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From Banking and Finance Law Daily, April 12, 2016

Appeals court to hear arguments on CFPB’s constitutionality; new ground broken?

By John M. Pachkowski, J.D.

In advance of the April 12, 2016, oral argument to be heard by the U.S. Court of Appeals for the District of Columbia regarding the constitutionality of the Consumer Financial Protection Bureau, the advocacy group Americans for Financial Reform has noted that if the judges sitting on the panel follow Supreme Court precedent, “the challenge to the CFPB’s structure will fail.”

Director’s action. The case before the appellate court grew out of a decision rendered by the CFPB Director in June 2014 that PHH Corp., a mortgage lender, illegally referred consumers to mortgage insurers in exchange for kickbacks. He also issued a final order that prohibits PHH from violating the law and requires it to pay $109 million to the bureau. The Director’s decision was upheld in part, and reversed in part, in a November 2014 Recommended Decision by an administrative law judge, which held that PHH violated the Real Estate Settlement Procedures Act when it accepted kickbacks for loans that closed on or after July 21, 2008. Those kickbacks took the form of mortgage reinsurance premiums that the mortgage insurers paid to a subsidiary of PHH (see Banking and Finance Law DailyJune 4, 2015).

Appeal. On appeal, PHH argued in its brief to the appeals court that:

  • the Director’s Decision and Order impermissibly applied new interpretations of RESPA retroactively to punish past conduct that was expressly permitted by agency guidance and regulations; and
  • the Decision’s interpretation of RESPA’s Section 8 is contrary to the statute, arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.

PHH also argued that “the unprecedented structure of the CFPB, conferring legislative, executive, and judicial power on the democratically unaccountable Director” violated the Separation of Powers Clause of the U.S. Constitution.

The CFPB’s brief argued that the Director’s Decision and Order are entitled to deference under the two-step framework of Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842 (1984).

The bureau countered PHH’s separation of powers argument stating that “it is well settled that for-cause removal for the heads of agencies such as the Bureau is constitutional because it does not impede the Presidents’ ability to assure that the laws are faithfully executed.” It continued, “Nor has Congress ceded its power of the purse merely because Congress funded the Bureau with Federal Reserve funds, not through the annual appropriations process.” The bureau’s brief concluded, “For-cause removal has no impact on Congress’ power of the purse, and the Bureau’s funding mechanism has no impact on the President’s ability to faithfully execute the laws.”

Oral arguments needed. On April 4, 2016, the court issued an order instructing the parties to “be prepared to address at oral argument” the following questions:

  1. What independent agencies now or historically have been headed by a single person? For this purpose, consider an independent agency as an agency whose head is not removable at will but is removable only for cause; and
  2. If an independent agency headed by a single person violates Article II as interpreted in Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010), what would the appropriate remedy be? Would the appropriate remedy be to sever the tenure and for-cause provisions of this statute, see 12 U.S.C. § 5491(c)? Cf. Free Enterprise Fund, 561 U.S. at 508-10. Or is there a more appropriate remedy? And how would the remedy affect the legality of the Director's action in this case?

Breaking ground. In its analysis, AFR concluded, “A decision striking down the CFPB’s structure would not only break new constitutional ground, it would have wide-reaching practical consequences as well. Such a holding would mean that the structures of at least three other agencies are also unconstitutional because they are headed by a single official removable only for cause.” The three agencies that could be affected are: the Federal Housing Finance Agency, Office of Special Counsel, and Social Security Administration. Also, AFR suggested that the president does not even have the power to remove the Comptroller of the Currency except for cause.

Companies: Americans for Financial Reform; PHH Corporation

MainStory: TopStory CFPB DoddFrankAct RESPA

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