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The CFPB and the DC Court of Appeals: A Rebuke and Question of Constitutionality

On October 11, the U.S. Court of Appeals for the District of Columbia delivered what is perhaps the biggest setback to the Consumer Financial Protection Bureau (CFPB) to date. The court held the structure and independence of the federal government’s relatively new consumer financial monitor to be unconstitutional in an opinion rebuking the CFPB for its action against PHH Corporation, a New Jersey mortgage lender.1

This is hardly the first time that the CFPB has been the subject of scrutiny and heated controversy. Since its creation as a product of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the Bureau has been used as a political piñata by both parties in Congress, with Republicans and pro-industry groups generally arguing that the Bureau has gone far past the purpose envisioned in Dodd-Frank, and Democrats and consumer groups pushing to grant it additional oversight powers.2 The House GOP has moved to assert greater control over the Bureau’s autonomy and budget since regaining control of the lower chamber following the 2010 Congressional elections.3

In fact, however, the CFPB was never originally supposed to take the structure that the DC Circuit deemed unconstitutional in its recent decision. The Bureau was originally supposed to be supervised by a five-commissioner board, but the structure was changed to the current one-Director model during negotiations over the Dodd-Frank law in Congress.4 It is precisely this one-Director structure and the DC Circuit’s finding of its unconstitutionality that have caused this most recent headache for the Bureau.

So what is PHH, and why did this issue arise in this case?

PHH Corporation is a New Jersey-based mortgage lender whom an administrative law judge at the CFPB found guilty of accepting kickbacks from mortgage insurers. That administrative law judge ordered a fine of $6.4 million against PHH. However, the sole CFPB Director, Richard Cordray, took a much stricter view of the law, and used his broad discretion and powers to impose a larger penalty of $109 million.5 The Court found Director Cordray’s interpretation to be incorrect and in violation of due process,6 unanimously faulting the CFPB for its action against PHH. However, two of the three judges on the panel went further, declaring the structure of the CFPB that allowed Director Cordray such broad discretion to be unconstitutional.

Writing for the Court, Judge Kavanaugh states that “the Director of the CFPB possesses more unilateral authority – that is, authority to take action on one’s own, subject to no check – than any single commissioner or board member in any other independent agency in the U.S. Government.”7 He explains this conclusion further by stating that due to the vast array of consumer protection statutes enforced by the CFPB, the Director of the Bureau exercises unusually enormous power over American businesses, consumers, and the overall economy.8

Kavanaugh relies on two important precedents in the realm of administrative and regulatory law in the Court’s opinion. The first, Myers v. United States, 272 U.S. 52 (1926), involved the U.S. Supreme Court holding in a landmark ruling that Article II of the U.S. Constitution gave the President “authority to supervise, direct, and remove at will subordinate officers in the Executive Branch.”9 Less than a decade later, however, the Supreme Court created an exception to Myers with its holding in Humphrey’s Executor v. United States, 295 U.S. 602 (1935), permitting Congress to create independent agencies which can exercise executive power. Kavanaugh explains that such an agency’s independence is derived from the fact that these agencies’ heads are “removable by the President only for cause, not at will, and therefore are not supervised or directed by the President.”10

The CFPB’s single-Director structure, Kavanaugh explains, is an impermissible departure from the multiple-commissioner model that all other independent executive agencies have hereto followed.11 He further elaborates that because power is so concentrated in the hands of a single Director, instead of a body of commissioners who could act as checks on one another, that such a structure lacks accountability and fails to preserve individual liberty under Article II of the Constitution.12

Essentially, then, because the CFPB was structured as an independent agency, but with only one Director removable only for cause, it did not fit into the framework established by the Supreme Court in Myers and Humphrey’s Executor. 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. There exist in the Executive Branch agencies with single directors which are not independent, and independent agencies with multiple commissioners (who serve to hold each other accountable), but, as Kavanuagh explains, there has never been an independent agency with a single director exercising substantial executive authority.13 In effect, the CFPB combined both of these aspects (independence plus a single Director) and thus breached the framework of Myers and Humphrey’s Executor.

There has been little tolerance by the courts for executive agencies following structures outside of this framework. For example, the Supreme Court in 2010 struck down the structure of the Public Company Accounting Oversight Board as unconstitutional, stating that the two levels of for-cause protection from removal insulated agency heads too much from the President and thus “exceeded the bounds on traditional independent agencies and thus violated Article II.”14.)) Kavanaugh even quotes from the Supreme Court’s ruling in that case: “Perhaps
the most telling indication of the severe constitutional problem with the PCAOB is the lack of historical precedent for this entity.”15

Indeed, as Judge Kavanaugh notes in his opinion, “the single-Director structure of the CFPB represents a gross departure from settled historical practice.”16 Historical practice, Kavanaugh writes, is valid in determining the constitutionality of certain arrangements between the Executive and Legislature when constitutional text does not resolve the matter.17 The unique and unprecedented structure of the CFPB presents an interesting case in how to balance the desire for it to remain an independent agency versus the need to comply with the Constitution.

In the next blog post in this series, we will explore further the implications of the ruling for the financial services industry, along with the possible next steps for the CFPB and the Obama Administration, should they choose to appeal the DC Court of Appeals’ ruling.

  1. Brent Kendall and Yuka Hayashi, Appeals Court Deals Setback to Consumer-Watchdog Agency, WALL ST. J. (Oct. 11, 2016, 7:51 PM), 

  2. See generally Gillian B. White, What Will Happen to the Consumer Financial Protection Bureau? THE ATLANTIC (Oct. 11, 2016), 

  3. See generally Press Release, House Financial Services Committee, CFPB Lacks Oversight and Accountability (June 18, 2013),; see also Sylvan Lane, House panel passes bills to ramp up CFPB oversight, THE HILL (Apr. 13, 2016, 3:10 PM), 

  4. PHH Corp. v. Consumer Fin. Prot. Bureau, No. 15-1177 (D.C. Cir. Oct. 11, 2016) at 5-6. 

  5. Kendall, supra note 1. 

  6. PHH Corp. at 72. 

  7. Id. at 6. 

  8. Id. 

  9. Id. at 4. 

  10. Id. 

  11. Id. at 5. 

  12. Id. 

  13. Id. 

  14. Id. at 8 (citing Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477, 514 (2010 

  15. Free Enterprise Fund v. Public Company Accounting Oversight Board at 505. 

  16. PHH Corp., at 8. 

  17. See id. at 7-8 (quoting NLRB v. Noel Canning, 134 S. Ct. 2550, 2559 (2014), “Long settled and established practice is a consideration of great weight in a proper interpretation of constitutional provisions regulating the relationship between Congress and the President.”). 

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