It may turn out to be only a symbolic defeat for the Obama administration, but a three-judge panel of the Court of Appeals for the District of Columbia yesterday struck down as unconstitutional the leadership structure of the federal Consumer Financial Protection Bureau (CFPB), currently headed by Richard Cordray. Judge Brett Kavanaugh authored the opinion, and Senior Circuit Judge A. Raymond Randolph issued a concurring opinion. Circuit Judge Karen LeCraft Henderson issued an opinion concurring in the majority’s statutory analysis, but dissenting from the majority’s decision to address the constitutional question.

The CFPB is a creature of the Dodd-Frank Act of 2010, which may rank with Obamacare as one of the worst pieces of legislation ever passed by Congress (see here and here for analyses of these fatally flawed statutory schemes). It created a regulatory nightmare, giving the CFPB unprecedented power over the consumer financial market with almost no accountability to anyone. Instead of being reliant on appropriations by Congress, the CFPB has a budget fixed as a certain percentage of the Federal Reserve’s appropriations. This arrangement effectively makes it unaccountable to Congress and to the rest of the Executive Branch, including the president.

Consumer Financial Protection Bureau structure

As the court said, this is “a case about executive power and individual liberty.” While the federal government’s power “is essential to societal order and progress,” it is also “simultaneously a grave threat to individual liberty.”

After explaining the Framers’ intent in designing separation of powers into the federal government, the lead opinion reviewed the history of the creation of independent federal agencies, noting that today they “collectively constitute, in effect, a headless fourth branch of the U.S. Government. They exercise enormous power over the economic and social life of the United States.” Because of their “massive power and the absence of Presidential supervision and direction, independent agencies pose a significant threat to individual liberty and to the constitutional system of separation of powers and checks and balances.” Truer words were never spoken.

To help mitigate that risk, independent agencies “have historically been headed by multiple commissioners, directors, or board members who act as checks on one another,” The court observed. Although not “accountable to and checked by the President,” the heads of independent agencies “are at least accountable to and checked by their fellow commissioners or board members.” Thus, no head of any independent agency can act “unilaterally without any check on his or her authority.” No federal agency “exercising substantial executive authority has ever been headed by a single person. Until now.” The CFPB is headed by a single director who “possesses more unilateral authority…than any single commissioner or board member in any other independent agency in the U.S. Government.” In fact, he has more “unilateral authority than any other officer in any of the three branches of the U.S. Government, other than the President.” He has “enormous power over American business, American consumers, and the overall U.S. economy…covering everything from home finance to student loans to credit cards to banking practices.” He “alone decides what rules to issue; how to enforce, when to enforce, and against whom to enforce the law; and what sanctions and penalties to impose on violators of the law.”

Because the CFPB director’s power is “massive in scope, concentrated in a single person, and unaccountable to the president,” it triggers important constitutional questions. In this case, that constitutional question was raised by PHH Corp., a mortgage lender which was subjected to a $109 million fine by Richard Cordray. PHH sued arguing that having a single director heading an independent agency violated Article II of the Constitution.

What did the court conclude?

The court agreed, pointing out that the single-director structure “represents a gross departure from settled historical practice” and “poses a far greater risk of arbitrary decisionmaking and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency.” The CFPB “lacks” the constitutionally critical check of a multi-member commission or reporting to the president; it is a “wolf that comes as a wolf.”   

Not only did the court find the structure of the CFPB unconstitutional, it was very critical of Cordray’s claims against PHH. It agreed with PHH that Cordray had misinterpreted a provision of the Real Estate Settlement Procedures Act when he claimed that the company’s behavior was illegal. Second, it agreed that Cordray had applied his misinterpretation retroactively, which violates “bedrock principles of due process.”

Finally, the court seemed astonished at Cordray’s claim that the three-year statute of limitations contained in the applicable federal law did not apply to his actions because supposedly no federal statute of limitations applies to “any CFPB administrative actions to enforce any consumer protection law.” In other words, Richard Cordray was arguing that his agency was above the law. The court quickly tossed out that claim as well, holding that the applicable statute of limitation applies to all CFPB actions “whether brought in court or administratively.” It thus remanded the PHH enforcement matter to the CFPB for reconsideration subject to a new constitutional accountability mechanism.

The Court’s ‘fix’

While there is no doubt that the language in this case is very important in upholding the separation of powers and political accountability principles ingrained in the Constitution, the problem lies in the remedy ordered by the court. Rather than shutting down the entire CFPB and invalidating the Dodd-Frank law (or at least the Dodd-Frank provisions that deal with the CFPB), the court instead decided to allow the CFPB to continue to operate. Its solution to the unconstitutional leadership structure was to order that the director now be accountable to the president. The president will have “the power to remove the Director at will, and to supervise and direct the Director.” The CFPB will operate in the same manner as other federal departments, such as the Justice and Treasury Departments, whose political heads report directly to the president, rather than operating as an independent agency.

This “solution” has two flaws:

1. In the current administration, this change will have no effect in limiting the arbitrary and capricious actions of Richard Cordray and the unreasonable and unjustified regulatory burden the CFPB is imposing on our financial markets. President Obama has exhibited exactly the same type of unilateral behavior in abusing his executive power (see, for example, here, here, and here). More generally, as a practical matter, it appears unlikely that any president would closely supervise a highly specialized agency such as the CFPB (let alone seriously consider dismissing its director), given the many high-level responsibilities and political considerations presidents face.
2. This limited solution leaves the CFPB and the Dodd-Frank law in place. Thus, the abusive agency and a burdensome law will continue to hobble our economy and hurt consumers. Very recently, for example, the CFPB has proposed economically irrational new rules (see here and here) that threaten to destroy the payday and “high cost installment” lending industry, which offers many low income consumers the only source of debt finance available to them.

The broad (and best) solution is for Congress to abolish the CFPB and to reallocate whatever functions that merit retention to politically accountable agencies with economic expertise in consumer finance. Beyond that, Congress should consider enacting additional regulatory reforms, such as requiring congressional approval of new major regulations issued by agencies (including financial services regulators) and subjecting “independent” agencies — including financial services agencies — to executive branch regulatory review. (See the Heritage Foundation’s February 2016 proposal.)

Let us hope that the new president takes the lead in promoting pro-consumer reforms along these lines, in the interests of greater constitutional accountability and a stronger, more efficient American economy.