Notice & Comment

The Constitutionality of the CFPB Again Before the Courts

Amidst the flurry of administrativelawrelated opinions that the Supreme Court handed down at the end of last week, an intriguing separation-of-powers-related opinion from the Southern District of New York (SDNY) received comparatively little immediate attention. Last Thursday, Judge Loretta Preska ruled that the Consumer Finance Protection Bureau (CFPB) cannot bring an enforcement action in district court on the ground that the bureau’s structure is unconstitutional. Demonstrating the potential reach of judicial opinions even when they do not immediately garner majority support, Judge Preska ‘s opinion adopted in toto four sections of D.C. Circuit Judge Brett Kavanaugh’s opinion dissenting from the en banc D.C. Circuit court’s opinion in PHH v. CFPB. (Judge Kavanaugh previously had written the majority opinion for the D.C. Circuit panel that first heard the case.)

Within the SDNY, the CFPB and the New York Attorney General (NYAG) had filed an enforcement action alleging that the defendants had misled consumers into entering certain ageements. But Judge Preska found that “because the CFPB’s structure is unconstitutional, it lacks the authority to bring claims” under the Consumer Financial Protection Act (CFPA). Consequently, she terminated the CFPB as a party to the action. (The judge ultimately denied the Defendants’ motion to dismiss, however; the NYAG has independent statutory authority to bring claims under the CFPA.)

About 100 pages into the opinion, Judge Preska reached the defendants’ constitutional claim. She highlighted the D.C. Circuit’s January 2018 en banc opinion in PHH affirming the CFPB’s constitutionality. But she promptly rejected the en banc court’s conclusion. Instead Judge Preska adopted “Sections I-IV of Judge Brett Kavanaugh’s* dissent (joined in by Senior Circuit Judge A. Raymond Randolph), where, based on considerations of history, liberty, and presidential authority, Judge Kavanaugh concluded that the CFPB ‘is unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single Director.’”

In the sections of his opinion now adopted by Judge Preska, Judge Kavanaugh stated in part:

As the Supreme Court has explained, our Constitution “was adopted to enable the people to govern themselves, through their elected leaders,” and the Constitution “requires that a President chosen by the entire Nation oversee the execution of the laws.” Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477, 499 (2010). Article II of the Constitution provides quite simply: “The executive Power shall be vested in a President of the United States of America.” U.S. Const. art. II, § 1. And Article II assigns the President alone the authority and responsibility to “take Care that the Laws be faithfully executed.” Id. § 3. Article II makes “emphatically clear from start to finish” that the President is “personally responsible for his branch.” Akhil Reed Amar, America’s Constitution: A Biography 197 (2005).

. . .

In order to control the exercise of executive power and take care that the laws are faithfully executed, the President must be able to supervise and direct those subordinate executive officers. As James Madison stated during the First Congress, “if any power whatsoever is in its nature Executive, it is the power of appointing, overseeing, and controlling those who execute the laws.” 1 Annals of Congress 463 (Madison) (1789) (Joseph Gales ed., 1834); see also Neomi Rao, Removal: Necessary and Sufficient for Presidential Control, 65 Ala. L. Rev. 1205, 1215 (2014) (“The text and structure of Article II provide the President with the power to control subordinates within the executive branch.”).

. . .

The Article II chain of command therefore depends on the President’s removal power. As James Madison explained during the First Congress: “If the President should possess alone the power of removal from office, those who are employed in the execution of the law will be in their proper situation, and the chain of dependence be preserved; the lowest officers, the middle grade, and the highest, will depend, as they ought, on the President, and the President on the community.” 1 Annals of Congress 499 (Madison).

. . .

Under the [Consumer Financial Protection Act] as enacted, the President may not supervise, direct, or remove at will the CFPB Director. As a result, a Director appointed by a President may continue to serve in office even if the President later wants to remove the Director based on a policy disagreement, for example. More importantly, a Director may continue to serve as Director under a new President (until the Director’s statutory five-year tenure has elapsed), even though the new President might strongly disagree with that Director about policy issues or the overall direction of the agency.

