As discussed in part one of this blog post, the U.S. Court of Appeals for the District of Columbia recently delivered what is perhaps the biggest setback to the Consumer Financial Protection Bureau (CFPB) to date. To review, the court essentially held the structure and independence of the Bureau to be unconstitutional in an opinion rebuking the Bureau for its action against PHH Corporation, a New Jersey mortgage lender. ((Brent Kendall and Yuka Hayashi, Appeals Court Deals Setback to Consumer-Watchdog Agency, Wall St. J. (Oct. 11, 2016, 7:51 PM), http://www.wsj.com/articles/federal-appeals-court-finds-structure-of-cfpb-unconstitutional-1476197389?mg=id-wsj.))
In this second blog post on the DC Appeals Court’s decision, we will explore some of the potential implications of the ruling for the financial services industry. We will also examine the steps that have been taken (and might be taken further) by the Obama Administration, and in light of Donald Trump’s unexpected victory in the November election, any other steps the CFPB may take in response to the ruling.
The CFPB has been used as a political piñata by both parties in Congress, and received a good deal of ire from now-President Donald Trump on the campaign trail. ((Jonnelle Marte, Americans Could Lose This Important Consumer Watchdog Under Donald Trump. Washington Post. (Nov. 11, 2016). https://www.washingtonpost.com/news/get-there/wp/2016/11/11/americans-could-lose-this-important-consumer-watchdog-under-donald-trump/?utm_term=.77281ceee2bb.)) Indeed, Trump made repealing the Bureau’s authorizing statute, the contentious Dodd-Frank law, a key priority and campaign issue during the election. ((Id.)) A hypothetical outright repeal of Dodd-Frank, the authorizing statute for the Bureau, would effectively eliminate the Bureau entirely. ((Jonnelle Marte, CFPB Challenges Court Ruling That Finds Its Structure Is Unconstitutional. Washington Post. (Nov. 18, 2016). https://www.washingtonpost.com/news/get-there/wp/2016/11/18/cfpb-challenges-court-ruling-that-found-its-structure-is-unconstitutional/?utm_term=.e0121c19907d.))
As explained in the first blog post on this topic, the DC Circuit Court held that the CFPB’s single-Director structure is an impermissible departure from the model that all other independent executive agencies follow, which involves multiple commissioners as opposed to a single Director. ((PHH Corp. v. Consumer Fin. Prot. Bureau, No. 15-1177 (D.C. Cir. Oct. 11, 2016) at 5-6.)) Writing for the Court, Judge Kavanaugh explained that this structure lacks accountability and thus poses a threat to the liberty of everyday American citizens (under Article II of the Constitution) in a way that a multiple-commissioner model would not. ((Id.))
Indeed, the fact that the sole Director of the CFPB was only removable for cause led the DC Court of Appeals to conclude that the CFPB did not fit into the framework established by the Supreme Court in Myers and Humphrey’s Executor. ((See Brian Koziara, The CFPB and the DC Court of Appeals: A Rebuke and Question of Constitutionality (Part I), Mich. Bus. & Entrepreneurial L. Rev. (Oct. 18, 2016), http://mbelr.org/the-cfpb-and-the-dc-court-of-appeals-a-rebuke-and-question-of-constitutionality/.)) Because the CFPB was structured as both an independent agency and with only one Director, removable only for cause, it was not accountable enough to protect individual liberties under the Constitution. By striking down the for-clause removal structure as unconstitutional when combined with the single-Director element, the Court’s ruling effectively could allow President Trump to fire and replace CFPB Director Richard Cordray once Trump takes office, prior to the expiration of Cordray’s term in 2018. ((Marte, supra, note 4.))
There is also doubt, even if the CFPB successfully appeals the ruling, about whether such a successful reversal would come in time for Director Cordray to retain his job. It is no secret in Washington, D.C. that President Trump is no fan of Cordray or the CFPB, and amidst much speculation and worry about the future of the Bureau, Cordray recently sent Bureau staff an email urging them to focus on the agency’s work in the weeks and months ahead, presumably in an attempt to quell fears over the future. ((Marte, supra, note 2.))
The path forward for the CFPB past the DC Circuit is somewhat unclear as well. An appeal of the final en banc decision would go to the United States Supreme Court, which is currently deadlocked between the Court’s four liberals and four conservatives. Such a deadlock would mean that the DC Circuit’s en banc decision would stand. But it remains to be seen how quickly a President Trump’s Supreme Court nominee Neil Gorsuch will get confirmed by the US Senate. Given Gorsuch’s track record of opposing agency independence, Daniel Fisher, Bureaucrats May Be the Losers If Gorsuch Wins a Seat on the Supreme Court, Forbes (Jan. 26, 2012), http://www.forbes.com/sites/danielfisher/2017/01/26/bureaucrats-may-be-the-losers-if-gorsuch-wins-a-seat-on-supreme-court/#294ae583460f.)) he would likely side with the Supreme Court’s conservatives in upholding Judge Kavanaugh’s initial ruling from the DC Circuit last month. But given the current political climate and refusal from Senate Republicans to hold confirmation hearings for President Obama’s Supreme Court nominee Judge Merrick Garland, such confirmation of a Trump appointee by the Senate in time for a hypothetical appeal to the Supreme Court is not a certainty.
So, then, what are the implications for the financial services industry from this ruling and potential future developments? For starters, less regulation and oversight will theoretically permit greater choices for consumers in the financial services market. But at what cost? One of the most notorious targets of the CFPB to date has been the payday lending business, which makes “predatory” loans to relatively unsophisticated everyday Americans. ((Adam C. Smith, Consumers Need Protection From the CFPB, American Banker (Oct. 18, 2016, 11:00am), https://www.americanbanker.com/opinion/consumers-need-protection-from-the-cfpb.)) The CFPB has determined such business practices to be harmful and has sought to protect consumers who are not as financially savvy by largely ending the practice. However, as Adam Smith from American Banker points out, these consumers must turn to even less desirable options when payday lending becomes unavailable, including overdraft fees, credit card cash advances, or selling possessions to pawn shops, in effect, limiting consumer choice. ((Id.))
The ruling also creates a level of uncertainty for the financial services industry. If the DC Circuit’s ruling from last month stands, a restructuring of the CFPB by Congress would be in order. Depending upon how the CFPB is ultimately restructured, or if it even survives a potential outright repeal of Dodd-Frank by the 115th Congress, it could become a much more political agency, impacted in different Presidential Administrations by whomever is selected by a Republican or Democrat President to lead the Bureau. ((John Heltman, Kate Berry, Rob Blackwell, Cheat Sheet: What CFPB Constitutionality Ruling Means for Banks, American Banker (Oct. 11, 2016) https://www.americanbanker.com/news/cheat-sheet-what-cfpb-constitutionality-ruling-means-for-banks.)) And the prospect of massive shifts in consumer financial services regulation every four to eight years is not something looked upon fondly by the financial services industry. ((Id.))