CFPB declared unconstitutional, again

Lending

For the second time in less than a year, a federal court has ruled that the Consumer Financial Protection Bureau is not constitutionally structured.

Earlier this week, U.S. District Judge Loretta Preska of the New York Southern District declared the CFPB to be unconstitutionally structured, as part of a ruling in a case involving a company that provides lump-sum payouts to those awaiting payment in a structured settlement.

The case involves RD Legal Funding, which was sued by the state of New York and the CFPB for allegedly cheating NFL concussion settlement and 9-11 settlement members out of their money.

The CFPB sued the company under the Consumer Financial Protection Act, but the company countered by arguing that the bureau was unconstitutionally structured, and therefore had no right to bring a CFPA claim.

And Preska agreed.

In a ruling handed down earlier this week, Preska said that the CFPB is unconstitutional, lacks the authority to bring a CFPA claim against RD Legal, and is removed from the case.

“Accordingly, the Court finds that the CFPB ‘lacks authority to bring this enforcement action because its composition violates the Constitution’s separation of powers,’ and thus the CFPB’s claims are dismissed,” Preska wrote in her ruling.

The ruling flies directly in the face of a now well-known ruling involving the CFPB.

Earlier this year, the full Court of Appeals for the District of Columbia Circuit ruled that the CFPB is constitutionally structured, reversing its own previous decision in a case involving PHH Corp.

The decision overturned the court’s October 2016 decision, which declared the CFPB’s leadership structure unconstitutional by a 2-1 vote and vacated a $100 million fine levied by the CFPB against PHH.

The court’s earlier decision declared the leadership structure of the CFPB to be unconstitutional, ruling that CFPB’s current structure allows the director to wield far too much power, more than any other agency in the government.

“Because the Director alone heads the agency without Presidential supervision, and in light of the CFPB’s broad authority over the U.S. economy, the Director enjoys significantly more unilateral power than any single member of any other independent agency,” the court wrote in its October 2016 decision.

The case began with former CFPB Director Richard Cordray adding a $103 million increase onto a $6 million fine initially levied against PHH for allegedly illegally referring consumers to mortgage insurers in exchange for kickbacks.

PHH fought the fine, arguing that Cordray did not have the authority to increase the fine. The case eventually made its way to the Court of Appeals, which ruled in 2016 that the CFPB’s leadership structure was unconstitutional and vacated the additional $103 million fine.

The CFPB fought the ruling, asking the court to rehear the case en banc, meaning that it wanted the entire court to hear the case, which the court agreed to do back in February 2017.

Despite ruling that the CFPB was constitutionally structured, the Court of Appeals voided the $100 million-plus fine against PHH.

That left the Supreme Court as PHH’s only option in challenging the CFPB’s constitutionality, but earlier this year, PHH decided not to pursue the case to the nation’s highest court.

The CFPB, for its part, also gave up on its pursuit of PHH, dismissing its case against the company earlier this month.

But Preska views CFPB’s constitutionality differently and states that the Court of Appeals’ decision has no bearing in this case.

“In reaching the question of the constitutionality of Title X of Dodd-Frank, which established the CFPB as an ‘independent bureau’ within the Federal Reserve System, the Court acknowledges the en banc holding of the Court of Appeals for the District of Columbia Circuit in PHH Corp. v. CFPB, upholding the statute. Of course, that decision is not binding on this Court,” Preska writes.

Preska writes that she agrees with Court of Appeals Judge Brett Kavanaugh, who wrote the original Court of Appeals decision to declare the CFPB unconstitutional.

From Preska’s ruling:

Respectfully, the Court disagrees with the holding of the en banc court and instead adopts Sections I-IV of Judge Brett Kavanaugh’s dissent (joined in by Senior Circuit Judge A. Raymond Randolph), where, based on considerations of history, liberty, and presidential authority, Judge Kavanaugh concluded that the CFPB “is unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single Director.”

Also most respectfully, the Court disagrees with Section V of Judge Kavanaugh’s opinion wherein he determined the remedy to be to “invalidate and sever the for-cause removal provision and hold that the Director of the CFPB may be supervised, directed, and removed at will by the President.” Instead, the Court adopts Section II of Judge Karen LeCraft Henderson’s dissent wherein she 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 out the ‘heart’ of a statute. Because section 5491(c)(3) is at the heart of Title X [Dodd Frank], I would strike Title X in its entirety.”

And so, Preska declared the CFPB to be unconstitutional and dismissed its claims against RD Legal, but allowed the state of New York’s claims to move forward.

Never one to shy away from criticizing the bureau, House Financial Services Committee Chairman Rep. Jeb Hensarling, R-Texas, celebrated Preska’s decision.

“Today is a good day for democracy, economic freedom, due process, and the Constitution. The District Court for the Southern District of New York has confirmed what House Republicans have said all along, that the Bureau’s structure is unconstitutional,” Hensarling said in a statement.

“By design the Bureau is arguably the most powerful and least accountable Washington bureaucracy in American history—and under then-Director Richard Cordray, it showed,” Hensarling added. “The Bureau infringed on the economic freedoms of consumers, limited their financial choices, increased their costs, and failed to hold managers accountable for widespread discrimination and abuse of its own employees.”

Now, the issue of CFPB constitutionality could move to an appellate court again, if the bureau so chooses. Whether or not that happens is a different story.

To read Preska’s decision in full, click here.

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