Congress insulated the CFPB’s Director from Presidential influence, yet also granted the CFPB extraordinarily broad authority to implement and enforce U.S. consumer protection laws. . . .

. . .

All of that massive power is ultimately lodged in one person – the Director of the CFPB – who is not supervised, directed, or removable at will by the President.

Because the Director acts alone and without Presidential supervision or direction, and because the CFPB wields broad authority over the U.S. economy, the Director enjoys significantly more unilateral power than any single member of any other independent agency. By “unilateral power,” I mean power that is not checked by the President or by other commissioners or board members. Indeed, other than the President, the Director of the CFPB is the single most powerful official in the entire U.S. Government, at least when measured in terms of unilateral power. . . .

. . .

. . . [T]he CFPB’s novel single-Director structure departs from history, transgresses the separation of powers, and threatens individual liberty.”

. . .

After adopting the first four parts of Judge Kavanaugh’s opinion, Judge Preska parted ways with Judge Kavanaugh on the proper remedy for the structural constitutional violation, adopting Judge Henderson’s position that the CFPB Director’s for-cause removal protections are not severable from the CFPA. Finally, Judge Preska also rejected the CFPB’s May 2018 attempt to ratify the filing of the enforcement action now that the Bureau is headed by an Acting Director who is removable at will.

The posture of this case is interesting. When Judge Kavanaugh originally determined in PHH that the CFPB Director’s tenure protections are unconstitutional, he was ruling in an appeal from the CFPB’s own internal enforcement proceedings. The order issued in those proceedings was a particularly compelling example of the unrestrained exercise of individual, singular power. An administrative law judge initially had “recommended that the Director order disgorgement of about $6.4 million.” On review then-Director Richard Corday “raised the disgorgement amount to more than $109 million”—an increase of more than 1,600%. Despite disagreeing with Judge Kavanaugh’s conclusion that the CFPB’s structure violates the Constitution, the en banc D.C. Circuit reinstated the statutory portions of Judge Kavanaugh’s opinion finding this to be unlawful.

In contrast, Judge Preska’s SDNY ruling came in an enforcement action that the CFPB had filed directly in an Article III court. To anyone who believes that the CFPB’s tenure-protected single-director structure represents an unprecedented trampling on the exercise of electorally accountable executive power, the conclusion that the CFPB should not be exercising governmental power in its current unconstitutionally structured form certainly is the right answer. And perhaps Judge Kavanaugh’s position on CFPB removal restrictions ultimately will become governing law, in the vein of many of the Article II concerns that he raised in 2008 about the Public Company Accounting Oversight Board that ultimately were reflected in the Supreme Court’s Free Enterprise Fund decision.

But to the extent that the CFPB continues to exist in its present form, it is preferable for CFPB to bring enforcement actions in district court with the protections of the Article III judiciary rather than within the Bureau itself where the CFPB serves as lawgiver, enforcer, and judge. Not only does the Bureau’s use of internal adjudication for enforcement proceedings raise core separation-of-powers concerns, but the Bureau’s internal adjudicative procedures can be overbearing on regulated parties as a practical matter. Even from among the group of independent agencies, the CFPB’s adjudicative procedures are tougher on regulated parties than procedures used by other agencies. (See Part IV of this comment recently filed by the GMU Administrative Law Clinic.)

The CFPB’s current adjudicative procedures seem to strike a balance that much too significantly values efficiency at the cost of procedural fairness. Earlier this year the CFPB issued a request for information regarding its adjudicative procedures and enforcement actions. As the CFPB sorts through responses to its RFI, and as the CFPB as currently structured continues to engage in enforcement, submission to the procedural safeguards of the Article III judiciary would provide at least one external separation-of-powers check for a bureau whose structure makes it an authority unto itself.

* I served as a law clerk to Judge Kavanaugh in 2006-07.

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