All Things FinReg


In a spirited oral argument on April 12, a panel of the US Court of Appeals for the DC Circuit questioned the constitutionality of the Consumer Financial Protection Bureau’s (CFPB’s) governance structure. Specifically, the court is examining the decision by the US Congress to concentrate the power of this independent federal agency in a single director—and then largely insulate that director not only from the checks and balances of Congress and the courts, but also in large part from review and control by the President.

The oral argument was made in a case brought by mortgage lender PHH Corp., appealing a CFPB administrative order that charged it with alleged illegal kickbacks under the Real Estate Settlement Procedures Act (RESPA). An administrative law judge appointed by CFPB Director Richard Cordray had initially imposed a penalty of $6.4 million. When both PHH and the CFPB staff appealed, Director Cordray sat as the appellate officer and increased the penalty by over 1,600% to $109 million.

PHH then filed an appeal of Director Cordray’s order with the US Court of Appeals, as was its right under the Dodd-Frank Act. It marked the first challenge to a CFPB administrative action since the agency’s creation in 2011.

Oral Argument Before the US Court of Appeals

In its appeal to the DC Circuit, PHH argued that the CFPB’s authorizing legislation creates an unconstitutional independent agency officer who is neither part of nor subject to review by any branch of government. The lender cited several features of the CFPB governance structure in support of its contention:

  • The agency is run by a single director rather than a multimember commission, as in the case of other financial regulatory agencies such as the Securities and Exchange Commission.
  • The CFPB director is appointed for a term of years, and can be removed only for cause.
  • Because the CFPB’s funding comes from the Federal Reserve (which itself is self-funding through interest on bonds and assessments on the banking system), the agency escapes budgetary oversight through the Congressional appropriations process.
  • The CFPB is exempted from the ordinary administrative agency rulemaking process, which would require it to obtain permission from the Office of Management and Budget before promulgating rules or taking a position on legislation.
  • The CFPB’s authorizing statute does not expressly require it to weigh the costs and benefits of its proposed rules, as other agencies must do.

In PHH’s argument, these features in combination render the CFPB governance arrangement unconstitutional.

Although the features of which PHH complained can be found in other independent agencies of the federal government, the CFPB could not point to any other agency where all these features exist. Moreover, the Court of Appeals was troubled by the CFPB’s argument that, in administrative proceedings, no statute of limitations applies to its actions. One of the panel judges referred to this argument as an “abomination.” Because Director Cordray’s decision considered conduct beyond the three-year statute of limitations in RESPA, the issue may be central to the ultimate determination of the case.

Beyond the constitutional arguments, the DC Circuit panel also raised an issue of statutory interpretation: the underlying RESPA offense, the judges worried, is not clearly defined. This is because RESPA’s anti-kickback provisions have been administered by a variety of federal agencies, and there is no specific definition for the violations asserted.

The court’s focus on vaguely defined statutory terms may encourage related challenges to the CFPB’s authority. Many CFPB-regulated financial institutions have complained that in enforcing a Dodd-Frank Act provision that prohibits “unfair, deceptive, or abusive acts or practices” (UDAAP), the CFPB has repeatedly failed to take regulatory action to adequately define those terms. Should the US Court of Appeals for the DC Circuit reach the RESPA interpretive point in this case, it may shed some light on the CFPB’s authority—or lack of it—in the UDAAP context, and possibly prompt the CFPB to act.

Key Takeaways

Although the court could rule expansively and hold that the CFPB’s structure is unconstitutional, thus sending the entire issue back to Congress to consider how to repair it, the panel signaled that this is not their intent. The questioning at oral argument, and the language of the court’s preliminary orders, suggest that the court will search for the least disruptive “fix” to cure the concentration-of-power issue. For example, in its questioning, the court asked whether striking down the provisions of the authorizing legislation that permit the director’s removal only for cause might not be sufficient to make the director answerable to the executive branch.

Given that RESPA is one of nineteen statutes enforced by the CFPB, the court’s decision on the statute of limitations issue will also be of great importance. If RESPA’s statute of limitations does not apply in CFPB administrative actions, then arguably neither would the time limitations in those other laws. This would significantly broaden the authority of the CFPB.

Finally, the court’s ruling on the penalty itself will be of great import. If Director Cordray's decision to increase the penalty from $6.4 million to $109 million remains as precedent, it will serve as a strong deterrent to anyone considering a challenge to a CFPB enforcement action. Already insulated by statute from meaningful oversight by the executive and legislative branches, the CFPB’s administrative discretion would then go largely unchecked by the judicial branch as well.