Appellate Court Rules CFPB Structure is Unconstitutional

In a long-awaited decision in the case of PHH Corporation v. CFPB, the U.S. Court of Appeals for the District of Columbia Circuit ruled that, among other holdings, the CFPB was structured in a way that is unconstitutional.

The U.S. Court of Appeals for the District of Columbia recently ruled on the case of PHH Corporation v. The Consumer Financial Protection Bureau (CFPB). PHH Corp., initially appealed the CFPB’s decision to increase a previously levied $6 million fine by more than $95 million. The fines against PHH were initially levied by the CFPB for allegedly referring mortgage clients to preferred mortgage insurers to reap the benefits of reinsurance purchase rewards—a process that is illegal under Section 8 of the Real Estate Settlement Procedures Act.

The U.S. Court of Appeals for the District of Columbia decision in the case not ruled against the CFPB in terms of the fines levied against PHH, and outlined the unconstitutionality of the CFPB’s underlying structure.  The Court primarily assessed whether the CFPB had the proper authority to render decisions and act as an agency of the federal government.

The decision was based largely on the argument that the delegation of authority by the President of the United States was subject to the President’s own control. The Court found that, upon reviewing the structure of the CFPB, the Bureau was constituted in a way that was not subject to the direct control of the President. This immunity from Presidential control essentially created a structure that prevented the President from removing the CFBP Director at will. In its ruling, the Court stated that this structure varies from that of any other agency operating as an authority of the executive branch of the federal government, thus yielding the CFPB a substantial amount of power with limited oversight.

The Court of Appeals suggested that in a sense, the power wielded by Director Cordray of the CFPB was greater than that of the President because the Bureau had the ability to enact regulations with no oversight, which could in turn have a significant effect on the economy. Due to this fact, the Court ruled that the CFPB’s structure was unconstitutional from inception, and that the law must be rewritten to remove the provisions specifying that the Director can only be removed for cause. The Court then imposed on the statute the requirement that the CFBP director be removeable at the will of the President, as is the case with every other single director agency operating with authority from the executive branch.

Regarding the operations and enforcements of the CFPB, the Court of Appeals ruled that the Bureau remains fully functional in its duties and responsibilities and shall operate as it has prior to the ruling. The prior enforcement actions of the CFPB were not addressed under this ruling.

The main takeaways from this component of the U.S. Court of Appeals’ PHH decision are threefold. First, the ruling does not necessarily suggest that the regulations or laws put forth by the CFPB were null. The enforcements and regulations previously established by the Bureau will remain intact, and any necessary changes could come through ratification conducted by the Bureau.  Second, prior enforcement actions made by the CFPB primarily consisted of settlement agreements which are not expected to be changed by any future rules or ratifications. The final, and perhaps timeliest consideration of this ruling is that a change in administration could affect change within the structure of the CFPB, and as an extension any future actions and enforcements that may have an impact on the United States economy.