Financial Services Law Developments: FYI: 5th Cir Holds CFPB Structure is Constitutional

Wednesday, March 11, 2020

FYI: 5th Cir Holds CFPB Structure is Constitutional

The U.S. Court of Appeals for the Fifth Circuit recently held that the restrictions on the President's removal authority under the Consumer Financial Protection Act, allowing for the removal of the Director only for "inefficiency, neglect of duty, or malfeasance in office", are valid and constitutional.

A copy of the opinion is available at: Link to Opinion

As you may recall, Congress created the Consumer Financial Protection Bureau ("CFPB") in response to the 2008 financial crisis and tasked it with implementing and enforcing preexisting consumer-protection statutes. The CFPB is headed by a single CFPB director appointed for a five-year term by the President with the advice and consent of the Senate and removable by the President for "inefficiency, neglect of duty, or malfeasance in office."

The CFPB filed a civil enforcement action against two payday lenders and their owner (Payday Lenders) in the U.S. District Court for the Southern District of Mississippi. The CFPB alleged that the Payday Lenders had engaged in unfair, deceptive, or abusive acts.

The Payday Lenders filed a motion to dismiss alleging that the CFPB is unconstitutionally structured, and as a result, any enforcement action it initiates is void from its inception.

In reviewing the Payday Lenders motion, the trial court examined the ruling of the U.S. Court of Appeals for the District of Columbia Circuit in PHH Corporation v. CFPB, 881 F.3d 75 (D.C. Cir. 2018), and denied the motion, holding that "the [CFPB] is not unconstitutional based on its single-director structure" and certified its order for interlocutory appeal.

The Fifth Circuit heard oral argument but withheld ruling pending the en banc court's resolution of Collins v. Mnuchin, 938 F.3d 553 (5^th Cir. 2019).

Collins held that the Federal Housing Finance Agency ("FHFA") violated the Constitution's separation of powers and is "too insulated from executive control because it is funded through annual assessments on the [government-sponsored entities ("GSEs")], is free of any formal executive control, and is led by a single director removable only for cause."

The Collins court distinguished PHH, noting that while the Executive Branch has no authority over the FHFA, it "can directly control the CFPB's actions through the [Financial Stability Oversight Council ("FSCO")]."

The Fifth Circuit then heard a second round of oral argument where the Payday Lenders argued that the structure of the CFPB violates the separation of powers doctrine arguing that because the Bureau is led by a single director removable by the President only for cause, it denies the Executive Branch its due.

The Fifth Circuit found no support for this argument in constitutional text or in Supreme Court decisions and upheld the constitutionality of the CFPB's structure.

The Fifth Circuit noted that the Supreme Court of the United States "has, without exception, upheld for-cause protection for officers so long as removal authority remains in the hands of the President or his at-will agent." Further noting, the Supreme Court has struck down officer removal restrictions three times, "each where the removal power has been held by Congress or given to someone other than the President."

The Court distinguished Collins where it found that the FHFA's single-member leadership, in conjunction with for-cause removal protection and other features, unconstitutionally insulated the FHFA noting in the present matter the "FSOC's veto provides the Executive Branch with 'an emergency brake to hold the CFPB accountable,' the Executive Branch holds no formal control over the FHFA."

Finally, the Fifth Circuit concluded that "[t]he President can remove the CFPB Director only for 'inefficiency, neglect of duty, or malfeasance in office,' a broad standard repeatedly approved by the Supreme Court. That alone is enough to decide this case. If there is any threat of undue concentration of power, the Office of President is its beneficiary" finding "neither the text of the Constitution nor the Supreme Court's previous decisions support the Appellants' arguments that the CFPB is unconstitutionally structured, the district court is AFFIRMED."

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751

Mobile: (312) 493-0874
Email: rwutscher@MauriceWutscher.com

Admitted to practice law in Illinois

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

Financial Services Law Updates

and

The Consumer Financial Services Blog™

and

Webinars

and

California Finance Law Developments

PLEASE NOTE:

The editor and sponsoring law firm of this blog represent and serve banks, lenders, loan buyers, loan servicers, debt collectors, and other financial services companies. We do not represent consumers.

Any communications or information obtained may be provided to our clients, including for the purpose of debt collection.

The information in this blog and related updates is general in nature, and should not be considered legal advice.

Legal advice requires a full and complete understanding of a particular situation. Your situation may involve material facts that prevent the direct application of the information in this blog and related updates.

You will not become a client of the editor or sponsoring law firm simply by reading this blog.

In order to become a client of the editor or sponsoring law firm, the editor or sponsoring law firm must agree to represent you in writing.

Until we agree to represent you in writing, we are not prevented from representing any other party.

Until you are a client of the editor or sponsoring law firm, any communications with us will not be confidential.

The Editor's Bio

Ralph T. Wutscher
Maurice Wutscher LLP
20 N. Clark Street, 33rd Floor
Chicago, Illinois 60602
Direct: (312) 493-0874
RWutscher@MauriceWutscher.com
https://www.MauriceWutscher.com/

Ralph Wutscher's practice focuses primarily on representing depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, distressed asset buyers and sellers, loss mitigation companies, automobile and other personal property secured lenders and finance companies, credit card and other unsecured lenders, and other consumer financial services providers. He represents the consumer lending industry as a litigator, and as regulatory compliance counsel.

Ralph has substantial experience in defending private consumer finance lawsuits, including cases ranging from large interstate putative class actions to localized single-asset cases, as well as in responding to regulatory investigations and other governmental proceedings. His litigation successes include not only victories at the trial court level, but also on appeal, and in various jurisdictions. He has successfully defended numerous putative class actions asserting violations of a wide range of federal and state consumer protection statutes. He is frequently consulted to assist other law firms in developing or improving litigation strategies in cases filed around the country.

Ralph also has substantial experience in counseling clients regarding their compliance with federal laws, and with state and local laws primarily of the Midwestern United States. For example, he regularly provides assistance in connection with portfolio or program audits, consumer lending disclosure issues, the design and implementation of marketing and advertising campaigns, licensing and reporting issues, compliance with usury laws and other limitations on pricing, compliance with state and local “predatory lending” laws, drafting or obtaining opinion letters on a single- or multi-state basis, interstate branching and loan production office licensing, evaluations and modifications of new or existing products and procedures, debt collection and servicing practices, proper methods of responding to consumer inquiries and furnishing consumer information, as well as proposed or existing arrangements with settlement service providers and other vendors, and the implementation of procedural or other operational changes following developments in the law.

Ralph is a member of the Governing Committee of the Conference on Consumer Finance Law. He is also the immediate past Chair of the Preemption and Federalism Subcommittee for the ABA's Consumer Financial Services Committee. He served on the Law Committee for the former National Home Equity Mortgage Association, and completed two terms as Co-Chair of the Consumer Credit Committee of the Chicago Bar Association.

Ralph received his Juris Doctor from the University of Illinois College of Law, and his undergraduate degree from the University of California at Los Angeles (UCLA). He is a member of the national Mortgage Bankers Association, the American Bankers Association, the Conference on Consumer Finance Law, DBA International, the ACA International Members Attorney Program, as well as the American and Chicago Bar Associations.

Ralph is admitted to practice in Illinois, as well as in the United States Court of Appeals for the Seventh Circuit, the United States District Courts for the Northern and Southern Districts of Illinois, and the United States District Court for the Eastern District of Wisconsin, and has been admitted pro hac vice in various jurisdictions around the country.