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U.S. Court of Appeals Finds CFPB Structure Unconstitutional

The recent opinion issued today by the U.S. Court of Appeals for the District of Columbia Circuit finds for PHH Corporation against the Consumer Financial Protection Bureau (CFPB).

At issue was the CFPB Director’s decision to overturn existing precedent from the Department of Housing and Urban Development (HUD) interpreting Section 8 of the Real Estate Settlement Procedures Act (RESPA) on captive reinsurance arrangements.  

PHH was fined $109M by the CFPB for violating Section 8.  PHH appealed arguing the interpretation of RESPA was incorrect and that the CFPB was unconstitutionally structured. 

The D.C. Circuit found:

  • CFPB incorrectly interpreted RESPA as it allows captive reinsurance arrangements so long as the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of the reinsurance
  • CFPB violated PHH’s due process rights in departing from prior HUD interpretations and retroactively applying the new interpretation
  • CFPB is structured unconstitutionally, but will continue to exist and operate as a federal agency subject to the supervision and direction of the President, however, it will no longer as an independent agency outside the removal authority of the President. 

Further, in ruling the Court rejected CFPB’s argument that the CFPB has no statute of limitation for enforcing any consumer protection law, finding Dodd-Frank incorporates the statute of limitations for all underlying statutes enforced by the CFPB in administrative proceedings—here RESPA has a 3 year statute of limitations whether enforced by the CFPB in court or administratively. 

Excerpts include:

“Because the CFPB is an independent agency headed by a single Director and not by a multi-member commission, the Director of the CFPB possesses more unilateral authority – that is, authority to take action on one’s own, subject to no check – than any single commissioner or board member in any other independent agency in the U.S. Government. Indeed, as we will explain, the Director enjoys more unilateral authority than any other officer in any of the three branches of the U.S. Government, other than the President.

At the same time, the Director of the CFPB possesses enormous power over American business, American consumers, and the overall U.S. economy. The Director unilaterally enforces 19 federal consumer protection statutes, covering everything from home finance to student loans to credit cards to banking practices. 

The Director alone decides what rules to issue; how to enforce, when to enforce, and against whom to enforce the law; and what sanctions and penalties to impose on violators of the law. (To be sure, judicial review serves as a constraint on illegal actions, but not on discretionary decisions within legal boundaries; therefore, subsequent judicial review of individual agency decisions has never been regarded as sufficient to excuse a structural separation of powers violation.) That combination of power that is massive in scope, concentrated in a single person, and unaccountable to the President triggers the important constitutional question at issue in this case.

This new agency, the CFPB, lacks that critical check and structural constitutional protection, yet wields vast power over the U.S. economy.

In light of the consistent historical practice under which independent agencies have been headed by multiple commissioners or board members, and in light of the threat to individual liberty posed by a single-Director independent agency, ………………we hold that the CFPB is unconstitutionally structured. (Emphasis added.)