Consumer Bureau Structure Needs a Tweak

WASHINGTON (CN) — The D.C. Circuit on Tuesday found the Consumer Financial Protection Bureau's organization under a single director unconstitutional, but rejected the remedy of shutting down the agency.

Sen. Elizabeth Warren, D-Mass., downplayed the importance of the ruling, calling it a "small technical tweak to Dodd-Frank" that "will likely be appealed and overturned."

Historically, independent agencies have been headed by multiple commissioners who act as checks of one another. But the CFPB, established with Congress's ratification of the Dodd-Frank Act, marked a departure from precedent — it is headed by a single director, not a multi-member commission.

President Barack Obama appointed Richard Cordray as CFPB director in 2012, after the Senate failed to take action on his nomination in July the previous year.

As director, Cordray "enjoys more unilateral authority than any other officer in any of the three branches of the U.S. government, other than the president," according to the three-judge panel's 101-page ruling.

The director has authority to enforce 19 federal consumer protection statutes, decides new rules to adopt, and how and against whom to enforce them against.

Then-professor and now-Senator Elizabeth Warren proposed the CFPB as a traditionally structured multimember agency, but Congress overruled her.

PHH Corporation, a mortgage lender and subject of a $109 million CFPB enforcement action for accepting kickbacks from mortgage insurers, filed a lawsuit arguing that the CFPB's organization as headed by a single director is unconstitutional.

The D.C. Circuit panel of three Republican-appointed judges agreed Tuesday that the CFPB is "unconstitutionally structured."

Judge Brett Kavanaugh wrote for the panel: "The multimember structure of independent agencies acts as a critical substitute check on the excesses of any individual independent agency head — a check that helps to prevent arbitrary decisionmaking and thereby to protect individual liberty."

The CFPB lacks this check, "yet wields vast power over the U.S. economy. So 'this wolf comes as a wolf,'" Kavanaugh continued, quoting former Supreme Court Justice Antonin Scalia's dissent in Morrison v. Olson.

But the D.C. Circuit declined to shut down the CFPB, as PHH encouraged it to do. Nor would it order the CFPB to restructure as a multimember independent agency, which would require creating a variety of new offices.

Kavanaugh said the agency could continue operating so long as the for-cause clause covering the director's employment is severed from the statute.

Once severed, "the president now will have the power to remove the director at will, and to supervise and direct the director. The CFPB therefore will continue to operate and to perform its many duties, but will do so as an executive agency akin to other executive agencies headed by a single person, such as the Department of Justice and the Department of the Treasury."

The panel vacated the agency's $109 million judgment against PHH, finding that it incorrectly interpreted Section 8 of the Real Estate Settlement Procedures Act to pay captive reinsurance arrangements, and applied its new interpretation retroactively.

"The CFPB on remand still will have an opportunity to demonstrate that the relevant mortgage insurers in fact paid more than reasonable market value to the PHH-affiliated reinsurer for reinsurance, thereby making disguised payments for referrals in contravention of Section 8," Kavanaugh wrote.

However, the judge affirmed PHH's reading of the Dodd-Frank Act, that a three-year statute of limitations applies to laws enforced by the CFPB in administrative proceedings, so much of the alleged misconduct may be outside the agency's scope.

The CFPB said it is considering an appeal.

Senior Judge A. Raymond Randolph filed a concurring opinion, and Judge Karen LeCraft Henderson concurred in part and dissented in part.

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