Has administration change created separation of powers trap for CFPB?

By Richard Roth

The Dodd-Frank Act provision allowing the Consumer Financial Protection Bureau’s director to be removed only for cause is unconstitutional, but the CFPB should not be eliminated, according to the Department of Justice. In an amicus curiae brief filed in PHH Corp. v. CFPB, Justice argues that the for-cause termination restriction violates the Constitution’s separation of powers principles but that severing the restriction from the rest of the Dodd-Frank Act, not the elimination of the bureau, is the proper remedy.

At the request of the CFPB, a three-judge panel decision in the case was vacated and an en banc hearing scheduled. In PHH Corp. v. CFPB, the panel majority decided that:

1. The CFPB’s single-director structure is impermissible for an independent agency.
2. The proper remedy for the violation is to sever the section permitting the CFPB director to be removed only for cause from the remainder of the Dodd-Frank Act, which would permit the President to remove the director at will.
3. The CFPB misinterpreted RESPA when it tried to enforce against PHH Corp. a new interpretation of how the act applied to the use of captive reinsurers, resulting in a $109 million disgorgement order.

The Justice Department’s brief addresses only the first two issues.

Separation of powers. The brief frames the separation-of-powers dispute as whether the Supreme Court’s 1935 decision in Humprey’s Executor v. U.S., 295 U.S. 602, which upheld the Federal Trade Commission’s removal-for-cause structure, should be extended to the CFPB. It should not be extended, according to the Justice Department.

The core of the position is that the Constitution requires the President to “take Care that the Laws be faithfully executed.” As part of doing so, the President has the authority to appoint administrative officers to act under his direction. The President cannot ensure that the nation’s laws are faithfully executed if he does not have the ability to remove from office those persons who are failing to act according to his directions, the brief argues.

Humphrey’s Executor created an exception to the President’s removal power that applied to the five-member FTC. It is important to understand that the FTC is a multiple-member commission whose members are appointed on a staggered basis, the brief says. This arrangement creates an agency that has “long-term continuity and expertise” and that has some ability to avoid the appearance of partisanship. It also facilitates group decision-making.

The Constitution vests in the President the power to enforce the laws. However, “The principles animating the exception in Humphrey’s Executor do not apply when Congress carves off a portion of that quintessentially executive power and vests it in a single executive officer below the President who is not subject to the President’s control,” the Justice Department asserts.

Practical concerns. Extending the Humphrey’s Executor exception to a single-director bureau could create an exception that “swallows the rule” that the President can remove officers who are not executing the laws to his satisfaction, the brief warns. Moreover, the CFPB’s single-director structure actually makes such a conflict more likely.

First, when an agency’s power is vested in a single individual, that individual becomes more able to act independently rather than under the direction of the President. Second, when an agency’s head has a term longer than that of the President, such as the CFPB director’s five-year term, a President who has only a for-cause removal authority could not select a replacement.

As a result, the President would have neither the “front-end” appointment power nor the “back-end” removal power, the Justice Department says.

Severability. The brief supports the panel’s decision not to invalidate the entire CFPB, asking the full court instead to agree with severing the removal-for-cause provision from the remainder of the Dodd-Frank Act. This remedy would allow the bureau to remain fully functional. As noted in the panel decision, a severability clause was included in the act, and that clearly expressed Congress’s intent.

Related case. In a footnote, the Justice Department noted that its brief takes a position contrary to what Justice has previously asserted in another suit. In State National Bank of Big Spring v. Mnuchin, the Justice Department, representing the Treasury Department and the CFPB, defended the constitutionality of the CFPB’s structure. Based on its new position on the issue, Justice said it is working with the CFPB to allow the bureau’s own attorneys to take over the Big Spring litigation.

Possible future effect. Under the Dodd-Frank Act, the CFPB can rely on its own attorneys “in any action, suit, or proceeding to which the Bureau is a party” (12 U.S.C. §5563(b)). However, there is a potentially significant exception to that authority.

The CFPB’s ability to represent itself before the Supreme Court is restricted. Within 10 days of the entry of a judgment that could be appealed, the bureau must ask the Attorney General for permission to represent itself. The bureau can represent itself only if the AG either consents or fails to object within the following 60 days (12 U.S.C. §5563(e)).

It seems unlikely that the Justice Department would consent to allowing the CFPB to argue before the Supreme Court a legal position with which Justice disagrees. This could leave the bureau unable to attempt to vindicate its organization in the Supreme Court regardless of how the D.C. Circuit rules on the issue:

• If the appellate court rules that the single-director structure is constitutional, PHH Corp. could request a Supreme Court review. The Justice Department then could deny the CFPB’s request to represent itself and concede the separation-of-powers issue before the Supreme Court. That would leave only the remedy at issue.
• If the appellate court rules that the single-director structure violates separation-of-powers principles and that severance is the proper remedy, the Justice Department likely would not consent to allowing the bureau to appeal the issue to the Supreme Court. Instead, it would defend the decision, should PHH Corp. appeal. (However, such an appeal by PHH Corp. is unlikely, as the appellate court decision would free the company from the bureau’s $109 million disgorgement order, which would be a clear victory for the company.)
• If the appellate court rules that the single-director structure violates separation-of-powers principles and that the Dodd-Frank Act’s creation of the bureau must be disregarded, the Justice Department again likely would not consent to allowing the bureau to appeal the issue to the Supreme Court. Instead, it would file the appeal and argue for severance as the proper remedy.

As a result, the best result for the CFPB might be for the appellate court to decide the case based only on PHH Corp.’s claim that the bureau’s RESPA interpretation was wrong. This would allow the appellate court to defer consideration of the separation of powers issue, at least until the likely appeal in Big Spring.

Preserving the ability to raise the issue before the Supreme Court was cited by a group of attorneys general from 17 states and the District of Columbia when they asked for permission to intervene in the en banc appeal. That request was denied.

For more information about the CFPB, subscribe to the Banking and Finance Law Daily.