The U.S. Court of Appeals for the District of Columbia issued a ruling today that constricts the power and reach of the Consumer Financial Protection Bureau, ruling that the leadership structure is unconstitutional, that the agency violated due process, and that the CFPB’s arguments that there is no statute of limitations on enforcement actions is absurd.
The ruling was made in the case of PHH Corp. v. Consumer Financial Protection Bureau. PHH, a mortgage lender, was the recipient of an enforcement order from the CFPB. The order required PHH to pay $109 million after it was accused of taking kickbacks from a subsidiary for referring mortgage insurance business. PHH argued that the CFPB should be shuttered because the leadership structure of the agency was unconstitutional and that the agency violated the statute of limitations included in the Real Estate Settlement Procedures Act when assessing the fine.
The court agreed.
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.
Rather than agreeing with PHH that the CFPB needed to be closed, the court took a narrower form of punishment. Under the Dodd-Frank Act, the law which created the CFPB in the first place, the director of the agency can only be fired for cause, that is, if the President of the United States has a justified reason for taking the action. The Appeals Court ruled that the for cause provision of the Dodd-Frank Act be removed, allowing the President to hire and fire the director at his or her discretion.
The CFPB therefore will continue to operate and to perform its many duties, but will do so 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. Those executive agencies have traditionally been headed by a single person precisely because the agency head operates within the Executive Branch chain of command under the supervision and direction of the President. The President is a check on and accountable for the actions of those executive agencies, and the President now will be a check on and accountable for the actions of the CFPB as well.
During its deliberation, the court asked the CFPB for examples of other government agencies that operated with the same structure where the director could only be removed for cause. The CFPB came back with the Social Security Administration, the Federal Housing Finance Agency, and the Office of Special Counsel. Those agencies do not have the same legislative and fine-imposing powers as the CFPB.
Rep. Jeb Hensarling [R-Texas], chairman of the House Financial Services Committee issued a statement, which said, in part: “The CFPB has an important mission. Properly designed and led, it is capable of great good. But the Bureau’s bizarre and defective structure allows it to evade the time-tested checks and balances that are necessary to hold it or any other government bureaucracy accountable. ”
Hensarling has introduced a bill that would, among other changes, alter the structure of the leadership of the CFPB to a five-person commission, from a single director.
The appeals court goes to great lengths in its 94-page ruling to detail all the ways that the CFPB’s structure is unconstitutional and goes against all that the framers of the constitution and Congress has done in the past 225 years to ensure a system of checks and balances in the federal government. Quoting James Madison, the court wrote:
“If the President should possess alone the power of removal from office, those who are employed in the execution of the law will be in their proper situation, and the chain of dependence be preserved; the lowest officers, the middle grade, and the highest, will depend, as they ought, on the President, and the President on the community.”
Along with ruling on the issue of its leadership structure, the appeals court also ruled on whether the CFPB erred in meting out the $109 million penalty on PHH. In this case, the CFPB ruled in 2015 that certain types of insurance referrals were prohibited by the Real Estate Settlement Procedures Act. The CFPB then applied that ruling in its investigation of PHH, but looked back as far as 2008 to examine the lender’s conduct. RESPA’s statute of limitations is three years. PHH had been operating on interpretations of RESPA by the Department of Housing and Urban Development until the CFPB came in and violated due process by “applying its changed interpretation to PHH’s past conduct and requiring PHH to pay $109 million for that conduct.” The CFPB tried to argue that HUD’s interpretations were not reflected in a binding rule. The court disagreed and then offered this analogy:
Put aside all the legalese for a moment. Imagine that a police officer tells a pedestrian that the pedestrian can lawfully cross the street at a certain place. The pedestrian carefully and precisely follows the officer’s direction. After the pedestrian arrives at the other side of the street, however, the officer hands the pedestrian a $1,000 jaywalking ticket. No one would seriously contend that the officer had acted fairly or in a manner consistent with basic due process in that situation.
The CFPB argued that it is exempt from statutes of limitations because it engaged in an administrative action and not a legal action, and that it has the authority to bring enforcement actions under Dodd-Frank. Again, the court ruled against the CFPB.
The absurdity of the CFPB’s position is illustrated by its response to a hypothetical question about the CFPB’s bringing an administrative enforcement action 100 years after the allegedly unlawful conduct. Presented with that question, the CFPB referenced its prosecutorial discretion. But “trust us” is ordinarily not good enough.
