A federal appeals court case challenging the constitutionality of the Consumer Financial Protection Bureau is raising concerns that if the agency loses, it could open the floodgates for a flurry of other lawsuits against the CFPB.
A three-judge panel is due to decide soon whether a provision of the Dodd-Frank Act specifying that a director of the CFPB could be removed only "for cause" is constitutional — and what remedies should be put in place if it isn't.
"If the court said Director [Richard] Cordray was not constitutionally appointed, it could provide grounds for people to challenge various enforcement actions and rulemakings," said Andy Arculin, of counsel at the law firm Venable and a former senior counsel in the CFPB's Office of Regulations. "Potentially it could be very messy for the CFPB."
The CFPB got pummeled in oral arguments on April 12, when judges focused on constitutional issues raised by the nonbank mortgage lender PHH Corp., which sued the CFPB last year after Cordray ordered a $109 million disgorgement for an alleged kickback scheme. Hostile questioning by two D.C. Circuit judges has led many lawyers to believe that the panel might lean toward a ruling against the bureau's constitutionality.
"The question is what would be the unintended consequences of ruling in a certain way," Arculin said. "The agency was meant to be set up as an independent agency and when various stakeholders engage the bureau and meet with Director Cordray today, there's a sense that he's the decision maker. If there were back channels through Congress or the White House, that could be used to circumvent the director or undermine that independence, it could change the way people lobby them."
The three-judge panel's decision is unlikely to be the final word, however.
The CFPB is likely to appeal any decision against it by filing a petition for an en banc hearing of the D.C. Circuit. The full appeals court, some suggest, might be friendlier to the government's case than the more conservative three-judge panel, all of whom are Republican appointees.
Peter Wilson, an associate at Katten Muchin Rosenman in Chicago and a former CFPB attorney, said it would be a strategic call for the government to pursue an en banc review.
"It's a fair guess that a simple majority of judges on the D.C. Circuit might disagree with the [three-judge] panel about the heart of the argument," Wilson said. "If the government lost it could seek review en banc, and while the D.C. Circuit is conservative in granting en banc review, this is a case where it might be likely."
An en banc hearing is further complicated by the fact that Merrick B. Garland, the chief judge of the D.C. Circuit, would likely not hear the case while his nomination to the Supreme Court is still pending. The D.C. Circuit currently has 11 active judges, including Garland. All active judges who are not recused would hear the case en banc, according to the court's rules.
In some ways, the closely watched case also could hinge on the death of Justice Antonin Scalia, and whether the Supreme Court agrees to take an appeal. The CFPB also could ask for a review directly from the Supreme Court.
"This is the kind of a case where everybody knows the Supreme Court is likely to grant it if the constitutional issues are reached," Wilson said.
The timing of a decision also is critical.
The three-judge panel is expected to decide within weeks or possibly months. An appeal of either the panel's decision or an en banc ruling means the case would not be heard until the Supreme Court's next term. By then, it is likely that a ninth justice would have been appointed to succeed Scalia. As a result, the case could turn on the results of the presidential election. A Republican appointee might favor the decision against the agency, while a Democratic one might support the CFPB.
"A fifth vote inclined to go the government's way could change the calculus for PHH," Wilson said.
There is also the possibility that the court battle could be decided on narrower legal grounds. Aside from the constitutional concerns, the mortgage industry is looking for a decision on the CFPB's novel interpretation of the Real Estate Settlement Procedures Act, known as Respa.
"There are many, many ways of being able to uphold the verdict without addressing the constitutionality issue," said Joseph Lynyak, a partner at the law firm Dorsey & Whitney. "The en banc ruling could give a victory to PHH while ignoring that issue."
But Lynyak also said he thinks there will be fallout from any decision.
"You will have a lot of practitioners advising their clients to take more adversarial positions on the CFPB's enforcement authority, and there will certainly be a period of uncertainty," he said.
Craig Nazzaro, of counsel in Baker Donelson's Atlanta office and a former vice president and assistant general counsel with JPMorgan Chase, agreed that the industry, particularly small banks, could challenge the bureau. He also expects a Supreme Court showdown.
"This is one of the most powerful regulators ever created by the U.S. government, one that affects so many American consumers and so much of the business world," Nazzaro said. "The question is, was it set up in a constitutional manner and is it a legal regulator?"