Long And Winding (Court) Road For CFPB Case

The U.S. Court of Appeals for the D.C. Circuit decided last week that the CFPB is unconstitutional and has overreached. Yet, in the face of that decision, the question remains: What’s next?

“What’s next” is likely to be what strategists in sports and politics refer to as a “long game,” filled with twists and turns as the agency, and its many detractors, square off on the question of whether the CFPB should exist in the first place, and the top court of the land may be the ultimate arbiter.

By now, those who follow Capitol Hill, the CFPB and the many industries monitored by that agency know that a federal appeals court ruling last week found that parts of the CFPB’s governing and leadership structures — in which the director, currently Richard Cordray, can be removed only for cause — are, in fact, unconstitutional.

The case stems from the CFPB’s oversight and penalizing of PHH, a mortgage lender based in New Jersey that was ordered to pay $109 million due to alleged violations (namely, in the form of kickbacks to existing business partners in mortgage insurance) of the Real Estate Settlement Procedures Act. PHH decided to fight the $109 million fine, which included $6.4 million in “ill-gotten gains” from its activities. That fine was overturned by last week’s verdict.

The three-judge panel of the D.C. Circuit ruled that the agency and its director made its findings — and its fines — based on flawed legal judgement, separate and apart from the issue of whether the CFPB is constitutional as currently constituted.

As is so often the case, this may only be a brick in a long legal road. In an interview conducted by Karen Webster, Ron Mann, the Albert E. Cinelli professor of law at Columbia University, suggested that the ruling  and questions regarding the constitutionality of the CFPB mean that “the U.S. Supreme Court almost has to hear this.” And, he noted of the arguments via the ruling, the appeals court “does a good job, better than I think I’ve previously seen, of linking the ‘having multiple people on the commission’ to concerns about executive authority.”

Mann was referring to the court’s assertion that the CFPB has violated the idea of separation of powers, as set forth in the Constitution. At issue is whether the director is, or should be, answerable to the president of the United States and whether the legal process in cases in which the CFPB is involved is set up appropriately. In the latter case, the CFPB, through its director, actually appoints the judges who sit on the administrative courts that hear appeals concerning the CFPB’s findings and actions. The agency has said it might look for a review of the case by the Supreme Court.

Beyond the issue of constitutionality, continued Mann, questions swirl around just what to do about all this. ”The most interesting part of the case by far concerns the remedy,” he told Webster. “It’s hard to know what to think about that.” And as the case moves through additional layers of the appeals process, moving toward the top court in the land, it may not be as simple as saying “the CFPB has to have a multi-member commission” instead of a director to oversee it.

The decision handed down last week did not recommend measures of redress that would shut down the CFPB or change the way it is (now) funded through a congressional appropriations process. As for the structure of the CFPB itself, Mann cautioned that more oversight via Congress, and more heads at the head desks, may not mean much. “Just because you have one person [at the helm] versus five doesn’t make it any cheaper” to run the agency, nor would it mean all that much for making the oversight process cheaper for those firms being regulated and/or fined.

Given the timing of the most recent decision and the fact that any hearing by the Supreme Court (and remember the Supremes must actually rule on whether they will hear the case at all) will be a 2017 event (at the earliest), Mann noted that the timing “means the next person [the director] will be more beholden to Hillary Clinton than they otherwise would be.” (Professor Mann, like the prediction markets, seems to have discounted the possibility of Donald Trump winning the election.) Richard Cordray’s term is up in 2018.