more judicious sounding] :-)

    1. Jerri-Lynn Scofield Post author

      Yes, and I can’t wait to witness the acrobatic flip-flopping that Johnny R and his gang will demonstrate as to the appropriate restraint the Court should accord an executive branch decision the next time a Republican occupies the oval.

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