Sullivan & Cromwell Discusses D.C. Circuit Ruling Invalidating CFPB Structure

On October 11, 2016, a panel of the U.S. Court of Appeals for the D.C. Circuit held that the Consumer Financial Protection Bureau (the “CFPB”) is “unconstitutionally structured” because its authority is vested in a single appointee who can be removed by the President only for cause.  To remedy this constitutional flaw, the Court severed the unconstitutional “for-cause” provision in the legislation (Dodd-Frank) that created the CFPB.  “As a result, the CFPB now will operate as an executive agency.  The President of the United States now has the power to supervise and direct the Director of the CFPB, and may remove the Director at will at any time.”

In addition to the constitutional flaw, the Court held that the CFPB’s underlying decision suffered from several “statutory” flaws:  (1) the CFPB misinterpreted the statute at issue, section 8 of the Real Estate Settlement Procedures Act; (2) by retroactively applying a “new” interpretation to PHH’s past conduct and requiring PHH to pay $109 million for that conduct, the CFPB violated the “bedrock” principle of due process that the people should have fair notice of what conduct is prohibited; and (3) the CFPB’s administrative enforcement proceedings are subject to statutes of limitations.  Although the constitutional holding has received a great deal of attention, we see potentially more significant and immediate implications arising from the Court’s holding regarding statutes of limitations in enforcement proceedings.  That holding should be of substantial interest to both the federal banking agencies and the financial institutions they regulate.


Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) created the CFPB as an “independent bureau” in the Federal Reserve System, headed by a single Director appointed by the President with the advice and consent of the Senate and removable by the President only for cause (i.e., inefficiency, neglect of duty, or malfeasance in office).[1]  Dodd-Frank confers broad authority on the CFPB, and hence the Director, to “regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws,”[2] which include the Real Estate Settlement Procedures Act (“RESPA”), and to implement those laws through “rules, orders, guidance, interpretations, statements of policy, examinations, and enforcement actions.”[3]

In January 2014, the CFPB filed an administrative enforcement proceeding against PHH Corporation, a mortgage loan originator, and certain of its affiliates (collectively, “PHH”), alleging that PHH’s “captive reinsurance” arrangements with mortgage insurers violated the prohibition in section 8 of RESPA on payments for referrals—“kick-backs”—in connection with mortgage loans.  Under those arrangements, PHH referred mortgage loan borrowers to the insurers with which it had reinsurance arrangements, and those mortgage insurers in turn purchased mortgage reinsurance from PHH.[4]

The CFPB’s proceeding against PHH was heard in the first instance by an administrative law judge (“ALJ”), whose November 2014 decision recommending injunctive relief and disgorgement of $6.4 million fully satisfied neither the CFPB nor PHH.  Both parties appealed to the Director in the first appeal of a CFPB administrative enforcement proceeding.  In June 2015, the Director issued a widely publicized decision upholding the ALJ’s decision in part and reversing it in part.  Applying a de novo standard of review, the Director held, among other things, that (1) no statute of limitations applies when the CFPB pursues a RESPA violation in an administrative enforcement proceeding, (2) section 8 of RESPA bars captive reinsurance arrangements, and (3) a 1997 letter issued by the CFPB’s predecessor agency charged with implementing and enforcing RESPA, the Department of Housing and Urban Development (“HUD”), which stated that certain captive reinsurance arrangements are permissible under section 8, provides no protection to PHH because it was not a rule, regulation or interpretation published in the Federal Register.  The Director further ordered PHH to disgorge over $109 million in premiums it received pursuant to the captive reinsurance arrangements—a figure premised on the Director’s finding that PHH had violated RESPA every time it received a reinsurance premium from a mortgage insurer to which it had referred a borrower, and about 17 times the amount recommended by the ALJ.

PHH promptly petitioned the U.S. Court of Appeals for the D.C. Circuit for review of the CFPB’s decision and requested a stay pending judicial review arguing, among other things, that the CFPB is unconstitutionally structured and that the Director’s decision suffered from several statutory flaws.  A different panel of the Court granted the stay motion in August 2015, and the merits panel heard oral arguments in April 2016.

