WASHINGTON (Legal Newsline) – An appeals court's ruling that the U.S. Consumer Financial Protection Bureau's structure is unconstitutional was surprising because of what it declared and for its language, two Washington, D.C.-based regulatory attorneys say.

"We agree that this is a very unusual ruling," David Felt and Tom Pahl of Arnall Golden Gregory's D.C. office said during a Legal Newsline joint email interview.

"Federal courts have the authority to declare statutes unconstitutional, but it is rare that they use that authority to declare that the structure of federal agency is unconstitutional.

"We also would note that the court used very strong language in describing the risks to the public of the CFPB exercising authority without adequate Presidential control and equally strong language in setting forth how aggressive the CFPB actually had been in doing so with regard to PHH."

Felt and Pahl are members of the firm's privacy and consumer regulatory practice while Felt also works in the firm's government and regulatory affairs area.

In the case, PHH Corporation et al. v. the Consumer Financial Protection Bureau, the U.S. Court of Appeals for the District of Columbia Circuit ruled in favor of lender PHH, which challenged to the financial watchdog provisions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

The court threw out a $109 million penalty that had been imposed on the company and also ruled the CFPB to be unconstitutional because its director was too secure in his/her position. The current director is Richard Cordray, a former attorney general of Ohio.

Before the ruling, the CFPB director, who runs the bureau without a board, could only be removed for cause. With the appeals court's ruling, the director now serves at the will of the president.

In July 2014, PHH objected to CFPB accusations that the lender referred customers to mortgage insurers that also purchased reinsurance from a PHH unit. The CFPB claimed the reinsurance payments were improper kickbacks and imposed a the penalty. The appeals court did not agree.

The more brow-raising part of the case is the change possibly wrought in the relationship between the CFPB director and the president.

"It is always hard to speculate as to why courts rule as they do," Felt and Pahl said. "Our impression, however, is the court here feared that the lack of control by the President over the CFPB Director posed a great risk of abuse of power and that how the CFPB actually used its power with regard to PHH evidenced to the court that its fears had been realized.

"For that reason, the court apparently believed that it was necessary to send a strong message and it did."

Even more striking was the government's argument in this case.

"One aspect of this case that we find interesting is that it is forcing the President to argue that he (or she) should have less control over an administrative agency than the court has required," Felt and Pahl said.

"It is unusual, although not unprecedented, for the administration to take this position, but it is an argument that may come back to haunt future presidents if the PHH decision is overturned. The early cases in this area always pitted the President against a political appointee whom he was trying to get rid of. "

Other questions remain, such as whether the case will be appealed and what would happen if the case was affirmed on appeal.

"Either of the parties could ask that the entire D.C. Circuit review the decision of the panel," Felt and Pahl said. "If the entire D.C. Circuit affirms, the CFPB could continue to operate, that is, engaging in the same examination, enforcement, and rulemaking activities the CFPB does today.

"The only difference is that the President would be able to remove the director of the CFPB at any time for any reason, thus ensuring that the CFPB is politically accountable for its actions."

That could lead to a president who names CFPB directors who will ensure the bureau goes in the direction the president wants it to.

"Given that Director Cordray was appointed by President Obama, it seems very unlikely that President Obama would remove him," Felt and Pahl said. "If Mr. Trump is the new President, he would almost certainly remove Director Cordray expeditiously and nominate someone else to replace him.

"If Secretary Clinton is the new President, she would be much less likely to remove Director Cordray, especially before his term expires in the summer of 2018."      

                

That said, it isn't clear what the U.S. Supreme Court, hypothetically, may decide or even if it would be offered the case.

"It is not clear yet whether the parties will ask the Supreme Court to hear the case or, if asked, whether the Supreme Court would decide to hear it," Felt and Pahl said. "Assuming the Court decides to hear the case, it involves fundamental constitutional issues which are more likely than some other issues to be decided based on the ideology of the individual justices."

The U.S. Senate's refusal to consider President Obama's nomination to replace the late Justice Antonin Scalia, Sen. John McCain's comments that Senate Republicans would block a potential Clinton nomination and, perhaps, a possible blockage of a Trump nomination could mean the high court may be in a poor position to hear the case.

"The Supreme Court currently has eight members, four of whom generally are liberal and the other four of whom generally are conservative," Felt and Pahl said. "So the Court may split 4-4 on the fundamental constitutional issues implicated in the decision.

"Note that at the Supreme Court ties are decided in favor of the party who won below, i.e., a 4-4 split would leave in effect the decision of the D.C. Circuit."

However, the decision currently only applies to the D.C. Circuit.

"The other U.S. Courts are not bound by it and it is conceivable that they would reach the opposite result on the Article 2 issue," Felt and Pahl said. "The case could then move back up to the Supreme Court, which, hopefully, would have a full complement of members at that point."

There may also be congressional action.

"The D.C. Circuit decision indicated that an independent agency would not violate Article II of the Constitution if: (1) it has a single head the President can remove at will, or (2) it is a multi-member body whose members can be removed for cause," Felt and Pahl said.

"The D.C. Circuit essentially reworked the Dodd-Frank Act to conform to (1) and thereby preserve the CFPB’s constitutionality. Having done so, there is no need for Congress to take any action for the CFPB to continue to operate.

"Note, however, that Republicans in Congress are advocating that legislation be enacted to convert the CFPB into (2), although the prospects that Congress would pass legislation in the near future seem remote."

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