The Constitutionality of the Consumer Financial Protection Bureau (CFPB) - Reinforced by Historical Precedent
The Consumer Financial Protection Bureau (“CFPB”) was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act [12 U.S.C. § 5491(a)] in response to the 2008 financial crisis to regulate consumer financial products and services under the Federal consumer financial laws. [12 U.S.C. § 5491(a).]
Within the scope of regulating financial services and products, the CFPB has broad powers to prescribe rules and issue orders, engage in joint investigations and requests for information, conduct hearings and adjudication proceedings against businesses offering financial services and products, commence a civil action against businesses offering financial services and products, and refer matters for criminal prosecution. [12 U.S.C. § 5566.]
The CFPB is managed by one Director who is appointed for a 5-year term by the President. The director may only be removed by the President for inefficiency, neglect of duty, or malfeasance in office. [12 U.S.C. § 5491(c)(3).] The Director sets the CFPB’s funding budget, which is based on what is reasonably necessary to carry out the authorities of the CFPB under Federal consumer financial law. [12 U.S. Code § 5497 (a)(1).] The CFPB’s funding budget is limited by a 12% cap of the total operating expenses of the Federal Reserve System. [U.S. Code § 5497 (a)(2).]
Several cases brought constitutional challenges against the CFPB for its single Director structure. The most notable is PHH Corp. v. CFPB, which was granted a rehearing en banc by the Court of Appeals for the District of Columbia. When the Court of Appeals grants a rehearing en banc, all the judges of the court (rather than those assigned) hear the case. The en banc court in PHH heard oral arguments, but has not published its opinion as of writing this article.
The court in PHH found the CFPB’s single Director structure unconstitutional under Article II of the United States Constitution because, among other reasons, independent agencies do not have the same checks and balances from Presidential supervision; and, having a multi-member structure, instead of a single Director, would ameliorate arbitrary decision making and […] [*31] help preserve individual liberty. The court in PHH explained that “an independent agency with just a single Director […] represents a sharp break from historical practice […] and poses a far greater threat to individual liberty than does a multi-member independent agency.” [PHH Corp. v. Consumer Fin. Prot. Bureau 839 F.3d 1, 30-31 (D.C.Cir. 2016).] As noted above, the court’s opinion in PHH was vacated pending the opinion of the en banc court.
Is the CFPB’s structure unconstitutional?
Three distinct issues have been raised when addressing the constitutionality of the CFPB’s structure: (1) the single Director structure usurps executive power; (2) the Director can be removed only for cause; and (3) the CFPB is funded by unconventional methods. [See Consumer Fin. Prot. Bureau v. Navient Corp. (M.D.Pa. Aug. 4, 2017, No. 3:17-CV-101) 2017 U.S.Dist.LEXIS 123825, at *27.] This article in turn analyzes various viewpoints from different courts on the 3 distinct issues above.
(1) The single Director structure usurps executive power:
To usurp executive power, it must be established that an act by another department or branch unlawfully burdens or deprives a right or power inherent in the executive branch. To see if the CFPB usurps executive power, one must look to the rights and powers inherent in the executive branch and see if the CFPB’s structure infringes or deprives the executive branch of such rights and powers.
The Appointments Clause under Article II of the United States Constitution states in relevant part, the President “with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.” [USCS Const. Art. II, § 2, Cl 2.]
The Appointments Clause has two distinct sections: (1) “[p]rincipal officers are selected by the President with the advice and consent of the Senate”; and (2) as for “[i]nferior officers, Congress may allow [appointment] by the President alone, by the heads of departments, or by the Judiciary.” [Buckley v. Valeo, 424 U.S. 1, 132 [96 S.Ct. 612, 688, 46 L.Ed.2d 659, 752] (1976).]
In PHH, the court noted that the relevant portions of Article II do not require independent agencies to have a multi-member panel where commissioners or board members can check one another. [id. 839 F.3d 1, 30-31.] However, when looking to courts for precedents, a different trend becomes apparent. The constitution does not support a multi-member commission over a single-member Director. In a recent opinion, the United States District Court for the Central District of California noted that “neither the text of the Constitution nor any Supreme Court precedent supports drawing a constitutional distinction between multimember and director-led independent agencies, so the question is properly reserved for the political branches and the democratic process.” [Consumer Fin. Prot. Bureau v. Future Income Payments, LLC (C.D.Cal. May 17, 2017, No. SACV 17-00303-JLS (SSx)) 2017 U.S.Dist.LEXIS 80074, at *29.).]
