On October 11, 2016 the D.C. Circuit in PHH Corporation v.
CFPB, No. 15-1177, struck down the Consumer Financial
Protection Bureau's (CFPB) leadership structure as
unconstitutional. In short, the court ruled that Congress may
not create a powerful independent agency led by a single director,
rather than a multi-member commission, such as the Federal
Communications Commission (FCC) or the Federal Energy Regulatory
Commission (FERC). But rather than abolishing the CFPB
altogether, the court remedied the constitutional problem by
removing the CFPB's independence — that is, giving the
President the power to fire the CFPB Director at will. Thus,
so long as the President and CFPB Director are on the same page
politically, the CFPB can (and almost certainly will) continue to
act just as it did before. The court's ruling also
invalidated, on statutory grounds, a CFPB enforcement action aimed
at mortgage-reinsurance practices. But that ruling is
unlikely to have broad legal implications beyond referral
agreements in the real estate market.
The three-judge D.C Circuit panel (made up of all
Republican-appointed judges) split 2-1 on the constitutional
question. Judge Kavanaugh, a constitutional-law enthusiast
who regularly teaches a class at Harvard Law School on
separation-of-powers issues, wrote the majority opinion.
(Judge Henderson dissented, chastising the majority for going out
of its way to decide a constitutional question that she viewed as
unnecessary to resolution of the case.) After acknowledging
that the text of the Constitution does not directly address the
creation of independent agencies, Judge Kavanaugh's opinion
stressed that independent agencies are an anomaly in the federal
system because they are insulated from political accountability:
The President may remove unelected independent-agency leaders from
office only for malfeasance, neglect of duty, and the like, not
merely for policy disagreements. Throughout American history,
the court then emphasized, the power of independent agencies has
virtually always been checked by multi-member leadership
structures. In other words, it is harder for independent
agencies to get things done because a majority of co-equals —
for instance, three of five FCC commissioners — must first
agree. Accordingly, the court concluded, the CFPB's
unilateral leadership design gave it too much unchecked regulatory
authority over large swaths of the American economy. However,
the solution was not to shut down the CFPB, but instead, to allow
the President to supervise the CFPB Director, just as the President
supervises the Treasury Secretary or EPA Director.
There was more. Because the D.C. Circuit determined that
the CFPB could continue operating, it went on to address whether
the agency had lawfully interpreted its authority in the case at
hand: an enforcement action against a mortgage insurer for
"captive reinsurance agreements" (agreements by which a
mortgage lender refers borrowers to a mortgage insurer in exchange
for the insurer's commitment to purchase mortgage reinsurance
from the referring lender). Unanimous on this score, the
three-judge panel found that the CFPB had exceeded its authority
for two reasons. First, federal statute allows referral
agreements so long as the referring party receives fair market
value for the services it provides (here, reinsurance).
Second, because the Department of Housing and Urban Development
(HUD) had long told the mortgage-lending community that captive
reinsurance agreements were permissible, the CFPB's U-turn,
applied retroactively, deprived the mortgage-lending community of
due process, failing to provide fair notice of what was lawful.
What implications does yesterday's ruling have, and will it
stick? As suggested above, the constitutional ruling will
mean little practically unless the White House and CFPB Director
are at loggerheads. And this is unlikely unless a Director
appointed by a president of one political party continues to serve
during an administration led by the other party. (The CFPB
Director serves for five years, so overlap across administrations
is possible.) As for the rest of the court's ruling,
although significant for mortgage-reinsurance practices, it broke
no new legal ground on questions surrounding the lawfulness of
agency action generally. The ruling does, however,
demonstrate that judicial challenges to aggressive agency positions
can succeed. This is the case here even though the D.C. Circuit has
generally become more agency-friendly in recent years as a result
of President Obama's four appointments to the court. The CFPB
can now ask the full D.C. Circuit to rehear the case en banc. If
that fails, a Supreme Court petition would be the next step.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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