Now the CFPB's Structure is Ruled UNconstitutional. What Happens Next?

In spite of the recognition of the en banc decision by the Court of Appeals for the District of Columbia in the case of PHH Corp. v. CFPB, which upheld the constitutionality of the structure of the CFPB, the U.S. District Court for the Southern District of New York has declared the CFPB's structure UNconstitutional (emphasis added).

The case in question is CFPB and NY Attorney General v. RD Legal Funding, LLC, et al. You can download the 108-page decision here.

The CFPB and NYAG have accused RD Legal Funding (RD) of scamming consumers who accept cash advances while waiting for payouts from settlement agreements or judgments in their favor. The Government alleges that RD misled consumers into accepting what were actually usurious loans not allowed under state law.

What's interesting about the decision for the ARM industry are not the details of this particular case, but whether the now disparate rulings regarding the constitutionality of the CFPB's (now known as BCFP or Bureau) structure will have any actual effect on the future of the Bureau.

Judge Loretta Preska in RD notes her acknowledgement of the D.C. en banc ruling but says, "Of course, that decision is not binding on this Court." She then went on to issue the most aggressive interpretation we've seen following the PHH case. 

The Court disagrees with Section V of Judge Kavanaugh's opinion (a dissenting judge from the en banc review of the PHH case) wherein he determined the remedy to be to 'invalidate and sever the for-cause removal provision and hold that the Director of the CFPB may be supervised, directed, and removed at will by the President.' Instead, the Court adopts Section II of Judge Karen LeCraft Henderson's dissent wherein she opined that 'the presumption of severability is rebutted here. A severability clause 'does not give the court power to amend' a statute. Nor is it a license to cut out the 'heart' of a statute. Because section 5491(c)(3) is at the heart of Title X [Dodd Frank], I would strike Title X in its entirety." (emphasis added)

That's right - the Court says it would do away with Dodd Frank altogether - which means fully shutting down the Bureau. Supported by this argument, Judge Preska declared the CFPB ineligible to bring the current case and dismissed the agency as a party to the action.

The Court concluded, however, that the New York Attorney General may still pursue the case under the Consumer Financial Protection Act (CFPA) as well as New York law -- so as a practical matter for RD, the case will move forward.

insideARM Perspective

What practical effect this decision will have is unknown. Will this court's opinion with respect to the constitutionality of the Bureau be appealed? Under former CFPB Director Richard Cordray, it likely would have been. Under Acting (BCFP) Director Mulvaney? Perhaps there will be other priorities.

Just as Judge Preska in RD said she is not bound by the decision of the D.C. Circuit, so are other courts not bound by her ruling. Though one would certainly have to consider the effect of this decision on enforcement matters or other cases in the Second Circuit.

At a minimum, the decision could be used by those who would support those who seek to introduce a commission structure to the Bureau. When the D.C. Circuit Court of Appeals released its en banc decision in January 2018 upholding the constitutionality of the CFPB's structure, House Financial Services Committee Chairman Jeb Hensarling (R-TX) - a long time critic of the CFPB, and also (at the time) a rumored potential Cordray replacement - released this statement:

“I am deeply disappointed with the court’s decision and hope the Supreme Court will review the ruling in short order. In the meantime, I take great solace in the fact that Mick Mulvaney can use his unchecked, unilateral powers to continue the agency’s transformation into one that will, as he said, “exercise [its] statutory authority to enforce the laws of this nation….execute the statutory mandate of the bureau to protect consumers’ and go no further.

Even though I have total confidence in Acting Director Mulvaney’s vision, the fact remains that no one person in America – especially someone who is unelected – should have the authority to unilaterally control whether working Americans can get a mortgage or a checking account. The Bureau’s consumer protection mission is important, but no government agency – no matter how well-intentioned – should be able to evade common sense checks and balances that are necessary for accountability.

Republicans stand ready to work with Democrats to reform the CFPB into a law enforcement agency that truly protects consumers and is accountable to the people’s elected representatives.”

Following yesterday's decision in the RD case, Hensarling said this:

"The District Court for the Southern District of New York has confirmed what House Republicans have said all along, that the Bureau’s structure is unconstitutional.

By design the Bureau is arguably the most powerful and least accountable Washington bureaucracy in American history—and under then-Director Richard Cordray, it showed.  The Bureau infringed on the economic freedoms of consumers, limited their financial choices, increased their costs, and failed to hold managers accountable for widespread discrimination and abuse of its own employees. 

On June 8, 2017 the House of Representatives passed HR 10, the Financial CHOICE Act, which fixes the constitutional defects identified by the District Court by subjecting the Bureau to the control of the people’s elected representatives."