The Panel Decision

On October 11, 2016, in an eagerly awaited and very lengthy decision authored by Judge Brett Kavanaugh, the Court agreed with PHH that the CFPB is unconstitutionally structured and, as we previously suggested it might,[5] severed Dodd-Frank’s for-cause-removal provision from the remainder of the statute.[6]  The Court also agreed with PHH’s statutory objections to the Director’s decision.  Accordingly, the Court granted PHH’s petition for review, vacated the CFPB’s order against PHH, and remanded the case to the CFPB for further proceedings consistent with the opinion.  At the same time, the Court sua sponte ordered that issuance of the mandate be stayed until seven days after disposition of any timely petition for rehearing or petition for rehearing en banc.

Judge Raymond Randolph joined Judge Kavanaugh’s opinion in full and also filed a concurring opinion identifying what he believed to be an additional constitutional flaw based on the process by which the ALJ was appointed.

Judge Karen Lecraft Henderson concurred in part and dissented in part, agreeing with the majority as to the statutory flaws but explaining that she did not believe it was appropriate to reach the constitutional question (and thus expressing no opinion on the merits of that question).

Constitutional flaw

The bulk of the Court’s opinion is devoted to the rationale for concluding that the CFPB is unconstitutionally structured.  The majority opinion begins by tracing the evolution of independent agencies and their relationship to the executive power the Constitution vests in the President.  Traditionally, only “executive agencies” (or “non-independent agencies”) have been headed by a single official, as the CFPB is, and that official is subject to removal at the pleasure of the President.  This broad removal authority is necessary to ensure that the President can maintain control over the exercise of executive power.  As Judge Kavanaugh explains, over time, Congress began creating “independent agencies.”  These agencies exercised executive power independent of the President, and the President could remove their heads only for cause, but these agencies have traditionally been governed by multimember commissions or boards.  Questions about the constitutionality of these independent agencies were largely resolved by the Supreme Court in its 1935 Humphrey’s Executor decision.[7]  The question presented in this case, according to the majority, was whether Humphrey’s Executor extended to the CFPB structure:  an independent agency headed not by a multi-member commission but rather by a single Director.

In answering this question, the Court first presents a case for the CFPB as a “historical anomaly.”  Until the CFPB, “independent agencies exercising substantial executive authority have all been multi-member commissions or boards.”  Although there are a handful of examples of independent agencies headed by a single person removable only for cause, the Court said those agencies are different in kind from the CFPB in that they do not exercise the core executive power of bringing enforcement actions for violations of statues or agency rules and, in any event, lack “deep historical roots” or have been “constitutionally contested.”  Indeed, when viewed against the historical record of independent agencies, the CFPB is “exceptional in our constitutional structure and unprecedented in our constitutional history.”  Because in all other instances, heads of executive agencies either (i) are subject to the President’s direct control, (ii) share their authority with multiple co-heads, or (iii) lack the authority to bring enforcement actions against private individuals, the Court describes the CFPB Director as, “other than the President, . . . the single most powerful official in the entire United States Government, at least when measured in terms of unilateral power.”

Relying heavily on recent Supreme Court precedent,[8] Judge Kavanaugh explains that this departure is especially significant because, in separation-of-powers disputes like this one, which cannot be resolved by the constitutional text alone, historical practice plays a key role in defining constitutional limits.  Congress has traditionally required multi-member bodies at the helm of independent agencies as a “critical substitute check on the excesses of any individual independent agency head—a check that helps to prevent arbitrary decision making and abuse of power, and thereby to protect individual liberty.”  The Court concludes that because the CFPB departs so markedly from this “settled historical practice”—a departure that makes a significant difference for the individual liberty protected by the Constitution’s separation of powers—the CFPB’s structure is unconstitutional.

Turning to the remedy for the constitutional infirmity, the Court concludes that the for-cause removal provision should be severed from Dodd-Frank.  “As a result, the CFPB now will operate as an executive agency. The President of the United States now has the power to supervise and direct the Director of the CFPB, and may remove the Director at will at any time.”  The Court expressly declined to “consider the legal ramifications of [the] decision for past CFPB rules or for past agency enforcement actions.”  Instead, the Court left that question unresolved, noting that other agencies have recently been on the “receiving end of successful constitutional and statutory challenges to their structure and legality,” and that, “[w]ithout major tumult, the agencies and courts have managed to work through issues regarding the legality of past rules and of past or current enforcement actions.”

