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CFPB Declared Unconstitutional


The United States Court of Appeals for the District of Columbia Circuit today ruled on a critical case “about executive power and individual liberty.” In the matter of PHH Corporation, et. al., v. the Consumer Financial Protection Bureau, an alleged abuse of power and discretion by the Consumer Financial Protection Bureau (CFPB) and its Director led to a challenge of the very constitutionality of the CFPB’s organizational structure. Importantly for those industry members who provide goods and services related to residential mortgage loan transactions, the substantive matter at issue concerned the CFPB’s strained interpretation of the plain language of the Real Estate Settlement Procedures Act, which interpretation defied 40 years of the predecessor agency’s guidance as to exceptional conditions that would bar a finding that the statute’s anti-kickback provisions had been violated.

In sum, the Court held that the structure of the CFPB is unconstitutional. However, for many reasons (largely that it would be nearly impossible to shut down the entire CFPB), the Court limited its judicial remedy to a striking of the “removal for cause” provision in the 2010 Dodd-Frank Act that established the structure of the CFPB. Accordingly, the President now has supervisory authority over the Director, which in turn means that the Director may be removed at will. The result is that the CFPB will no longer act as an independent agency, but will be subject to the accountability processes of an executive agency.

The Court also ruled for PHH on all other substantive counts, including finding that RESPA Section 8 means what it had always meant. The Court used relatively harsh words and tone in its criticism of the CFPB’s behavior. The Court explained:

"Put aside all the legalese for a moment. Imagine that a police officer tells a pedestrian that the pedestrian can lawfully cross the street at a certain place. The pedestrian carefully and precisely follows the officer’s direction. After the pedestrian arrives at the other side of the street, however, the officer hands the pedestrian a $1000 jaywalking ticket. No one would seriously contend that the officer had acted fairly or in a manner consistent with basic due process in that situation. Yet that’s precisely this case. Here, the CFPB is arguing that it has the authority to order PHH to pay $109 million even though PHH acted in reliance upon numerous government pronouncements authorizing precisely the conduct in which PHH engaged.
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