The limits of the Consumer Financial Protection Bureau's power is now a question for the courts in at least two widely-reported cases. In one, PHH Mortgage has called into question the agency's structure and authority while appealing a CFPB fine over alleged kickbacks. And just last week, a District Court judge dismissed a CFPB suit against a for-profit college accreditor, ruling that the bureau lacked the authority to investigate the firm.
The new judicial scrutiny should not come as a surprise considering the aggressive steps the CFPB, and its sole director, Richard Cordray, have taken after the Dodd-Frank created the bureau. It is also the result of lawmakers, in drafting the 2010 law, failing to place necessary checks on the agency head by subjecting CFPB decisions to a five-member commission, rather than in one director.
Had the architects of the CFPB pursued a commission structure, we would not have had to contemplate the questions now before the courts. A commission could have provided for a more measured approach and balance of power in the execution of the agency's mandate. As these cases bring new attention to the CFPB's reach, they will likely also fuel the push for legislative reform to install a commission — doing what Congress failed to do almost six years ago.
The PHH appeal, in particular, which was heard earlier this month by the U.S. Court of Appeals for the D.C. Circuit, shines the spotlight on the CFPB's authority and structure. That focus was clear even before the hearing, when the court took the rare step of issuing an order asking parties to prepare to address certain questions on the historical precedence for independent agencies to be led by single directors and proposed remedies for single-director structures that do not meet a legal test.
Dodd-Frank states that the CFPB is to be led by a director appointed by the president and confirmed by the Senate. The director has a five-year term, and prior to expiration of that term, the president may only remove the director for inefficiency, neglect of duty, or malfeasance in office. Dodd-Frank also places the power of investigation, enforcement, rule promulgation, and staffing with the director with no oversight or accountability. Additionally, the bureau's budget is derived from a fixed percentage of the Federal Reserve's operating expenses. These funds only have to be requested by the CFPB's director.
PHH attorney Ted Olson, the former solicitor general, told the court that concerns about checks and balances in the CFPB's current structure include that the president lacks the power to remove the director without cause. Asked by the panel what remedy PHH sought, Olson said, "The only remedy is that this agency is unconstitutional and the decisions of this director in this case have to be overturned and the decision has to be vacated."
He continued: "If I was in your shoes I would be very tempted to write an opinion that Congress cannot create an agency like this that ignores all the rules of separation of powers. The separation of powers is what protects our liberties as individuals in this country."
While some have cast doubt on the likelihood of the court overturning CFPB policies, the outcome of the case could still have a dramatic impact on the financial services industry. Following the hearing, experts have weighed in on the potential of the court removing the "for cause" provision — meaning a new administration could remove Cordray or any other director simply because they wanted to appoint someone else.
If the court goes further, and rules the CFPB structure to be unconstitutional, the impact could be dramatic. What happens with all the rules the bureau promulgated? Untold sums have been spent on industry compliance with the CFPB's rules. Would those rules still apply? What about the enforcement actions that have already been finalized or the monies paid out under various consent orders?
Had Congress originally established a five-member CFPB commission, it likely would have quieted much of the concern about the agency's structure. Regardless of the outcome in the courts, lawmakers are still attempting to reform the structure.
The court in the PHH case is expected to issue a decision by the end of the summer, but we are likely far from over. If the court takes issue with the structure of the CFPB, either by finding it unconstitutional or by striking the tenure and for-cause provisions of Dodd-Frank, the CFPB may request en banc review. If granted, the case would be heard before all the judges on the D.C. Circuit. Not all of the court's members are likely to share the panel's skepticism about the CFPB's structure. Whatever the outcome at the D.C. Circuit, a further appeal to the U.S. Supreme Court seems likely.
Craig Nazzaro is of counsel in Baker Donelson's Atlanta office and is a member of the Consumer Finance Litigation and Compliance Group. Before joining Baker Donelson, he was a vice president and assistant general counsel with JPMorgan Chase. He can be reached at firstname.lastname@example.org.