I wrote only yesterday about the Consumer Financial Protection Bureau’s (CFPB’s) regulatory overreach with regard to payday loans, and it seems the D.C. Circuit Court was on the same wavelength. Judge Brett Kavanaugh, writing for the court, handed down a stinging condemnation of the Bureau’s structure, labeling the single-director model unconstitutional. Although the court’s remedy is somewhat limited – changing the agency from independent to one within the executive branch, with the director serving at the pleasure of the President – the opinion itself is a full-throated indictment of the CFPB’s structure and repeated overreach. Even given its limited application, it is a win for those who have long questioned the many defects in the CFPB’s design.

The case before the court arose out of an enforcement action brought by the CFPB against the mortgage lender PHH Mortgage. The action was initially brought before one of the agency’s own in-house adjudicators, who imposed a fine on the company. (Although not explicitly addressed in this case, these internal administrative proceedings, led by administrative law judges or ALJs, present their own issues, similar to those at the SEC that I have discussed here and here.) Director Richard Cordray apparently thought the $6.4 million fine imposed by the ALJ was insufficient and added another $102.6 million to the bill. PHH Mortgage appealed the Director Cordray’s decision to the D.C. Circuit.

The court’s decision turns principally on the magnitude of the director’s power. Unlike the heads of agencies such as the Department of Justice or Department of the Treasury, the director of the CFPB can be removed by the President only for cause. That is, the President could remove Cordray only for inefficiency, neglect of duty, or malfeasance. In fact, the court called the Bureau’s director the “single most powerful official in the entire United States Government, at least when measured in terms of unilateral power” after the President himself. And the President is at least accountable to the people through the democratic process. Other powerful positions within the federal government – Speaker of the House, Senate Majority Leader, heads of other independent agencies – have greater checks on their power. The Speaker cannot act without persuading and cajoling a large number of colleagues. Independent agencies such as the SEC and FTC are comprised of multi-seat commissions, and no one commissioner can act alone, making the commissioners themselves the checks on each other’s power. The director of the CFPB faces no such constraints.

The lack of constraint alone would make the CFPB’s structure a problem. But this power has not lain idle. Instead, the CFPB has sought to extend its reach not only beyond the bounds expressly set for it in its authorizing statute, but has also trespassed on basic principles of due process. Despite years of precedent established by the Department of Housing and Urban Development (HUD), the CFPB in this case decided it would interpret a key statutory provision differently. It was within the CFPB’s authority to issue a new interpretation, but the Bureau didn’t take this path. Instead, it elected to simply apply its new interpretation to PHH Mortgage, bring an enforcement action against the company, and then apply its interpretation retroactively, deeming culpable conduct that the company could not have known the Bureau would find illegal. If Congress is constitutionally barred from passing ex post facto laws, surely an agency is similarly barred; due process forbids it. And this is what the court found, noting that the “CFPB violated bedrock due process principles by retroactively applying its new interpretation of the statute against PHH.” (emphasis in original) 

Although PHH argued for the dissolution of the CFPB and indeed for the court to strike down Dodd-Frank in its entirety (since the Dodd-Frank Act created the agency), the court rightfully refused to take such a drastic step. Many would welcome an end to both, but the judiciary should not strike down laws lawfully passed by the legislature unless absolutely necessary. In this case, the court found that it could remedy the constitutional defect by requiring that the director serve at the will of the President, and that is an appropriately limited position for a court to take. The case was therefore remanded to the CFPB for reconsideration. 

To the extent it exists, the CFPB, as others have argued, should be turned into a commission with several commissioners, from different political parties, each bringing his or her own views and insights to the regulatory process. The CFPB’s funding should come through the appropriations process, which would impose a congressional check on its power, and not through a demand made of the Federal Reserve as is currently the case. While Judge Kavanaugh’s opinion makes no such sweeping changes, it moves the needle a little bit closer to accountability, due process, and constitutional soundness. For now, I’ll take it.