By Roger Parloff

On Wednesday, 11 D.C. Circuit Court judges will hear arguments over the constitutionality of the Consumer Financial Protection Bureau, an agency created in the wake of the great recession of 2008.

The stakes are high for both consumer protection advocates and financial services institutions. The latter have, in the past five years, been ordered by the CFPB to return nearly $12 billion to 29 million of their customers in recompense for various predatory practices. The Dodd-Frank Wall Street reform legislation of 2010 created the CFPB and gave it power to enforce 18 consumer protection laws previously administered by seven separate agencies, and also vested it with new authority to regulate and prosecute “unfair, deceptive, and abusive” acts.

Conceived in 2007 by then-Harvard law professor and now-Senator Elizabeth Warren (D-Massachusetts)—today, the personification of a liberal firebrand—the CFPB has been a political lightning rod since its inception. It has fought to rein in deceptive practices in such realms as subprime mortgages, payday lending, nonprofit education, and prepaid debit cards, with Republicans screeching in protest all the way.

In February Senator David Perdue (R-Georgia), the former CEO of Reebok and Dollar General Stores, whose state is home to TSYS—the parent of prepaid card unit Netspend—branded CFPB a “rogue agency” at Yahoo Finance’s All Markets Summit; Senator Ted Cruz (R-Texas) and Rep. John Ratcliffe (R-Texas) introduced bills to abolish the bureau; and, according to a report in Politico last month, President Donald Trump recently threatened to fire its director, Richard Cordray, a former Ohio attorney general. 

As it happens, Trump can’t currently fire Cordray, and that’s precisely what lies at the heart of the legal dispute the D.C. Circuit judges will be pondering. In the lawsuit, PHH Corp, a mortgage lender, is challenging the constitutionality of the CFPB’s structure. In January 2014 the bureau brought an enforcement proceeding against PHH which culminated, in July 2015, in the imposition of $109 million in fines against the company for its allegedly having participated in a kickback scheme.

PHH appealed, protesting not only its innocence, but also claiming that Congress violated constitutional separation of powers principles when it specified that the president could remove the director of the CFPB only for cause (e.g., neglect of duty or malfeasance) rather than at will (e.g., for mere policy differences). This arrangement granted the director too much insulation from public accountability, PHH claimed, thereby threatening the liberty of those who fall within the CFPB’s enforcement jurisdiction.  

A 2-1 panel of the U.S. Court of Appeals agreed with PHH’s argument last October. “The Director [of the CFPB] enjoys more unilateral authority than any other officer in any of the three branches of the U.S. Government, other than the President,” wrote U.S. Circuit Judge Brett Kavanaugh in declaring the CFPB’s structure to be unconstitutional. (Regardless of the constitutional issue, all three judges voted to vacate PHH’s fine on the grounds that CFPB had misinterpreted the statutes relating to PHH’s conduct. The one dissenting judge found it unnecessary to reach the constitutional question.)

But the panel’s decision was vacated in February by the full D.C. Circuit, which scheduled a rehearing of the appeal before the full court on May 24.

Another regulator at risk

Though the fate of the CFPB is a huge question in itself, it’s only part of what’s in play. While not formally challenged in this lawsuit, the structure of the Federal Housing Finance Agency—yet another hotbed of controversy—is also effectively on trial. Since September 2008 FHFA, whose structure closely resembles the CFPB’s, has been the conservator for the giant mortgage finance twins, Fannie Mae and Freddie Mac, which were deemed insolvent during the housing crisis. Due to FHFA’s contentious 2012 decision to send all future profits of the rebounding companies to the Treasury, effectively nationalizing them, it has become the target of sprawling stockholder litigation with at least $130 billion at stake.

Plaintiffs in those cases hope that if CFPB’s structure goes down in flames, so will FHFA’s and, with it, the notorious 2012 order that, they say, expropriated their property.

In still another measure of the political sensitivity of the upcoming argument, the U.S. Department of Justice has reversed its legal position in the case since the Trump Administration took office in January. The department now concedes—though the CFPB does not—that the CFPB is unconstitutionally structured.

At the same time, the Justice Department suggests a relatively modest fix for this situation, urging the court to simply sever the for-cause language from the legislation, making the director removable at will. That would allow President Donald Trump to fire Cordray, but it would leave the agency itself intact. (Cordray’s five-year term doesn’t expire until July 16, 2018, though he might resign before then, according to Politico, to run for Ohio governor.)

