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DC Circuit Shows No Sign of Punting on CFPB's Constitutionality

24 May 2017
The National Law Journal

When the full U.S. Court of Appeals for the D.C. Circuit agreed earlier this year to consider the Consumer Financial Protection Bureau’s constitutionality, it teed up the possibility of punting on that question and instead ruling on narrower grounds.

But the 11-judge panel that heard the case Wednesday appeared poised to take on the issue of whether the CFPB’s independent, single-director structure runs afoul of the Constitution.

The judges, sitting in the court’s ceremonial courtroom, focused squarely on the question of whether it was lawful, under the separation of powers clause, to restrict the president’s power to remove the director “for cause” only. Cabinet secretaries can be dismissed for any reason.

Several judges appeared skeptical that they could strike down that structure, citing a 1935 case—Humphrey’s Executor v. United States—in which the U.S. Supreme Court said a member of the Federal Trade Commission could not be fired at will by the president.

The arguments marked a pivotal point in mortgage provider PHH Corp.’s challenge to the CFPB. New Jersey-based PHH, represented by Gibson, Dunn & Crutcher partner Theodore Olson, prevailed before a divided three-judge panel that struck down the bureau’s structure last year. But that split decision, authored by Judge Brett Kavanaugh, was later vacated by the D.C. Circuit’s decision in February to grant an en banc review. The company is fighting a $109 million penalty—and many companies are riding on PHH’s argument against the agency.

Olson sought to distinguish the CFPB from the FTC and other five-member commissions. He argued that the CFPB’s power is “all vested in one person as opposed to being distributed among several people,” and later, he described the agency’s director as “completely independent of the president and completely unaccountable to the president.”

What follows are highlights from the 90-minute hearing.

The D.C. Circuit will likely hit the constitutional question. No punting there.

In the October panel decision, the three judges were united in overturning the CFPB’s interpretation of the Real Estate Settlement Procedures Act, the statute at the foundation of the agency’s enforcement action against PHH. But Judge Karen LeCraft Henderson, in a dissent, said the court should not have reached the constitutional question about the CFPB’s structure.

The full D.C. Circuit asked in February for arguments on three questions, among them: “May the court appropriately avoid deciding that constitutional question given the panel's ruling on the statutory issues in this case?”

There was no talk of taking that off-ramp on Wednesday, a suggestion the court is prepared to confront the constitutionality of the single-director structure head-on.

Some judges were skeptical the CFPB’s structure intruded at all on presidential power.

Judge Patricia Millett appeared unconvinced that the CFPB’s structure encroached executive power any more than an independent commission. She noted that no more than three commissioners at five-member agencies—such as the FTC and the U.S. Securities and Exchange Commission—can be from the same party, forcing the president to occasionally appoint members from the opposite political party. With the CFPB, the president does not face any such restriction, she said.

Posing the question of which was the “greater intrusion,“ Millett asked whether it was more limiting for a president to choose “someone of your choice for the bureau or someone of the other party for the commission?”

Kavanaugh had his eye on future directors of the CFPB.

Kavanaugh was struck at one point by how turnover for CFPB director would play out in the future.

The five-year term of the CFPB’s current director, Richard Cordray, expires in July 2018. Kavanaugh envisioned a presidential candidate running on a consumer protection platform and winning the White House in 2020 would have to wait three years before the five-year term of President Donald Trump’s appointee—he hasn’t named one—expires in 2023.

That would be a “bizarre situation,” Kavanaugh remarked.

Kavanaugh raised the possibility that the president at that point “might be the person who created the agency”—an apparent reference to U.S. Sen. Elizabeth Warren of Massachusetts. The judge’s line drew laughter.

What if Cordray stays past the July 2018 expiration of his term?

There was some talk at the hearing about what power Trump would have—if no nominee is pending—to remove Cordray after July 2018, when his term expires.
Olson said Cordray conceivably could stay at the agency past that date until his successor is confirmed by the U.S. Senate. That’s not an uncommon practice at federal agencies.

Kavanaugh asked CFPB attorney Lawrence Demille-Wagman whether Trump would be able to fire Cordray in any such holdover period. Demille-Wagman said Cordray would lose his “for cause” protection after his term expires.

Here are some quick-take reactions from two former CFPB lawyers.

Deepak Gupta, founding principal of Gupta Wessler and former CFPB attorney said he thinks “people who are supporters of the CFPB should be thrilled by today’s arguments.” Gupta said he “counted a solid majority of the D.C. Circuit supporting the constitutionality of the CFPB.”

And from Mayer Brown partner Ori Lev, a former deputy enforcement director at the CFPB: “There was some chatter before the argument about whether they would reach the constitutional issue or not,” said. “It certainly seems like that was what they care about and why they are sitting en banc.”

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Reprinted with permission from the May 24, 2017 edition of The National Law Journal © 2017 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

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