D.C. Circuit Strikes Down CFPB Leadership Structure

Financial Industry Alert


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.