Consumer Finance Insights
July 3, 2018

Federal Judge Rules CFPB Structure Unconstitutional

On June 21, 2018, a judge in the Southern District of New York ruled that the Consumer Financial Protection Bureau’s (CFPB’s) single director structure is unconstitutional.  See CFPB v. RD Legal Funding LLC (2018 WL 3094916 (S.D.N.Y. June 21, 2018)).  In doing so, the court adopted two dissenting opinions from PHH Corp. v. CFPB (881 F.3d 75 (D.C. Cir. 2016)), a D.C. Circuit opinion upholding the constitutionality of the CFPB’s structure, which we reported on here.

RD Legal is a financial services company offering cash advances to consumers who have settled cases or obtained judgments, but are waiting to collect or receive settlement payments.  The CFPB and the New York Attorney General filed suit jointly under the Consumer Financial Protection Act (CFPA), alleging that RD Legal’s lending practices were deceptive because it  misrepresented the nature of the cash advances and because the cash advances were, in fact, usurious loans that are void under state law.  Specifically at issue were cash advances made by RD Legal to claimants in connection with the National Football League (NFL) concussion litigation settlement (In re NFL Players’ Concussion Injury Litig. (MDL No. 2323 (E.D. Pa. Feb. 13, 2015)) and the September 11 Victims Compensation Fund, which awards funds to individuals harmed by latent injuries in connection with removing debris in the wake of 9/11.  RD Legal entered agreements with individuals entitled to receive payments from those funds, in exchange for the individual’s agreement to pay RD Legal a larger amount once they receive the awarded funds.

As part of its motion to dismiss, RD Legal alleged that the CFPB was unconstitutionally structured, and that it therefore lacked standing to bring claims under the CFPA.  The court agreed, and began by recognizing the D.C. Circuit’s PHH decision as well as noting that the decision is not binding on the court.  Instead, the court adopted Sections I-IV of Judge Kavanaugh’s PHH dissent where, “based on considerations of history, liberty and presidential authority,” Judge Kavanaugh determined that the CFPB “is unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single Director.”  See RD Legal Funding LLC, 2018 WL 3094916 at 35.

In Judge Kavanaugh’s dissent, he noted that independent agencies—whose board members are only removable by the President for cause—have aspects of all three branches of government:  they promulgate regulations, bring enforcement actions against private citizens, and adjudicate disputes involving private parties.  PHH Corp., 881 F.3d at 164-65.  As such, independent agencies “constitute, in effect, a headless fourth branch of the U.S. Government . . . hold[ing] enormous power over the economic and social life of the United States.”  Id. at 35.  Because of this enormous power, independent agencies are typically headed by multiple commissioners or board members, capable of checking one another, and “reduc[ing] the risk of arbitrary decisionmaking and abuse of power” by spreading out decisionmaking power.  Id.  Judge Kavanagh reasoned that the CFPB is unprecedented in that it is the first independent agency headed by a single director who is empowered to such a degree, with powers that rival even those of the President, particularly given that the President cannot check the director’s power by removing him (unless for cause).  Id. at 172.  In essence, Judge Kavanaugh likened the CFPB director to a “President of Consumer Finance,” and concluded that the Bureau is unconstitutionally structured because the “single-Director structure departs from settled historical practice, threatens individual liberty, and diminishes the President’s Article II authority to exercise the executive power.”   Id. at 172, 198.

However, the RD Legal court also disagreed with Judge Kavanaugh’s conclusion in Section V of his dissent, in which he determined that the for-cause removal provision could be severed such that the CFPB’s director can be removed at will by the President.  See RD Legal Funding LLC, 2018 WL 3094916 at *35.  Rather, the court adopted Section II of Judge Karen LeCraft Henderson’s PHH dissent, in which Judge LeCraft opined that “the presumption of severability is rebutted here.  A severability clause does not give the court power to amend a statute.  Nor is it a license to cut the heart out of a statute.”  See id. (quoting PHH Corp., 881 F.3d at 163-64) (internal quotation marks omitted).  Judge LeCraft determined that severing the for-cause removal provision would effectively turn the CFPB into an executive agency, with the director subject to the President’s removal power.  PHH Corp., 881 F.3d at 161-62.  Given that Congress intended that the CFPB be an independent agency, severing the for-cause removal provision would be contrary to this purpose, and therefore inappropriate.  Id. at 161-64.

Although the effect of the court’s decision is localized to the RD Legal case—the CFPB was dismissed from the case as a result of the decision, but the New York Attorney General was allowed to proceed with the CFPA claims—it could lend support to the argument that the Bureau’s single director structure is unconstitutional, or to efforts to turn the Bureau into a commission.  LenderLaw watch will continue to bring you updates as they occur.

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