CFPB ruled Unconstitutional, What’s Next?

Credit: Wikipedia, CFPB, HubPages.

In a huge story of interest for the MH industry, a federal appeals court declared that the U.S. Consumer Financial Protection Bureau’s (CFPB) structure is unconstitutional.

The 110-page ruling, handed down by the U.S. Court of Appeals for the D.C. Circuit, the nation’s second most powerful court, stated that the organization’s structure is unconstitutional because too much power is vested with it’s sole director, but that it can continue operating under the President’s supervision.

The ruling comes as part of an ongoing court battle between PHH, a non-bank mortgage lender and the CFPB.

PHH sued CFPB Director Richard Cordray after the agency issued an order against the lender for $109 million over an alleged kickback scheme around reinsurance payments. The CFPB accused PHH of referring customers to mortgage insurers who, in turn, bought reinsurance from one of PHH’s units.

Credit: National Mortgage Professional Magazine.

As a part of the legal action, PHH argued that the single-director structure of the agency and its funding outside of congressional appropriations were unconstitutional.

In the 2-1 ruling, the court found that the arrangement “represents a gross departure from settled historical practice of having multi-member commissions at independent agencies to keep them in check.

Executive power vested in the President can be conferred onto heads of lower administrative agencies, but that in doing so there have to be limits to that power,” the ruling said.

Agency directors may serve at the pleasure of the President, or in the case of independent commissions like the National Labor Relations Board or the Securities and Exchange Commission, directors are limited by the voting power of their fellow board members.

Judge Brett Kavanaugh. Credit: National Law Journal.

The CFPB is the first of its kind and an historical anomaly,” Judge Brett Kavanaugh wrote for the majority. Former President George W. Bush appointed Kavanaugh.

In short, when measured in terms of unilateral power, the Director of the CFPB is the single most powerful official in the entire U.S. Government, other than the President. Indeed, within his jurisdiction, the Director of the CFPB can be considered even more powerful than the President.

As Daily Business News readers are already aware, the ongoing battle surrounding the CFPB has been well documented, with our recent coverage around exactly what the CFPB does, and for whom.

richard cordray cfpb head 7-11
Richard Cordray.

As a result of the ruling, the court opted to strike the clause in the Dodd-Frank Act that said the CFPB Director could be removed “for cause,” essentially allowing the President to dismiss the head of the agency at will.

PHH argued that the agency should be shut down, but the court opted for a more narrow remedy, which allows the agency to operate by allowing the President to remove the director at will.

To remedy the constitutional flaw, we follow the Supreme Court’s precedents…and simply sever the statute’s unconstitutional for-cause provision from the remainder of the statute,” said Kavanaugh.

Here, that targeted remedy will not affect the ongoing operations of the CFPB. With the for-cause provision severed, the President now will have the power to remove the director at will, and to supervise and direct the director.

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Judge Karen Henderson. Credit: The National Law Journal.

In the dissenting opinion, Judge Karen Henderson, an appointee of Former President George H.W. Bush argued that PHH was “on firm legal ground in several of its specific complaints regarding the imposition of the CFPB’s $109 million fine,” but that the court should not have considered the constitutionality question at all.

Doing so rejects one of the most fundamental tenets of judicial decision making,” wrote Henderson. “Namely that courts should not rule on constitutionality questions unless they absolutely have to.

PHH can obtain full relief without our addressing the bureau’s challenged structure,” Henderson said. I do not believe that it is ‘indispensably necessary’ to resolve the for cause removal issue here.

Supporters of the CFPB blasted the decision, and want to see it appealed.

Karl Frisch. Credit: Stephanie Miller Show. criticized Kavanaugh for handing down what he described as a partisan ruling.

What this shows more than anything is that Judge Kavanaugh is in lockstep with conservative lawmakers and the Wall Street interests that have been trying to destroy the CFPB,” Frisch said.

The Hill reports that the ruling is viewed by CFPB supporters as a blow to consumers, pointing out that the agency led enforcement actions against Wells Fargo after that bank was found to have potentially created millions of fake accounts for customers.

Lisa Donner. Credit: Twitter.

Compromising the CFPB’s independence would be a huge gift to Wall Street greed and a loss for consumers. We are hopeful that this erroneous decision will be overturned, said Lisa Donner, executive director of Americans for Financial Reform.

The Hill also reports that the ruling marks a big win for the financial services industry and is certain to fuel new calls for replacing the director with a bipartisan commission.

We still assert a five-person, bipartisan board would preserve the Bureau as a strong, stable and effective regulator that would give the banking system certainty and consistency, regardless of a President Trump or Clinton,” said Richard Hunt, President and CEO of the Consumer Bankers Association.

Richard Hunt. Credit: CBA.

The National Association of Federal Credit Unions (NAFCU) argues that with the CFPB’s structure in question, it should not be doing anything. 

Dan Berger. Credit: NAFCU.

NAFCU urges an immediate moratorium at the CFPB on any rulemaking not already implemented,” said Dan Berger, NAFCU President and CEO. “The bureau should also consider ceasing and desisting all rule-makings until the legality is resolved.

Brian Wise, President of the U.S. Consumer Coalition, feels that Congress needs to take action.

Congress must pass comprehensive Dodd-Frank reform that includes an overhaul of the CFPB, including a change in the leadership structure,” said Wise, “Bringing the agency under the traditional congressional appropriations process, and subjecting it to the same anti-discrimination standards as other federal agencies and private corporations.

In addition to the question surrounding the constitutionality of the CFPB, the court’s ruling also addressed other issues related to the case.

Brian Wise. Credit: Freedom Fest.

According to National Mortgage News, the court ruled that the CFPB could not retroactively apply a new interpretation to the Real Estate Settlement Procedures Act, known as RESPA, which was substantially different from previous interpretations made by the U.S. Department of Housing and Urban Development (HUD.)

Additionally, the court said the CFPB has to apply the statute of limitations, which would reduce liability for PHH — and have a huge impact on other fines that the bureau imposes on others.

The Daily Business News will continue to follow this story closely. ##

(Image credits are as shown above.)

RC Williams, for Daily Business News, MHProNews.

Submitted by RC Williams to the Daily Business News, MHProNews.





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