Bureau of Consumer Financial Protection Once Again Deemed Unconstitutional

The Bureau of Consumer Financial Protection has once again been deemed unconstitutional, this time in an opinion issued on June 21, 2018, by Loretta A. Preska, Senior U.S. District Judge for the Southern District of New York, in Consumer Financial Protection Bureau et al. v. RD Legal Funding LLC et al. Although there are a number of interesting components to this case, the aspect of the decision that is most likely to garner headlines is the constitutionality holding. Specifically, Judge Preska determined that the Bureau’s structure as set forth in Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act violates the Constitution’s separation of powers because it attempts to create “an independent agency that exercises substantial executive power and is headed by a single Director.”

Judge Preska notes at the outset of the constitutionality discussion that, while she certainly is aware of the contrary holding from the Court of Appeals for the D.C. Circuit on January 31, 2018, in PHH v. CFPB, the Southern District of New York is not bound by decisions of the D.C. Circuit Court of Appeals. Instead of adopting the majority’s decision from the PHH case, Judge Preska instead chose to adopt Sections I-IV of the dissent that was written by Judge Brett Kavanaugh and Section II of the dissent written by Judge Karen LeCraft Henderson.

Collectively, this means that Judge Preska held that, “based on considerations of history, liberty, and presidential authority,” the Bureau’s single director structure, whereby the director can only be removed by the president for cause, is unconstitutional. According to Judge Preska, rather than simply strike the for-cause removal provision from Title X of Dodd-Frank, the appropriate remedy for this situation is to strike the entirety of Title X.

Interestingly, the opinion also sheds light on the Bureau’s attempt to rebut the constitutional question. The Bureau filed its action in this case on February 7, 2017, while Richard Cordray was still serving as the director of the Bureau. After Mick Mulvaney was appointed by the president to serve as acting director, the Bureau filed a Notice of Ratification with the court, attempting to ratify its decision to file the enforcement action. The Bureau then apparently argued that, because Acting Director Mulvaney is removable by the president at will, the defendants’ constitutional argument was mute. Judge Preska disagreed with this argument, and noted that “the constitutional issues presented by the structure of the [Bureau] are not cured by the appointment of Mr. Mulvaney. As Defendants point out, the relevant provisions of the Dodd-Frank Act that render the [Bureau’s] structure unconstitutional remain intact.”

As a result of the unconstitutionality holding, Judge Preska dismissed the Bureau’s claims because it “lacks authority to bring [the] enforcement action,” and terminated the Bureau as a party to the action. The attorney general for the state of New York, who joined the Bureau in its suit against RD Legal Funding and the other defendants, can proceed with the case. We will continue to track this case and any other developments that occur.