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Southern District of New York finds CFPB Structure Unconstitutional

On June 21, Judge Loretta Preska of the Southern District of New York concluded that the Consumer Financial Protection Bureau (“CFPB”) is unconstitutionally structured. This decision marks the first time in which a court has reached this conclusion.

In Consumer Financial Protection Bureau v. RD Legal Funding, LLC, the CFPB alleged RD Legal Funding, LLC and other related entities (the “Defendants”) violated the Consumer Financial Protection Act. Specifically, the CFPB alleged the Defendants offered cash advances to plaintiffs waiting on payments from settlement agreements or judgments entered in their favor. At issue in this particular case were cash advances offered to class members in the NFL Concussion Litigation class action and individuals qualifying for compensation under the September 11th Victim Compensation Fund of 2001. The CFPB argued the cash advances were fraudulently made and constituted usurious loans in violation of state law.

The Defendants filed a motion to dismiss arguing, among other things, that the CFPB is unconstitutionally structured, thus lacking the authority to bring a cause of action under the CFPA. In its decision, the court noted that this issue had been recently decided by the Court of Appeals for the District of Columbia Circuit in PHH Corp. v. CFPB, 881 F.3d 75 (D.C. Cir. 2018). In PHH, the D.C. Circuit held the provision in Title X of the Dodd-Frank Act which allows for the for-cause removal of the CFPB Director is constitutional because it does not interfere with the President’s executive power and does not restrict the President from firing the CFPB Director without cause. The court first noted that the D.C. Circuit’s decision in PHH was not binding.

Disagreeing with the decision in PHH, the court instead adopted the dissenting opinion, which found the CFPB to be “unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single Director.” However, the court disagreed with the dissenting opinion’s argument that the for-cause removal provision should be severed from Title X and the CFPB. Instead, the court held Title X and the CFPB should be stricken in its entirety. Accordingly, the court determined the CFPB lacked the authority necessary to bring an enforcement action under the CFPA because its structure violated the Constitution’s separation of powers and, thus, dismissed the claims against the Defendants.

This decision marks the first time in which a court has determined the CFPB’s structure to be unconstitutional and will most likely prompt similar challenges in other jurisdictions. This decision increases the likelihood that the United States Supreme Court will take up this issue at a future date.