PHH and Future Income Payments present a dichotomy that may soon be resolved by the en banc court’s pending opinion in PHH. However, the en banc opinion in PHH will likely only resolve the for-cause removal of the CFPB’s director, which is further discussed below.
(2) The Director can be removed only for cause:
The court’s reasoning in Consumer Fin. Prot. Bureau v. Future Income Payments, LLC comes from a long lineage of case law. In 1935, the Supreme Court of the United States in Humphrey's Ex'r v. United States, 295 U.S. 602, addressed the conditional removal of a commissioner, Humphrey, by the President for inefficiency, neglect of duty, of malfeasance in office. Similar to the CFPB, the conditional removal in Humphrey’s placed restrictions on the President’s ability to remove an officer. The court in Humphrey’s ruled in favor of the FTC’s conditional removal requirement because the FTC is characterized as a quasi-legislative and quasi-judicial entity – rather than an arm or an eye of the executive. [id.]
On June 29, 1988, following the decision in Humphrey’s, the Supreme Court of the United States decided the matter of Morrison v. Olson, 487 U.S. 654. Morrison involved the Ethics in Government Act of 1978, 28 U.S.C.S § 591 et seq, and whether appointment of independent counsel to investigate violations of federal criminal laws under the Act was constitutional. Similar to the CFPB’s single Director structure, the independent counsel in Morrison was removable only for "good cause" or physical or mental incapacity. 28 U. S. C. § 596(a)(1) (1982 ed., Supp. V). [Morrison v. Olson, 487 U.S. 654, 716, 108 S.Ct. 2597, 2632, 101 L.Ed.2d 569, 621 (1988).]
In Morrison, the Court held: (1) the Act did not violate the Appointments Clause; (2) the powers exercised by the Division did not violate U.S. Const. art. III; and (3) the Act did not violate the separation-of-powers principle. [Morrison v. Olson, 487 U.S. 654, 659, 108 S.Ct. 2597, 2603, 101 L.Ed.2d 569, 586 (1988).]
While, the PHH decision is still pending, there are several precedential cases that support the for cause- conditional removal of the CFPB’s single Director.
(3) The CFPB is funded by unconventional methods:
In a recent case before the U.S. District Court for the Middle District of Pennsylvania, the court noted that the CFPB’s funding does not remove the CFPB from the control of the President. [Consumer Fin. Prot. Bureau v. Navient Corp. (M.D.Pa. Aug. 4, 2017, No. 3:17-CV-101) 2017 U.S.Dist.LEXIS 123825, at *47.] The court went on to analyze the funding and addressed how Congress sets the CFPB’s level of funding in the appropriations bill and the President cannot simply veto a specific line item in the budget; instead, the President must veto the entire appropriations bill. [See U.S. Const. art. I, § 7, cl. 2.; id. at *48.]
The court in Consumer Fin. Prot. Bureau v. Navient Corp. reasoned that there are five other agencies operating completely outside normal annual appropriations; and, independent agencies with a funding structure, outside the normal appropriations process, have been in existence in the United States for over 100 years. [id. at *48.]
It’s likely the PHH en banc decision will take into account historical precedence supporting the constitutionality of the CFPB’s structure. There is no way to tell for sure how the en banc court will decide, but it’s only a matter of time before a decision is made. Regardless, it is anticipated that the en banc court’s decision will focus on the conditional- for-cause removal structure of the CFPB. Even with that provision deleted, the CFPB will continue to have broad powers to prescribe rules and issue orders, engage in joint investigations and requests for information, conduct hearings, and adjudication proceedings against businesses offering financial services and products, commence a civil action against businesses offering financial services and products, and refer matters for criminal prosecution. [12 U.S.C. § 5566.]
NOTICE: This is an attorney communication and a news article. It does not create a legal relationship, nor is it intended to be legal advice. It simply reflects the opinions of the author.
ABOUT THE AUTHOR: Alan Fassonaki, Attorney at Law
Alan Fassonaki served as Director of Operations for a Los Angeles company before going to law school. He graduated law school with magna cum laude honors. After law school, Alan took on employment at a public company in the East Bay Area as in-house counsel. Alan’s legal focus was contracts law, regulatory compliance, federal and state litigation, and corporate governance (policies, procedures, and the like). Afterwards, Alan started his law practice in Woodland Hills, California, where he now serves businesses with legal matters related to business law and business litigation.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.