In contrast, PHH and the U.S. Chamber of Commerce—which has filed an amicus case supporting PHH’s constitutional position—both argue that if the CFPB’s structure is flawed, only Congress can fix it. In the meantime, they contend, the whole agency must be dissolved and its past orders nullified. (Among the many outside groups supporting PHH are industry trade groups, like the American Bankers Association; the libertarian Cato Institute; and 15 mostly red states, led by Missouri.)

Why is the CFPB any different from the FTC?

For the CFPB and the amici defending it—which comprise consumer groups like Public Citizen; 17 mostly blue states and the District of Columbia; and current and former legislators who sponsored the legislation, including former Senator Christopher Dodd and former Representative Barney Frank—the main argument is an obvious one: Dozens of executive officials are removable by the president only for cause, and the Supreme Court upheld the constitutionality of that state of affairs more than 80 years ago.

The officials they are referring to are the commissioners and board members who make up almost every independent agency in government today, including the Federal Communications Commission, the Securities and Exchange Commission, the Federal Trade Commission, the National Labor Relations Board, the Federal Energy Regulatory Commission, and at least 20 other regulatory bodies established since 1887.

In 1935, in a case involving the FTC, the Supreme Court ruled that this basic structure did not violate separation of powers principles. (Incidentally, as originally envisioned by then-Harvard Law professor Warren, the CFPB would have been headed by a commission. The first version of the bill that created the bureau also called for a commission. The structure was later changed to a single-directorship to ensure the regulator could act with greater “speed and decisiveness in rooting out financial-product abuses,” according to a brief submitted by the bill’s sponsors, which was authored by lawyers at the Constitutional Accountability Center.)

Nevertheless, Judge Kavanaugh ruled last October that the CFPB, because it is headed by a single director, is fundamentally different from agencies headed by “multiple commissioners, directors, or board members who act as checks on one another.” (Emphasis in the original.) Multi-member commissions, he reasoned, “help prevent arbitrary decision making and abuses of power” because they “do not concentrate power in the hands of any one individual.” They depend, rather, on compromise and consensus, he wrote.

The CFPB’s defenders, on the other hand, say Kavanaugh’s argument is illogical and irrelevant. If the supposed constitutional flaw with the CFPB is that the president can’t remove its director easily enough, write lawyers for the Constitutional Accountability Center, “a multimember board serving staggered terms is, if anything, less accountable to the president.” Even if the president succeeds in replacing one member, they point out, he may still have no impact on the policies of the body as a whole.

Several consumer groups supporting the CFPB, including Public Citizen, contend in their brief that Judge Kavanaugh, by relying on his own ad hoc judgments about what structures most threaten personal liberty, was improperly substituting his judgment for that of Congress.  When agencies perform adjudicatory or regulatory functions requiring expert judgment, their lawyers contend, insulation from at-will removal by the president “enhances liberty by protecting the integrity with which public duties are carried out.”

This dispute could make its way to the Supreme Court

The case appears likely to be decided along political lines, with Republican-appointed judges being inclined to strike down the CFPB’s structure, and Democratic-appointed judges apt to uphold it. If that’s the case, then the full D.C. Circuit, which currently has a majority of Democratic-appointed judges, should uphold the CFPB’s constitutionality.

By the same token, however, if the case then proceeds to the Supreme Court, a half mile down Constitution Avenue, PHH may yet prevail. The case bears considerable resemblance to a 2010 precedent in which Chief Justice John Roberts, Jr., writing for a 5-4 court, struck down, on separation of powers grounds, the structure of the Public Company Accounting Oversight Board. That was another regulatory body created by reform legislation (the Sarbanes-Oxley Act of 2002) passed in the wake of a crisis—in that instance, the dot-com crash and a series of corporate and accounting scandals, led by Enron and WorldCom. In that instance PCAOB’s members—removable by the SEC only for cause, with the SEC commissioners themselves also being removable only for cause by the president—had been, Roberts found, unconstitutionally insulated from presidential accountability by two tiers of for-cause protection.

At the same time, the safe money would have to predict that even if the Supreme Court does find CFPB’s structure to be constitutionally flawed, it will most likely let the body itself survive, ordering only that its director shall henceforth be treated as removable at will. That is essentially what the Supreme Court did in the PCAOB case, and what Judge Kavanaugh would have done in the CFPB case.

That outcome, should it come to pass, will sorely disappoint critics of the CFPB—and of the similarly structured FHFA. But, alas, this case is more about vindicating abstract principle than about righting concrete wrongs. The latter task will probably be left to case-by-case review before other tribunals.