All Things FinReg


As the continuing saga of “what’s next” plays out for the Consumer Financial Protection Bureau (CFPB) in the run-up to President-elect Donald Trump’s inauguration and in the courts, the Obama administration’s Department of Justice (DOJ) came out in procedural support of the CFPB in a filing late last week. In a response to a petition for rehearing en banc, the DOJ supported the CFPB’s petition for rehearing, arguing that a panel decision filed on October 11 holding that the CFPB was unconstitutionally structured was incorrect and that the decision ought to be reviewed by the full US Court of Appeals for the District of Columbia Circuit. PHH Corporation v. CFPB (No. 15-1177, October 11, 2016).

We have previously detailed the case and its key developments (here, here, and here). To summarize: In PHH, a panel of the DC Circuit found that the CFPB was unconstitutionally formed because too much power is allocated to its unitary director, there is no effective congressional oversight of its appropriations or operations, and its director may only be removed by the president for cause. The panel held that the least intrusive remedy that would suffice to permit the CFPB to operate in a constitutional manner was to strike the “for cause” provision, thus rendering the director a standard non-career, “political” appointee of the president and subject to removal at his pleasure. With the election of Mr. Trump, it is highly unlikely that among the somewhat more than 4,000 “political” appointees who serve at the president’s pleasure, President Trump would choose to permit this director of the CFPB to remain in office.

Because so much power is concentrated in the director, a new president could affect radical change in CFPB operations almost immediately by appointing an acting director pending confirmation of a new director by the Senate. While there are limits to immediate changes that can be made to the CFPB’s existing rules, the director has sole discretion as to how those rules are enforced, how examinations are conducted of regulated entities, and how enforcement investigations are conducted. By sole fiat, the director could make wholesale changes immediately to the agency’s activities and conduct.

The DOJ filed a separate response because the Dodd-Frank Wall Street Reform and Consumer Protection Act gives the CFPB, unlike most other federal agencies, independent litigation authority and only required the CFPB to “consult” with the Justice Department before filing its petition. Accordingly, to learn the DOJ’s position, the court invited the DOJ to file its own response.

Interestingly, the DOJ did not fully support the CFPB’s position. Rather, its response is grounded in institutional concerns that because the panel decision was based on new law that is “at odds with the relevant Supreme Court precedent, review by the full court is warranted (DOJ Response at p. 4).” Moreover, the DOJ only addressed the constitutional issue and did not address other issues in the panel’s decision dealing with statute of limitations and interpretation of the underlying statute alleged to have been violated.

Ultimately, the timing may be key here. If the court decides the petition prior to the inauguration (January 20), this response may remain as the DOJ’s official position. On the other hand, if the petition is pending as of the inauguration, a new attorney general would be free to notify the court that the new administration no longer supports the CFPB’s position. This same change in position could also play out in other procedural postures in the circuit or in the cert process to the US Supreme Court. Such changes may further play out in tandem with congressional efforts to alter the CFPB’s structure through legislation which could replace the current unitary director format with a multi-member commission, subject the new commission to the congressional appropriations process or to full congressional oversight, subject the CFPB’s proposed rules to full US Office of Management and Budget review and oversight including a cost-benefit analysis, or require DOJ approval of positions taken in litigation, especially on appeal.

With multiple potential outcomes, regulated financial institutions and those with matters pending before the CFPB should pay close attention to ongoing developments, because those developments may now have a good deal more than theoretical impact. But with so much uncertainty, parallel investigations and enforcement actions may well be brought by state attorneys general. These AGs generally have their own state regulatory and enforcement authority, and also have close to unfettered authority to bring enforcement actions under the CFPB’s crown jewel statute for allegations of unfair, deceptive, or abusive conduct.