Consequences of CFPB’s Smackdown by Court

On its face, Tuesday’s federal appeals court decision curtailing the authority of the Consumer Financial Protection Bureau director was a blow to an agency that had become a jewel of the Dodd-Frank financial reform law.

The U.S. Court of Appeals for the D.C. Circuit found too much power—with too little oversight—was vested in the bureau’s director, Richard Cordray, a ruling that will provide fodder for Republicans who have long wanted to erase the agency itself from Washington’s regulatory landscape.

But the court’s tailored decision, with what it called a “targeted remedy,” could limit any aftershock for future enforcement. Indeed, the appeals court was insistent that the agency “will continue to operate and perform its many duties.”

What about old cases? The D.C. Circuit’s decision could entice past targets of the agency to challenge the enforcement actions. Companies might struggle on that front, however, because many enforcement actions are taken through consent orders. And revisiting past enforcement actions could also exacerbate reputational damage or further strain relations with the agency.

The D.C. Circuit expressly declined to confront how its ruling might play out. “We need not here consider the legal ramifications of our decision for past CFPB rules or for past agency enforcement actions,” Judge Brett Kavanaugh wrote. “We note, however, that this is not an uncommon situation.”

Kavanaugh identified adverse actions against the National Labor Relations Board, the Copyright Royalty Board and the Public Company Accounting Oversight Board. “Without major tumult, the agencies and courts have subsequently worked through the resulting issues regarding the legality of past rules and of past or current enforcement actions,” Kavanaugh wrote.

The remedy the court fashioned Tuesday gives the president the power to remove and supervise the CFPB director, a position that had already required U.S. Senate confirmation. The court otherwise left untouched the structure of the agency.

“If the court had ruled that the decisions of the bureau have to be made by a commission, that would cast more doubt than this ruling, which makes clear that Director Cordray can be removed by this president or the next president,” Covington & Burling partner Eric Mogilnicki said.

The CFPB said in a statement that “the bureau will continue its important work. Congress has charged the Bureau with ensuring that the markets for consumer financial products and services are fair, transparent, and competitive and with protecting consumers in these markets from unlawful practices. Today’s decision will not dampen our efforts or affect our focus on the mission of the agency.”

The CFPB’s past actions could be protected by the so-called “de facto officer doctrine,” which holds that a federal employee’s actions cannot be undone if it is later found that the employee’s government post has a legal defect, said Deepak Gupta, founding principal of the Washington boutique Gupta Wessler.

“It’s just designed to prevent chaos,” said Gupta, a former CFPB attorney.

“The agency is going to be able to continue operating as it has operated,” he said. “At least for now, this doesn’t kick the can back to Congress. It doesn’t say we’ve identified a constitutional flaw and it needs new legislation.”

$109M CFPB penalty vacated

The D.C. Circuit panel’s decision vacated a $109 million penalty against PHH Corp., a mortgage loan provider that the CFPB had charged with engaging in a kickback scheme by only referring customers to mortgage insurers that had contracts with a subsidiary, Atrium Insurance Co. The agency alleged the kickbacks took the form of insurance premiums that mortgage insurers paid to Atrium, a provider of mortgage “reinsurance” that PHH created in 1994.