In response to a challenge from mortgage servicer PHH Corp. regarding the constitutionality of the single director structure of the Consumer Financial Protection Bureau (the CFPB or Bureau), the United States Court of Appeals, District of Columbia Circuit (the DC Circuit) found that independent agencies, such as the CFPB, must be led by multi-member commissions in order to be constitutional.1 To cure this unconstitutional structure, the DC Circuit used the Dodd-Frank Act’s severability clause and effectively deleted the provision that the President may remove the CFPB director only for “inefficiency, neglect of duty or malfeasance of office.” The practical effect of removing this “removal for cause” clause is that the CFPB is now an executive agency which may have a single director (akin to the Department of Commerce or Environmental Protection Agency), and Director Cordray must follow the direction of the President of the United States.

This alert, the first of a two part series, explains the DC Circuit’s constitutional analysis and the implications for the CFPB going forward, particularly with respect to a new incoming President of the United States.

Our second installment, PHH v. CFPB, Part II: CFPB RESPA Duplicate Fail will discuss the DC Circuit’s finding that the CFPB not only misinterpreted the Real Estate Settlement Procedures Act, but also violated “bedrock due process principles” in applying that misinterpretation retroactively. Part II will address the state of RESPA interpretation today, and it will also suggest how this example of the CFPB’s due process violation may help companies navigate CFPB enforcement actions in the future.

The Trouble with Humphrey

To appreciate the full reach of the DC Circuit’s recent decision, a little history about the CFPB and the legality of independent regulatory agencies is helpful.

The CFPB, born out of the recent Great Recession, was created to assume primary authority for administering an alphabet soup of federal consumer financial protection laws that had previously been administered by an alphabet soup group of federal agencies. The Dodd-Frank Act, the CFPB’s originating statute, gives the CFPB novel powers, such as the authority to regulate “abusive” conduct (a term essentially left open for the CFPB to define through enforcement actions).

Even with the Bureau’s extensive authority, the authors of Dodd-Frank were concerned that the nascent federal consumer watchdog could be subject to the political whims of Congress or an unfriendly administration. As such, Congress decided to shield the CFPB from the annual Congressional appropriations process (instead, the Bureau’s budget is disbursed by the Federal Reserve). Congress also shielded the CFPB by making it into an independent agency (like the Federal Trade Commission), rather than an executive agency (like the Department of Commerce). The heads of independent agencies can be removed only for cause, rather than serving at the pleasure of the President.

Independent agencies are not a new concept – indeed, they trace their roots back to the turn of the last century. As the United States economy matured beyond its agrarian roots, Congress created “quasi-legislative” and “quasi-judicial” agencies to bring market oversight to an increasingly complex economy. At times, this development created consternation in the Executive Branch, as demonstrated by the famous Supreme Court case, Humphrey’s Executor v. United States.2

At the heart of the case was a dispute between President Franklin D. Roosevelt, and the pro-business Federal Trade Commission (FTC) Commissioner, William Humphrey, who rejected FDR’s progressive New Deal policies. (Humphrey had been appointed by FDR’s Republican predecessor, Herbert Hoover). Although FDR requested that Humphrey resign, and ultimately tried to fire him, Humphrey continued coming into work, and the high-stakes employment dispute ultimately made its way to the Supreme Court.

The Court observed that the Federal Trade Commission Act permitted the President to dismiss an FTC commissioner only for “inefficacy, neglect of duty, or malfeasance in office.” The Court held that FDR’s dismissal of Humphrey was based upon political differences, rather than the for-cause justification that the FTC’s authorizing statute demanded.

Humphrey’s Executor has since become the seminal Supreme Court case establishing the constitutionality of independent regulatory agencies. The Court drew a line between executive officers, on the one hand, and quasi-legislative or quasi-judicial officers, on the other. The former, such as the Secretary of State, serves at the pleasure of the president. The latter, such as an FTC Commissioner, can only be removed for cause. The Court reasoned that the Constitution does not give “illimitable power of removal” to the President in the context of quasi-legislative or quasi-judicial contexts because Congress, in creating such agencies, requires them to act independently of executive control.

More recent Supreme Court decisions have been in tension with Humphrey’s Executor, such as Free Enterprise Fund v. Public Company Accounting Oversight Board,3 holding that the President’s inability to remove members of the Public Company Accounting Oversight Board (PCAOB) was unconstitutional, even though the Securities Exchange Commission, which supervises the PCAOB, could remove PCAOB board members for cause. Even with these tensions, the legality of independent regulatory agencies is generally well established and well beyond the reach of the DC Circuit’s consideration.