Statutory flaws

Turning to PHH’s statutory objections to the Director’s decision, the D.C. Circuit concluded that, contrary to the CFPB’s interpretation, section 8 of RESPA allows captive reinsurance arrangements so long as the mortgage insurance companies pay the reinsurers no more than reasonable market value for services provided.  No deference was afforded to the CFPB’s interpretation.

The Court also held that, even if the CFPB’s interpretation of section 8 were permissible, it would represent a “complete about-face” from HUD’s “consistent” interpretation, characterized in the opinion as “agency guidance provided by top HUD officials and . . . given repeatedly,” which was widely known and relied on in the mortgage lending industry.  PHH justifiably relied on that interpretation and did not have fair notice of the CFPB’s new interpretation at the time of the conduct at issue.  Applying another recent Supreme Court ruling,[9] the Court concluded that, by retroactively applying its changed interpretation to PHH’s past conduct and requiring PHH to pay $109 million for that conduct, the CFPB violated the “bedrock” principle of due process that the people should have fair notice of what conduct is prohibited.[10]  This conclusion is in our view not particularly groundbreaking.

We believe the Court’s other statutory holding could prove potentially significant.  Relying at least in part on “[t]he general working presumption in federal civil and criminal cases . . . that a federal civil cause of action or criminal offense must have some statute of limitations and must not allow suits to be brought forever and ever after the acts in question[,]” the Court held that the CFPB “misread” both Dodd-Frank and RESPA in concluding that no statute of limitations was applicable in this case.  As to Dodd-Frank, the Court held that the statute empowers the CFPB to conduct hearings and adjudication proceedings to enforce federal consumer protection laws, including RESPA, “‘unless such Federal law specifically limits the Bureau from conducting a hearing or adjudication proceeding.’  …  Obviously, one such ‘limit’ is a statute of limitations.”  The CFPB’s administrative adjudications, therefore, are subject to the statutes of limitations of the various federal consumer protection laws it is charged with enforcing.  As to RESPA, contrary to the CFPB’s interpretation, the Court held that the three-year statute of limitations in RESPA applies not only to “CFPB actions to enforce Section 8 that are brought in court, but also for CFPB actions to enforce Section 8 that are brought administratively.”

The Court cites two statutory provisions in support of the “general working presumption” that a statute of limitations applies in federal civil and criminal cases.  Although those statutory provisions, 28 U.S.C. § 2462 and 18 U.S.C. § 3282, relate to penal actions (civil fines, penalties or forfeitures and non-capital criminal offenses, respectively), the Court’s decision encompasses not just the penal aspects but also the remedial aspects of the CFPB’s decision.  Although the impact on extant enforcement actions consensually entered into with financial institutions remains to be determined, this ruling could have significant implications for institutions facing future enforcement actions brought not only by the CFPB but also by the federal banking agencies.  Historically, the federal banking agencies have not viewed their cease and desist authority, which includes the authority to order restitution to consumers or other remediation, as bound by any statute of limitations.  On this basis, they have ordered institutions to provide restitution for or otherwise remediate violations that occurred well outside of any potentially applicable statute of limitations.  And, indeed, since section 8 of the Federal Deposit Insurance Act—the provision under which the federal banking agencies issue cease and desist orders—includes no statute of limitations, it is unclear what statute of limitations would apply if not the general five-year statute of limitations in 28 U.S.C. § 2462.


We believe it highly likely that a petition for rehearing en banc will be filed, and, whatever the result, we would expect a petition for certiorari to the U.S. Supreme Court.[11]  Until the matter is resolved, the ultimate effect of the Court’s ruling will be uncertain.  If the ruling stands, however, its ramifications could be significant.  The Court’s constitutional holding is receiving a great deal of attention, and, indeed, could result in challenges to any enforcement or regulatory action taken at a time when the CFPB was unconstitutionally structured.  The debate around the constitutionality of the CFPB is not likely to be resolved any time soon given the various challenges at different stages of adjudication[12] and the continuing Congressional interest in the structure of the CFPB.  As noted above, however, we see potentially more significant and immediate implications stemming from the D.C. Circuit’s holding as to statutes of limitations in enforcement proceedings.  That holding should be of substantial interest to both the federal banking agencies and the financial institutions they regulate.


