The structure of the Consumer Financial Protection Bureau (CFPB), which is headed by a single director who is removable only for cause, has been the subject of criticism and attack since the agency's inception. To date, legal challenges focusing on the agency's structure have not succeeded. Now, however, the federal court of appeals in the District of Columbia appears to be taking up the issue. A panel of that court issued an order on Monday raising questions about the Bureau's constitutionality. A decision that the CFPB's structure is unconstitutional could have widespread ramifications for the agency in the years to come.
The case is PHH Corp. v. Consumer Financial Protection Bureau, which involves a challenge to a $109 million sanction imposed by CFPB Director Richard Cordray for asserted violations of the Real Estate Settlement Procedures Act (RESPA). PHH and amici have raised numerous issues in the case for the court's consideration, ranging from the proper interpretation of RESPA to questions concerning statutes of limitations and remedies. On April 4, 2016, the three-judge panel (composed of Judges Karen Henderson, Brett Kavanaugh, and Raymond Randolph) directed the parties to be prepared to address two questions at the April 12, 2016 oral argument:
- What independent agencies now or historically have been headed by a single person? For this purpose, consider an independent agency as an agency whose head is not removable at will but is removable only for cause; and
- If an independent agency headed by a single person violates Article II as interpreted in Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010), what would the appropriate remedy be? Would the appropriate remedy be to sever the tenure and for-cause provisions of this statute, see 12 U.S.C. § 5491(c)? Cf. Free Enterprise Fund, 561 U.S. at 508-10. Or is there a more appropriate remedy? And how would the remedy affect the legality of the Director's action in this case?
The first question suggests that the panel may view the CFPB's structure, in which the agency is headed by a single Director who is removable only for cause, as constitutionally suspect. Other federal regulatory agencies are headed by a single director, including the Office of the Comptroller of the Currency and the now-defunct Office of Thrift Supervision. But the Executive Branch has taken the position that the heads of those components serve at the pleasure of the President. Many leaders of other independent agencies can be removed by the President only for cause, but those agencies are structured as multi-member commissions. (The Social Security Administration is the only federal agency of which we are aware that has a single director who is removable only for cause.) The court's question to the parties suggests that the combination of these two features—removal only for cause and a single agency head—has at least raised questions in the judge's minds regarding PHH's constitutional challenge to the agency's structure.
The court's second question—what remedy would apply upon a finding that the Bureau's structure is unconstitutional—further confirms the seriousness with which the court apparently views this issue. As the court's question suggests, the Supreme Court has previously held in an analogous circumstance that severance of the for-cause provisions of the statute—meaning that the Director would serve at the will of the President—was an appropriate remedy. That said, while the Supreme Court has emphasized that the "normal rule" is "that partial, rather than facial, invalidation is the required course" when a statute is challenged on constitutional grounds, the Court of Appeals might conclude that the Bureau's combination of structural features requires a different remedy, or that deciding how to address a finding of unconstitutionality should be left to Congress.
Either way, if the Court of Appeals decides in favor of the petitioner in PHH Corp. on constitutional grounds, the issue is likely to be raised in other pending CFPB enforcement litigation—both administrative and judicial—as well as in challenges to the agency's rulemaking and other actions. A similar constitutional challenge is already pending before the Seventh Circuit in CFPB v. ITT Educational Services, Inc. If the D.C. Circuit panel were to declare the CFPB's structure unconstitutional, the agency would almost certainly seek either rehearing or certiorari, ushering in yet again a period of legal uncertainty regarding the agency's authority reminiscent of the days before Director Cordray's confirmation by the Senate.
Originally published April 6, 2016
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