Jim Flynn: Arbitration bites Wells Fargo customers
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Jim Flynn - Business (2013)

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On Jan. 31, the Consumer Financial Protection Bureau survived another near-death experience.

The U.S. Court of Appeals for the District of Columbia Circuit ruled, in a 7-3 decision, that the structure of the CFPB did not violate the separation of powers provisions of the U.S. Constitution.

In addition to the majority opinion in this case, there were three dissenting opinions and two concurring opinions, which totaled 250 pages of scholarly legal analysis. (This is not surprising since the D.C. Circuit is thought to be a stepping stone to the U.S. Supreme Court and the judges there like to show off.)

The claim that the CFPB is unconstitutional comes from it being led by a director appointed by the president and confirmed by the Senate but who cannot be fired by a later (and now unhappy) president other than for cause, meaning "inefficiency, neglect of duty, or malfeasance in office."

Giving the CFPB this independence was exactly what Congress wanted when it created the agency in 2010 as part of the massive Dodd-Frank Wall Street Reform and Consumer Protection Act. After greed in the financial services industry tanked the economy in 2008 and 2009, and it was obvious the regulatory structure then in place had failed its essential purpose, Congress wanted a watchdog agency that could carry out its agenda without undue meddling by the executive branch.

Although critics of the CFPB (stand in line) acknowledge that many other government agencies - referred to as "independent" agencies - function under a removal-only-for-cause structure, they are all headed by a commission and not a director. Brett Kavanaugh, one of the three dissenting judges (and former chair of the Federal Trade Commission), said this distinction is "profound."

"In a multimember independent agency, no single commissioner or board member can affirmatively do much of anything." But at the CFPB, one person gets to call the shots, and all the tweets and rants by a president can't change that. Congress, which created the CFPB, could change its structure. However, taking a position contrary to the interests of consumers doesn't seem to be a place anyone wants to go, especially in an election year.

The history of this case is interesting. In 2014, the CFPB started an administrative enforcement action against a large residential mortgage lender, PHH Corp. The CFPB concluded PHH was violating the Real Estate Settlement Procedures Act, which prohibits referral fees (aka kickbacks) in connection with mortgage lending. PHH vehemently denied the CFPB's claims, but after a nine-day hearing before an administrative law judge (a limited purpose judge who hears administrative agency enforcement actions), the CFPB ordered PHH to pay $109 million in restitution and fines.

PHH appealed, arguing that the CFPB had misinterpreted RESPA, but also maintained that the CFPB was an unconstitutional agency and should be shut down. PHH scored big points in this appeal. In a more than 100-page opinion issued in October 2016, a three-judge panel from the same court as last month's decision ruled that the CFPB had misinterpreted RESPA and the agency's structure violated the separation of powers provisions of the Constitution.

The court ruled that the Constitution does not allow for an independent agency run by a director who can only be fired for cause and (getting a bit carried away here) "the Director of the CFPB is the single most powerful official in the entire United States Government. . "

The CFPB was unhappy with the ruling and asked that the case be reheard by the entire court, which the court granted. So, with the recent full-court ruling, although the restitution and fine order against PHH has gone away, the CFPB continues to operate. But the case may very well end up in the Supreme Court, where a different outcome is possible.

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Jim Flynn is with the Colorado Springs firm of Flynn & Wright LLC. Contact him at moneylaw@jtflynn.com or via his website, jtflynn.com.

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