The Consumer Financial Protection Bureau’s leadership structure — a single powerful director who cannot be removed at will by the president — is unconstitutional, according to a ruling by a panel of judges on the D.C. Circuit Court of Appeals today. Under the ruling, the bureau may continue to operate, but its director may be removed not just “for cause” but at the president’s discretion.
“The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency,” the court said in PHH Mortgage v. CFPB.
The case arose in 2015, when CFPB Director Richard Cordray overruled an administrative law judge’s recommendation for a $6.5 million fine against mortgage lender PHH for allegedly requiring unlawful kickbacks from mortgage insurers in violation of the Real Estate Settlement Procedures Act. Cordray demanded that PHH pay 18 times more — or $109 million — for each time it accepted a kickback on or after July 21, 2008.
In addition to its constitutional claims about the bureau’s structure, the court ruled in favor of PHH on all its statutory claims. PHH argued that the CFPB misinterpreted Section 8 of RESPA in forbidding the kind of captive reinsurance arrangement that PHH used and that the bureau changed prior RESPA interpretations issued by the Department of Housing and Urban Development and applied them retroactively — even though the mortgage industry had relied on them for decades. The court thus rejected the bureau’s expansive application of a criminal provision.
The court held that retroactive applying of a new RESPA interpretation violated PHH’s due process rights and that the bureau is bound by the three-year statute of limitations for RESPA violations, even in administrative actions. The case is expected to be appealed, however, and may be heard by the full D.C. Circuit and appealed to the Supreme Court. The American Bankers Association will continue to monitor the case as it progresses.
“We’ve long believed that a five-member, bipartisan commission, as originally proposed, would strike a reasonable balance between independence and accountability,” said ABA President and CEO Rob Nichols. “A commission would broaden the perspective on any rulemaking and promote fair enforcement activity at the bureau, and it would provide necessary and appropriate checks and balances in the exercise of the CFPB’s authority.” For more information, contact ABA’s Rod Alba, Thomas Pinder or Jonathan Thessin.