CFPB Single-Director Structure Deemed Unconstitutional

Yesterday—in PHH Corp. v. CFPB—the U.S. Court of Appeals for the District of Columbia (the “D.C. Circuit”) held that the single-director structure of the Consumer Financial Protection Bureau (“CFPB”) is unconstitutional, noting, though, that the agency itself “will continue to operate and perform its many critical responsibilities . . . .” PHH v. CFPB, No. 15-1177, 2016 WL -------, slip op. at 13 (D.C.Cir. Oct. 11, 2016). The CFPB is an independent agency, meaning the head of the CFPB can only be removed by the President for cause, as opposed to traditional executive agencies whose directors the President may remove at will. The D.C. Circuit, looking to “history and tradition,” found no examples of independent agencies wielding commensurate power to the CFPB with a single director. Id. at 8. Indeed, the opinion states that the court specifically asked the CFPB to find any examples of single-director independent agencies. See id. at 29. The CFPB only found three in the history of the United States, none of which have comparable authority to the CFPB according to the D.C. Circuit.   

Analytically, the primary question before the court reduced to “whether [the court] may extend the Supreme Court’s Humphrey’s Executor precedent to cover this novel, single-Director agency structure for an independent agency.” Id. at 7. Humphrey’s Executor “upheld the constitutionality of independent agencies” over the vehement opposition of President Franklin Roosevelt. See id. at 21 (discussing Humphrey’s Executor v. United States, 295 U.S. 602, 624, 631–32 (1935)). “In the wake of the 1935 Humphrey’s Executor decision, independent agencies have continued to play an enormous role in the U.S. Government. . . . Importantly, however, the independent agencies have traditionally operated – and continue to operate – as multi-member” institutions. Id. at 22. The CFPB breaks from this tradition by having a single director who wields “massive power.” Id. at 24. Indeed, “the CFPB possesses the power to ‘prescribe rules or issue orders or guidelines pursuant to’ 19 distinct consumer protection laws. That power was previously exercised by seven different governmental agencies.” Id. (citing 12 U.S.C. §§ 5581(a)(1)(A) & 5481(14)) (internal citations omitted). 

To cure this unconstitutional defect, the D.C. Circuit severed the “for cause” removal provisions of the Dodd-Frank Act, which created the CFPB (declining to fully dissolve the CFPB as advocated by PHH Corporation (“PHH”)). As such, the director of the CFPB must now answer directly to the President who may remove the director at will, thereby creating a level of oversight that currently does not exist on the director’s actions. Whether this change will stand on appeal (and an appeal seems all but inevitable) or have far reaching impacts remains to be seen. However, by their very nature and name, independent agencies enjoy freedom from the news cycle and political climate of our nation. The fact that the director of the CFPB must answer to the President puts pressure on the agency to conform to the expectations of the electorate in a way that it simply never had to do before. At bottom, this change will mean the CFPB—and more particularly its director—cannot ignore demands of the President.

PHH Corp. v. CFPB will not be the final say on this issue. In fact, the case also addressed the merits of an appeal by PHH, challenging the statutory interpretations of the CFPB that gave rise to a $109 million order against PHH. Again, the D.C. Circuit sided with PHH.  The court reversed the CFPB’s order and required it to re-consider its findings and the consistency of its application of Section 8 of the Real Estate Settlement Procedures Act—the primary basis of the $109 million order. As such, this case will continue at the very least for the reconsideration of the CFPB’s $109 million order against PHH. However, this portion of the D.C. Circuit’s opinion will almost assuredly play second fiddle to the change regarding the CFPB director’s removal. The appeal and history of this case will be something all business currently or possibly regulated by the CFPB should watch as it very well might change the tenacity and tenor with which the CFPB executes and acts on its authority.