Hold the Champagne: Will the CFPB Court Decision Last?

Many people in the financial services world, including some credit unions, felt like celebrating on Oct. 11, 2016. That day, headlines announced a major defeat in court for the Consumer Financial Protection Bureau (CFPB): the U.S. Court of Appeals for the District of Columbia Circuit, often described as the nation's second most powerful court, had ruled that the structure of the CFPB was unconstitutional. The court said the statute that created the CFPB violated the constitutional doctrine of separation of powers not by creating an independent agency, but by vesting all the powers of that agency in the hands of a single director who is not subject to removal at the pleasure of the president, rather than a multi-member board or commission.

The decision was issued by a three-judge panel, which is the normal procedure. The portion of the decision on the separation of powers question was decided 2-1. The package of opinions on behalf of the panel as a whole, and on behalf of each of the two participating judges who did not author the official opinion of the court, is massive, totaling about 113 pages. They make good bedtime reading. In addition to the separation of powers issue, the court ruled on a number of other issues pertaining to the Real Estate Settlement Procedures Act (RESPA), due process of law when an agency applies a new interpretation retroactively, and statutes of limitations. On most of these issues, the court was unanimous. Those issues are quite important, but I will not discuss those here; suffice it to say that the CFPB's losing streak extended to all of them.

Now the CFPB, working with the Department of Justice, must decide whether and how to appeal this adverse decision. In my view, this massive loss on every issue, from the CFPB's structure to its statutory and regulatory interpretations, was not just another day at the office for the CFPB. It was a humiliation.

I will be very surprised if the government elects not to appeal. The CFPB has hinted publicly that it wants to appeal and is probably waiting for Justice Department permission to go ahead. If anyone on the government's legal team argues against an appeal, however, the argument may rest on two grounds.

The first ground would be that the loss was more symbolic than real. The court decided that the CFPB's constitutional problems could be cured rather simply. Rather than ruling that the entire agency needed to be rethought, it simply invalidated the provision of the law that made it independent from the President's supervisory authority over the executive branch. This means that the CFPB can carry on exactly as it has until now, except that the president can remove the director for any reason, or for no reason. As long as the current president or someone with a similar philosophy occupies the White House, that removal power is unlikely to cause fundamental change at the bureau.

The second ground might be that the executive branch, of which the Department of Justice is very much a part, is sometimes not enthusiastic about creating agencies beyond the president's control. These agencies have a long history in the United States, and they have caused Congress, the executive branch, and the Supreme Court itself to take evolving, or sometimes contradictory, positions on how they fit into the constitutional framework of our government. In fact, it was Franklin Roosevelt who most famously challenged a legislative restriction on his ability to remove a commissioner at an independent agency during the New Deal era. He lost in the Supreme Court, which decided that the restriction was lawful.

On a practical level, the court seems to have issued a major ruling with relatively modest implications. But putting that aside, this court opinion seems odd in a number of ways. While I cannot predict the future of the case with any certainty, in my opinion, those oddities increase the chances for reversal. Here are some of the vulnerabilities that I see:

First, all federal courts are bound by the principle that they should decide cases on the narrowest grounds possible. There are many reasons for this approach, including the avoidance of judicial activism. It is especially important in cases that may present both broad, constitutional issues and narrower, statutory or regulatory issues. That is the situation here. Yet the court seems to have strained to reach the constitutional issues when it could have avoided them by limiting its ruling to the other questions in the case. The partially dissenting opinion of one of the judges points this out effectively. The majority opinion tries to rebut the criticism, but not very persuasively. The fact that the elaborate constitutional discussion in the opinion leads to such a small practical result may reinforce the impression that the court was overly eager to deal with the constitutional issue. A preference for judicial restraint could give a reviewing court a handy basis for reversing the case.

Second, the court's opinion is strikingly short on citations to precedent in one key respect. The opinion spends many pages analyzing the history of independent agencies in the structure and function of the U.S. government. It relies very heavily on the fact that virtually no such agencies have been placed under the authority of a single director, rather than a group, in the past. But the court then goes further and says that this historical pattern was born out of a belief that a board or commission would create its own checks and balances that would help prevent threats to individual liberty. The court cites many law review articles and other non-judicial writings in support of this theory. But the court cites almost no court cases, in the Supreme Court or otherwise, in support of this idea. In court, prior judicial opinions are what truly count as authoritative precedent. Their absence in key parts of the current case is a weakness that a reviewing court may notice.

Third, some of the language in the opinion creates a tone that simply struck me as unusual in what clearly aims to be a major, scholarly analysis of an important issue. In places, the court's words read more like an issue brief for use with members of Congress than a serious and restrained judicial opinion. For instance, the court suggests that the CFPB Director is in some sense "the single most powerful official in the entire United States Government, at least when measured in terms of unilateral power. That is not an overstatement." The court then goes on to suggest that the director of the CFPB is more powerful than the Speaker of the House, the Senate Majority Leader, or the Chief Justice of the United States. Really? I doubt that Richard Cordray feels that way.

I don't want to make too much of this, but I believe the style of the opinion may contribute to a reviewing court's sense that it needs to review the decision with a critical eye.

Of course, judges at every level are independent thinkers with their own approaches to the issues. No one can be sure what will happen during any future review. But I would advise keeping the champagne corked for now. There will be plenty of time to open it later if the current court's opinion in this case is upheld or maybe even expanded at a higher level of the judicial system.

Eric Richard is a principal in the Washington law firm of CU Counsel PLLC and formerly served as executive vice president and general counsel of the Credit Union National Association from 1997-2015.



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