Politics & MoneyMortgage

Stunner: Court of Appeals reverses earlier ruling, declares CFPB constitutional

PHH’s challenge to CFPB leadership structure rebuked by full Court of Appeals

In a stunning reversal of its previous decision, the full Court of Appeals for the District of Columbia Circuit ruled Wednesday that the Consumer Financial Protection Bureau is constitutionally structured.

The decision reverses the court’s October 2016 decision that declared the CFPB’s leadership structure unconstitutional by a 2-1 vote and vacated a $100 million fine levied by the CFPB against PHH Corp.

“None of the theories advanced by PHH supports its claim that the CFPB is different in kind from the other independent agencies and, in particular, traditional independent financial regulators,” the court’s ruling states.

“The CFPB’s authority is not of such character that removal protection of its Director necessarily interferes with the President’s Article II duty or prerogative,” the ruling continued. “The CFPB is neither distinctive nor novel in any respect that calls its constitutionality into question. Because none of PHH’s challenges is grounded in constitutional precedent or principle, we uphold the agency’s structure.”

The court also ruled that PHH’s challenge, if successful, would have changed the face of government as we know it.

From the court’s ruling (emphasis added by HousingWire):

Wide margins separate the validity of an independent CFPB from any unconstitutional effort to attenuate presidential control over core executive functions. The threat PHH’s challenge poses to the established validity of other independent agencies, meanwhile, is very real. PHH seeks no mere course correction; its theory, uncabined by any principled distinction between this case and Supreme Court precedent sustaining independent agencies, leads much further afield. Ultimately, PHH makes no secret of its wholesale attack on independent agencies—whether collectively or individually led—that, if accepted, would broadly transform modern government.

Because we see no constitutional defect in Congress’s choice to bestow on the CFPB Director protection against removal except for “inefficiency, neglect of duty, or malfeasance in office,” we sustain it.

The court’s earlier decision declared the leadership structure of the CFPB to be unconstitutional, ruling that CFPB’s current structure allows the director to wield far too much power, more than any other agency in the government.

“Because the Director alone heads the agency without Presidential supervision, and in light of the CFPB’s broad authority over the U.S. economy, the Director enjoys significantly more unilateral power than any single member of any other independent agency,” the court wrote in its October 2016 decision.

The case began with former CFPB Director Richard Cordray adding a $103 million increase onto a $6 million fine initially levied against PHH for allegedly illegally referring consumers to mortgage insurers in exchange for kickbacks.

PHH fought the fine, arguing that Cordray did not have the authority to increase the fine. The case eventually made its way to the Court of Appeals, which ruled in 2016 that the CFPB’s leadership structure was unconstitutional and vacated the additional $103 million fine.

The CFPB fought the ruling, asking the court to rehear the case en banc, meaning that it wanted the entire court to hear the case, which the court agreed to do back in February 2017.

The court’s previous ruling in the CFPB-PHH case also made the director of the agency removable at will. Under the CFPB’s current structure, the director serves a five-year term and may only be terminated by the president for “inefficiency, neglect of duty, or malfeasance in office.”

Last year, the government began to indicate that it might be switching sides in the battle between the CFPB and PHH, signaling that the Trump administration would not be as supportive of the CFPB as the Obama administration had been.

And indeed that’s what happened, as the Department of Justice filed an amicus brief in March 2017, asking the court to rule the CFPB’s leadership structure unconstitutional and grant President Donald Trump the authority to fire the CFPB director at will.

But the full Court of Appeals ruled that the CFPB is constitutionally structured and that the director is removable only for cause.

From the ruling:

We find no reason in constitutional precedent, history, or principle to invalidate the CFPB’s independence. The Supreme Court has sustained for-cause protection for the heads of certain administrative agencies—even if they perform a mix of regulatory, investigative, prosecutorial, and adjudicatory functions—as compatible with the President’s essential duty to assure faithful execution of the law. The CFPB led by a single Director is as consistent with the President’s constitutional authority as it would be if it were led by a group. Like other independent federal financial regulators designed to protect the public interest in the integrity and stability of markets from short-term political or special interests, the CFPB is without constitutional defect.

Congress’s decision to provide the CFPB Director a degree of insulation reflects its permissible judgment that civil regulation of consumer financial protection should be kept one step removed from political winds and presidential will. We have no warrant here to invalidate such a time-tested course. No relevant consideration gives us reason to doubt the constitutionality of the independent CFPB’s single-member structure. Congress made constitutionally permissible institutional design choices for the CFPB with which courts should hesitate to interfere.

But the court’s decision was not unanimous. Several judges, including Judge Brett Kavanaugh, who authored the court’s original opinion, dissented in this ruling.

In his dissenting opinion, Kavanaugh argues that the CFPB should be led by a committee, rather than a single director.

“The CFPB violates Article II of the Constitution because the CFPB is an independent agency that exercises substantial executive power and is headed by a single Director,” Kavanaugh writes in his dissention. “We should invalidate and sever the for-cause removal provision and hold that the Director of the CFPB may be supervised, directed, and removed at will by the President.”

Coincidentally, there’s also another CFPB-related legal battle that the D.C. Court of Appeals is set to hear soon.

This one involves the leadership of the bureau itself.

Leandra English, who was Cordray’s choice to lead the bureau after he stepped down, has been fighting in the courts after Mick Mulvaney was installed as CFPB acting director.

Just before Cordray stepped down in November, he promoted English from chief of staff to deputy director, positioning her to take over as acting director upon Cordray’s departure.

But the Trump administration fought Cordray’s line of succession and installed Mulvaney, who frequently criticized the agency while serving in Congress, as acting director.

That set off a legal battle over who was really in charge of the CFPB, but U.S. District Judge Timothy Kelly sided with Trump, handing control of the bureau to Mulvaney.

But English didn’t give up, asking Kelly for a preliminary injunction that would have replaced Mulvaney with English at the CFPB. That request proved unsuccessful, as Kelly denied English’s request for a preliminary injunction, which enabled Mulvaney to maintain control of the CFPB.

English took her case to the D.C. Court of Appeals, which said earlier this month that it will hear English’s case on an expedited basis.

To read the Court of Appeals full decision on the CFPB-PHH case, click here.

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