[1]   12 U.S.C. § 5491.

[2]   12 U.S.C. § 5491(a)

[3]   12 U.S.C. § 5492(a)(10).

[4]   The reinsurance was purchased from a PHH subsidiary, Atrium.

[5]   See Sullivan & Cromwell LLP Memo to Clients, D.C. Circuit Allows Challenges to the CFPB’s Constitutionality to Proceed: Separate Panels Reverse District Court Dismissal of Texas Bank’s Challenges on Standing and Ripeness Grounds and Grant Mortgage Servicer’s Motion to Stay CFPB Action Pending Judicial Review (August 7, 2015).

[6]   The Court specifically noted:  “Some have suggested that the CFPB Director is similar to the Comptroller of the Currency.  But unlike the Director, the Comptroller is not independent. The Comptroller is removable at will by the President.  See 12 U.S.C. § 2 (‘The Comptroller of the Currency shall be appointed by the President, by and with the advice and consent of the Senate, and shall hold his office for a term of five years unless sooner removed by the President, upon reasons to be communicated by him to the Senate.’).”

[7]   Humphrey’s Executor v. United States, 295 U.S. 602 (1935).

[8]   NLRB v. Noel Canning, 134 S. Ct. 2550 (2014) and Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010).

[9]   Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156 (2012).

[10]  In a footnote, the Court states that its holdings as to the CFPB’s misinterpretation and retroactive application of section 8 represent alternative holdings and, as such, both constitute binding precedent of the Court.

[11]  The CFPB has authority under the Dodd-Frank Act to represent itself in the Supreme Court, as long as it makes a written request to the Attorney General, and the Attorney General concurs.  12 U.S.C. § 5564 (e).

[12]  On July 12, 2016, in a separate challenge to the CFPB’s constitutionality, State National Bank of Big Spring v. Lew, the U.S. District Court for the District of Columbia, following remand from the D.C. Circuit, deferred ruling on the plaintiffs’ attack on the CFPB on separation of powers grounds because PHH’s case was pending before the D.C. Circuit.  In that case, the plaintiffs lodged a separate attack on the CFPB:  that the recess appointment of the Director was unconstitutional and that his subsequent ratification of actions taken during the period between that recess appointment and his Senate confirmation were invalid.  While the district court appears to have agreed that the recess appointment was invalid—a conclusion consistent with the Supreme Court’s decision in Noel Canning—it disagreed as to the legal consequences, finding that the ratification after the Director was properly appointed resolved any constitutional deficiency.  Given the D.C. Circuit’s decision in PHH, the district court presumably now will rule on the plaintiffs’ separation of powers claim.  In reaching its conclusion, the court relied on an April 14, 2016 decision by a divided panel of the Ninth Circuit in CFPB v. Chance Edward Gordon.  There, the Court concluded that “Congress authorized the CFPB to bring the action in question. . . .  Because the CFPB had the authority to bring the action at the time Gordon was charged, Cordray’s August 2013 ratification, done after he was properly appointed as Director, resolves [the alleged constitutional] deficiencies.”  This decision was reached over the vocal dissent of Circuit Judge Ikuta, who explained that the Director was not properly appointed by the President and therefore could not exercise the executive power necessary to bring the enforcement action against Gordon.  On July 20, 2016, the full Ninth Circuit denied a petition for rehearing en banc.  On September 22, 2016, Justice Kennedy extended the time to file a petition with the Supreme Court to November 17, 2016.

This post comes to us from Sullivan & Cromwell LLP. It is based on the firm’s memorandum, “D.C. Circuit Invalidates CFPB Structure as Unconstitutional; Rejects ‘Flawed’ Statutory Application in Enforcement Proceeding,” dated October 13, 2016, and available here.