NY Federal Judge: CFPB Structure Unconstitutional

Financial Services Law

Dismissing the CFPB from a suit it joined with the New York attorney general, a federal judge sitting in New York has ruled that the structure of the Bureau of Consumer Financial Protection (formerly known as the Consumer Financial Protection Bureau, or CFPB) is unconstitutional, requiring dismissal of its claims against various defendants.

What happened

The CFPB and the New York attorney general sued defendants RD Legal Funding and related persons for violation of certain provisions of the Consumer Financial Protection Act. The New York AG alleged that the same defendants violated New York law for the same actions that form the basis of the CFPA claims.

RD Legal Funding moved to dismiss the complaint on three principal grounds. First, that the CFPB is unconstitutionally structured and therefore lacks the authority to bring claims under the CFPA; second, that the U.S. District Court, Southern District of New York lacks federal jurisdiction because the defendants are not “covered persons” under the CFPA; and third, that the claims otherwise fail to state a claim for relief. In staking out their constitutional arguments, the defendants had to contend with a directly adverse ruling by the U.S. Court of Appeals for the D.C. Circuit, in PHH Corp. v. CFPB, 881 F.3d 75 (D.C. Cir. 2018), in which the appeals court, sitting en banc, upheld the statute’s constitutionality, including the CFPB’s structure. Defendants also had to overcome the rulings of myriad federal district courts, nearly all of which rejected constitutional claims.

In a 104-page ruling, Judge Loretta Preska rules that, because the CFPB’s structure is unconstitutional, it lacks the authority to bring claims under the CFPA and “is hereby terminated as a party” in the suit. However, because the New York AG has independent authority to bring claims under the CFPA, its concurrent claims survive. On the issue of constitutionality, however, the decision is woefully thin on independent analysis. Instead, the court merely adopted key portions of U.S. Appeals Court judge Kavanaugh’s dissent, “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.’” Surprisingly, however, the court takes it one step further, rejecting Judge Kavanaugh’s opinion that the remedy was 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 judge adopts Judge Henderson’s dissent arguing 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.”

Further, the court rejected the CFPB’s attempted ratification, in May 2018, of the prior decisions by Acting Director Mulvaney. The CFPB argued that, because the President may remove Mulvaney at will, defendants may not obtain dismissal on the grounds that the suit was initially filed by a director at the CFPB removable only for cause. In rejecting that ratification, the court concluded that the ratification does “not address accurately the constitutional issue raised in this case, which concerns the structure and authority of the CFPB itself, not the authority of an agent to make decisions on the CFPB’s behalf.”

To read the opinion, click here.

Why it matters

The decision has little impact on the defendants, whose claims may be pursued to the fullest extent by the New York AG. And the suit is not binding precedent for anyone other than the current parties. The CFPB is free to pursue other enforcement actions, even within the federal courts of New York. That said, look for other defendants outside the D.C. Circuit to cite this case as grounds for similar relief. Given the hostility of the current CFPB leadership to the Bureau’s significant enforcement powers, it is entirely possible that the Bureau will not seek an interlocutory appeal of this ruling.