Appellate Court Decision Holding CFPB Unconstitutional Promises Significant ImplicationsIn a landmark decision, the U.S. Court of Appeals for the D.C. Circuit held that the Consumer Financial Protection Bureau’s (CFPB) structure violated the Constitution’s separation-of-powers requirements. In PHH Corporation v. Consumer Financial Protection Bureau, No. 15-1177 (D.C. Cir., filed 2015), a majority of the Court held that the CFPB’s structure violated the Constitution because the agency was headed by a single director who could only be removed by the President for cause. The unanimous panel further held that the CFPB had erred in its statutory interpretation of RESPA (as well as its refusal to honor past regulatory guidance of the statute), and thus reversed the large damages imposed against PHH. The decision has significant implications, not just to the lending community, but also to any highly regulated industries.


In 2014, the CFPB brought an administrative enforcement action against PHH Corporation, a mortgage lender, alleging violations of certain anti-kickback provisions in Section 8 of the Real Estate Settlement Procedures Act. PHH defended against the claims, arguing that its conduct was based on express statutory guidance authored by the Department of Housing and Urban Development, when it was the agency charged with interpreting the statute. An administrative law judge found in favor of the CFPB and ordered PHH to disgorge approximately $6.5 million in illegal fees. PHH used the administrative procedure to appeal to the CFPB’s Director, who not only affirmed PHH’s liability, but increased the disgorgement amount to $109 million. PHH then sought judicial review of the agency decision in the U.S. Court of Appeals for the D.C. Circuit.

D.C. Circuit Holds Statute Unconstitutional

In a lengthy opinion written by Judge Brett Kavanaugh and joined in full by Senior Judge Raymond Randolph, the Court held that because the CFPB is headed by a single director who can be removed by the President only for cause, it was neither an executive agency nor an independent agency that comported with the Constitution’s separation-of-powers requirements. The Court began by noting the fundamental role the separation-of-powers doctrine serves in the U.S. Constitution and the long-standing precedent from the Supreme Court holding that, in order for a regulatory agency to be constitutionally constructed, it must either be accountable to the President as an executive agency or a true independent agency. The Court further held that central to an agency’s independent status is its governance by a board of commissioners or directors instead of a sole director. The Court based this requirement on two principles: (1) the reasoning behind the Supreme Court’s decision in Humphrey’s Executor v. United States, 295 U.S. 602 (1935) that recognized the constitutional validity of independent agencies based on their ability to operate as “a body of experts appointed by law and informed by experience,” and (2) longstanding historical practice and precedent of structuring independent agencies to be headed by a panel of commissioners or directors. After analyzing and ultimately distinguishing two of the three examples offered by the CFPB of other independent agencies headed by a sole independent director (the Court noted CFPB’s proposed example of the Federal Housing Finance Agency, but declined to take it as an example of historical practice given that it was created around the same time as the CFPB), the Court concluded that CFPB’s organizational structure was unprecedented in independent agency history. Based on recent decisions from the U.S. Supreme Court in Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010) and NLRB v. Noel Canning, 134 S. Ct. 2550 (2014), which emphasized the role of historical practice in addressing separation-of-powers questions, the Court concluded that the CFPB’s novel structure gave too much unaccountable power to the agency and its director and therefore held it to be unconstitutional.

Although the Court concluded that the CFPB’s structure violated the Constitution, the Court stopped short of ordering the agency to unwind operations. Instead, it ordered that the restriction on removal of the director only “for cause” should be stricken. Having ordered that provision stricken, the Court deemed it to be severed from the rest of the statute, allowing the CFPB to continue to operate as an executive agency. The Court considered the possibility of ordering the CFPB to be reorganized into a multi-member body, but declined to do so given the possibility of gridlock over appointments, as well as the threat of judicial overreach. However, the Court did note that Congress had the option of enacting legislation reorganizing the agency in that fashion. That may prove to be the most expedient approach, given the danger (or at least perceived danger) of abrupt, politicized decision-making by an agency that is completely beholden to the President.

Having addressed the headline-grabbing constitutional issue, the Court then turned to address the merits of the case—which, despite the lack of fanfare, may prove more meaningful in practice for institutions subject to the CFPB’s regulatory reach. The Court ruled against the CFPB on both of the merits issued and presented for review, holding that the agency could not penalize a company for actions conducted in reliance on previous agency guidance concerning an interpretation of federal law and that the CFPB was in fact limited to a three-year statute of limitations in bringing administrative enforcement actions against firms allegedly in violation of regulations. We will analyze those holdings and their implications in more detail in separate blog posts.

Senior Judge Randolph joined the majority decision authored by Judge Kavanaugh, but also wrote separately to express his belief that the administrative law judge that initially considered the case against PHH and wrote a recommendation should have been considered an “inferior Officer” under the Constitution, and thus was not properly appointed to the case when he was assigned by an administrative law judge acting on behalf of the Securities and Exchange Commission and CFPB. Judge Karen Henderson dissented from the majority’s constitutional holding, noting that she did not believe the Court needed to reach that issue, but joined the majority’s holdings regarding the merits of the CFPB’s claims.

Implications of Ruling

The scope of the Court’s constitutional ruling remains to be seen. In other instances where courts have held that regulatory agencies were unconstitutionally structured, the remedy was to undo the effect of any administrative enforcement actions still pending, although the agency retained the ability to start over again with its enforcement efforts under a new constitutional structure. The PHH Court avoided that issue by choosing to address the merits of the CFPB’s interpretation of the statute. Going forward, however, major questions remain unanswered regarding the effect of past and pending agency enforcement conduct, which, according to the D.C. Circuit Court, has taken place under an unconstitutional structure. Factors such as the finality of the rulings in those actions and their method of resolution (i.e., a contested adjudication versus a settlement) will probably dictate whether those rulings remain fully binding. We anticipate those issues to be vigorously litigated in the coming weeks and months.