May 18, 2017 / 6:21 PM / 2 years ago

U.S. consumer bureau faces fateful test in U.S. appeals court

NEW YORK (Thomson Reuters Regulatory Intelligence) - Oral arguments begin on May 24 in a U.S. appeals court case that could reshape the structure of the Consumer Financial Protection Bureau, or even determine the independent agency’s existence.

Consumer Financial Protection Bureau Director Richard Cordray testifies before the House Financial Services Committee in Washington September 12, 2013.

A decision would not only affect the status of the current CFPB director, Richard Cordray, an Obama recess appointee whose term expires in July, 2018, but also the agency’s rulemaking agenda.

The central issue in the case is the constitutionality of the CFPB’s single-director structure, a key feature mandated by the Consumer Financial Protection Act (CFPA), which was enacted as part of the Dodd-Frank regulatory overhaul in 2010. Under the act, the director cannot be fired by the president except for cause. Another unusual feature is that the CFPB receives automatic funding directly from the Federal Reserve, instead of through the annual congressional appropriations process.

Detractors say the framework is unconstitutional because it concentrates too much power in one person who is accountable to neither the president nor Congress.

The case, PHH Corporation v. Consumer Financial Protection Bureau, arises from a CFPB enforcement order against mortgage lender PHH for kickback violations under Section 8 of the Real Estate Settlement Procedures Act (RESPA). A divided panel of the D.C. Circuit Court of Appeals vacated the enforcement order on October 11, 2016, holding that the CFPB leadership structure is unconstitutional.

The panel, however, declined to disband the agency. Rather, the panel served up a limited remedy by severing the act’s “terminate for cause only” provision. If that remedy is upheld it would unofficially turn the CFPB into an executive agency. The remedy would allow the CFPB to remain in operation without new legislation, subject to the president’s power to terminate the director at will.

The CFPB appealed, and the D.C. Circuit vacated the panel’s judgment pending a ruling on the case by the entire court of 10 judges.

The case has several issues of significance. Professor Aditya Bamzai of the University of Virginia Law School argues that the president already has the independent legal right to terminate the director at will, despite the contrary language of the CFPA. Further, at least one other agency formed in the wake of the financial crisis could be affected by the outcome. The Federal Housing Finance Agency (FHFA), the conservator of Fannie Mae and Freddie Mac, is also an independent agency whose sole director cannot be removed at will.


Much of the CFPB’s rulemaking agenda sits in limbo. For example, the CFPB has not issued a final rule banning class-action waivers in consumer financial services contracts, given the implied threat of Republican reversal under the Congressional Review Act. Reversal under the review act would also preclude the CFPB from issuing “substantially similar” regulation without new legislation.

A full appeals court decision upholding the panel’s ruling would kill the proposed rule for all intents and purposes. First, an affirmation would raise the question of whether the CFPB would have to submit the rule to the cost-benefit analysis process that currently applies only to executive branch agencies.

Furthermore, any CFPB appeal of the PHH case to the U.S. Supreme Court faces a prodigious procedural hurdle. High court appeals by the CFPB require Justice Department approval under Dodd-Frank. The D.C. Circuit has already denied a January motion by state attorneys general to intervene on behalf of the CFPB in case a new agency director or the Justice Department renders an appeal moot.

In any event, a Supreme Court appeal would likely drag on well after Cordray’s term expires. By then, President Donald Trump presumably will have appointed a director more receptive to issues such as class action waivers that would be in line with his business-friendly agenda.

The impact on existing CFPB rules is less clear. While a D.C. Circuit affirmation would not legally preclude the agency from enforcing existing rules, it might embolden financial institutions to challenge the validity of the rules in the first place.


Filed paperwork in the case suggests that a showdown on the constitutional issues is inevitable. The DOJ’s friend-of-the-court brief supports the panel’s decision to sever the provision limiting the president’s right to fire the director. It stopped short of endorsing the view, expressed in PHH’s brief, that the CFPB should be disbanded given its “many constitutional infirmities.” The CFPB’s brief conceded that removing the limitations on the president’s dismissal rights might be an appropriate remedy if the structure is found unconstitutional.

It is conceivable that the D.C. Circuit, however, might ignore the constitutional questions entirely. The court could invoke the doctrine of constitutional avoidance and decide the case based solely on the statutory provisions of the real estate act under which PHH was charged. The Court asked the parties to address this issue in their briefs. Again parting ways with PHH, the DOJ conceded that the court would be within its rights to avoid the constitutional issues, but urged the court to decide those issues given the likelihood that they would recur.


Republicans have called for the conversion of the CFPB to an independent agency with a bipartisan, multi-member commission, much like how the U.S. Securities and Exchange Commission and the Federal Trade Commission are structured. The court, however, would need to use the Dodd-Frank severance provision to rewrite the legislation to morph the agency into something that Congress in 2010 clearly tried to avoid.

Provisions in last year’s Financial CHOICE Act, the proposed Republican legislation that aims to replace Dodd-Frank, sought to convert the agency to a commission structure. The bill’s sponsor, House Financial Services Committee Chairman Jeb Hensarling (R-Texas), however, switched gears in February, 2017, calling in a staff memo for the agency to be led by a single director, terminable at-will by the president. The D.C. Circuit’s decision will likely influence the bill’s ultimate approach to restructuring the CFPB.

--PHH Corporation v CFPB: here

(Lawrence Hsieh is a senior legal editor for the Practical Law division of Thomson Reuters and author of the Corporate Transactions Handbook. The views expressed here are his own.)

This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on May. 16. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below