WASHINGTON — Appeals court justices appeared divided on whether the structure of the Consumer Financial Protection Bureau is constitutional during oral arguments Wednesday, with some judges suggesting the court had no power to decide otherwise while others said the current system was illogical and illegal.

The full D.C. Circuit — 11 judges in all, minus one recusal — heard arguments in PHH v. CFPB, a case that focuses on whether the agency's status as an independent regulator is incompatible with its single-director structure.

But the judges, six appointed by Democratic presidents while four were appointed by Republicans, sent mixed signals on which way they plan to rule, making it unclear which way the decision will go.

Theodore Olson
Theodore Olson, the attorney representing the mortgage servicer PHH, said that the Constitution “empowers the president to hold executive officers accountable” by being able to remove them at will. Bloomberg News

Some justices appeared to favor CFPB arguments that the agency is no different than other independent agencies, and its director cannot be fired at will by the president.

Theodore Olson, the attorney representing the mortgage servicer PHH, said that “the president alone shall take care that the laws be faithfully executed” and that the Constitution “empowers the president to hold executive officers accountable” by being able to remove them at will.

But Judge Thomas Griffith cut Olson short, saying the real question at hand was whether the powers in question — those wielded by the director of the CFPB — are greater or lesser than those wielded by the Federal Trade Commission.

That standard is relevant because the Supreme Court ruled in its 1935 opinion Humphrey’s Executor v. United States that the president could not remove a member of the Federal Trade Commission at will, Griffith said. He added that the court found the limitation of the president’s authority was constitutional in part because the agency’s authorities did not diminish the president’s ability to execute his office.

“There is very little distinction between the powers being exercised in Humphrey’s Executor and the powers being exercised here,” said Griffith, a George W. Bush appointee. “How is this different, in terms of diminishing the powers of the president, from Humphrey’s Executor?”

Olson replied that the CFPB has vested more power within a single director than any other agency created by Congress, but Griffith said that even if that is true, it means that the president has the authority to appoint a powerful regulator in a way that exceeds his authority to appoint members of other independent commissions.

“That would seem to me to be strengthening the president’s power, to shape the face of an agency with one person,” Griffith said.

Judge David Tatel, who was appointed to the court by President Bill Clinton, echoed the centrality of Humphrey’s Executor and a similar case, Morrison v. Olson — which also upheld the constitutionality of U.S. Office of Independent Counsel — in the court’s thinking regarding this case.

“We are an appeals court, and we are bound by Supreme Court precedent,” Tatel said. “Even if I agreed with you, I don’t see how, as a judge on an appeals court, bound by Morrison … how we can go there.”

But not everyone was convinced.

Judge Brett Kavanaugh, who was also appointed by President George W. Bush and who previously ruled against the CFPB last fall as part of a three-judge panel, said the question perhaps should revolve around whether the president’s ability to appoint the head of the CFPB matters in terms of his ability to execute his constitutional prerogatives.

He supposed that, if a Trump administration appointee to the post were to begin their term in July 2018, they would serve well into the next president’s administration and would be free to act counter to the administration’s policies.

“The next president may run on a platform of consumer protection — perhaps the person who created" the CFPB, Kavanaugh said, referring to Sen. Elizabeth Warren, D-Mass. “They can’t appoint [a new director]. That sounds crazy, in terms of constitutional text, structure and frankly common sense.”

Judge Robert Wilkins, appointed to the court by President Barack Obama, said that as a practical matter, Humphrey’s Executor ruled in favor of the dismissed official but entitled them to back pay, not a reinstatement of office.

“As long as the president is willing to cut a check, even if the court is against him, he can remove an official of cause,” Wilkins said.

The case arose after the CFPB filed a $109 million enforcement action against mortgage originator PHH in 2014.

PHH had an arrangement for several years with certain preferred mortgage insurers whereby PHH would steer its clients toward those preferred insurers, who in turn had reinsurance arrangements with a PHH affiliate. CFPB said this amounted to a kickback scheme — a violation of the CFPB’s interpretive guidance for the Real Estate Settlement Procedures Act, or Respa. The bureau further applied fines against the firm retroactively, even from before the guidance had been issued.

Among other arguments, PHH argued that CFPB did not have the authority to issue the action because its single-director structure violated the Constitution’s separation of powers clause. In October, a three-judge panel from the same court agreed, saying that the CFPB could either be restructured as an independent commission or turned into an executive agency whose head serves at the pleasure of the President. The judges opted for the latter, effectively nullifying the “for cause” limitation to the president’s power to dismiss the CFPB director.

The CFPB appealed the ruling to the full D.C. Circuit, but the case’s path took an unexpected turn with the election of Donald Trump in November. The Trump Justice Department later sided with PHH in the case, and because of a peculiarity in the CFPB’s authorizing statute, the agency requires Justice Department approval to appeal to the Supreme Court.

The case has also led to a tense standoff between Trump and CFPB Director Richard Cordray, with the Trump administration possibly waiting for a decision in the case before opting to fire the CFPB director. The case could also have further effects on other federal agencies with independent structures, such as the Office of the Comptroller of the Currency and Federal Housing Finance Administration.

Judge Janice Brown, who was appointed to the court by President George W. Bush, said there are few, if any, instances of a president firing an independent regulator for cause, which raises the question of whether that provision effectively means the official cannot be removed.

“If ‘for cause’ removal is something that has never been used successfully, that does diminish the president’s authority,” Brown said. “However you want to say it, if the president can’t remove them" it is a limitation.

But Lawrence DeMille-Wagman, arguing on behalf of the CFPB, said there is accountability inherent in the “for cause” dismissal authority, even if examples of such a firing are few. Traditionally, independent regulators who are informed they will be dismissed opt to resign first, he said, and the president can influence their policy choices and use the dismissal clause as leverage.

“It’s not a nothing,” he said.

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