Southern District of New York Holds the CFPB Is Unconstitutionally Structured

By: Louise Bowes Marencik, Diana M. Eng, and Jonathan K. Moore

On June 21, 2018, the United States District Court for the Southern District of New York (“Southern District”) held that Title X of the Dodd Frank Act, which established the Consumer Financial Protection Bureau (“CFPB”) as an “independent bureau” within the Federal Reserve System, is unconstitutional.

In Consumer Financial Protection Bureau v. RD Legal Funding, LLC, et al., the CFPB and The People of the State of New York, by Eric T. Schneiderman, Attorney General for the State of New York (collectively, “Plaintiffs”) alleged that the defendant entities violated the Consumer Financial Protection Act (“CFPA”) by offering cash advances to consumers awaiting payouts on settlement agreements or judgments entered in their favor, which Plaintiffs argued were actually usurious loans prohibited by state law. 2018 U.S. Dist. LEXIS 104132 (S.D.N.Y. June 21, 2018). The consumers at issue were class members in the National Football League Concussion Litigation class action, and individuals eligible for compensation from the September 11th Victim Compensation Fund of 2001.

Defendants filed a motion to dismiss arguing, among other things, that the Consumer Financial Protection Bureau is unconstitutionally structured and thus lacks the authority to bring causes of action under the CFPA. This issue was recently decided by the Court of Appeals for the District of Columbia Circuit’s holding in PHH Corp v. CFPB, 881 F. 3d 75 (D.C. Cir. 2018), which held that the for-cause removal provision of Title X is constitutional because it does not interfere with the President’s executive power and does not preclude the President from firing the director of the CFPB without cause.

The Southern District rejected the D.C. Circuit’s holding in PHH Corp., noting that it was not binding. Rather, the Southern District agreed with the dissent in PHH Corp., which found that the structure of the CFPB is unconstitutional “because it is an independent agency that exercises substantial executive power and is headed by a single Director.” 881 F. 3d 75, 198. However, the Southern District respectfully disagreed with Judge Kavanaugh’s dissent in PHH, which proposed severing the for-cause removal provision of Title X and allowing the President to supervise, direct, and remove the director of the CFPB at will. Instead, the Southern District held that Title X should be stricken in its entirety. Because the Southern District held that the CFPB lacked the authority to bring the claims, the CFPB was dismissed as a party to the action.

Consumer lenders should continue to monitor the developing case law regarding the constitutionality of the CFPB, as this holding makes it likely that this issue will remain hotly contested until it is taken up by the Supreme Court.

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