D.C. Circuit Invalidates CFPB Structure as Unconstitutional; Rejects “Flawed” Statutory Application in Enforcement Proceeding: Appeals Court Rules in PHH v. CFPB that CFPB Action Suffered From Both Constitutional and Statutory Flaws; Ruling on Statutes of Limitations Could Affect Remedial Enforcement Actions by Federal Banking Agencies

Sullivan & Cromwell LLP - October 13, 2016

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.