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Court: CFPB Structure “Unconstitutional”….. FHFA Structured the Same Way


Another ruling out today by the 4th Circuit goes against the government and coupled with this one from last week, we may be getting a stronger idea of how they may rule in the Perry appeal before them. Granted, this is a different judge panel than deciding the Perry appeal but one has to think these judges talk to each other. It would be highly uncomfortable for them to issue concurrent rulings that counter each other. For that reason alone one has to be sure the judges in Perry have been aware of this ruling and the reasoning behind it for some time.  More on this later..

There has been considerable argument in the GSE litigation regarding the “rights of the conservator”. Plaintiffs have argued that the government overstepped its rights and transitioned from a conservator to a receiver without the proper notice and procedure (among other things).  Further, they argue that Treasury was in charge of the whole operation, not FHFA as the regulator/conservator as the statute requires. For those main reasons (and others), the NWS should be invalidated.   Plaintiffs argue HERA was based wholly on the statute the FDIA governs the FDIC in bank conservatorships and its history dealing with those troubled institutions should guide the courts.

“A Conservator is under the statute, under the regulations, under the same statute the FDIA that governs the FDIC, and decades of tradition and common law as conservator is a trustee for the assets of its ward”

The government claims that is not true and that HERA basically says “we can do anything we want”.

Plaintiffs counter that by saying if Congress has meant for HERA to say “we can do anything we want” they would have placed it in the statute. The fact that HERA is essentially exactly the same as the FDIC statute means Congress did not intend HERA to mean that.

In PHH v CFPB the court today ruled (emphasis mine):

The CFPB’s theory is that Congress – for some unstated reason – did not carry forward the three-year statute of limitations for CFPB administrative actions to enforce Section 8. Under the CFPB’s theory, the agency therefore can always circumvent the three-year statute of limitations simply by bringing the enforcement action administratively rather than in court. But Congress did not suggest that by transferring authority from HUD to the CFPB, it intended to relax the longstanding three-year statute of limitations. Moreover, “Congress ‘does not, one might say, hide elephants in mouseholes.’” Puerto Rico v. Franklin California Tax-Free Trust, 136 S. Ct. 1938, 1947, slip op. at 11 (2016) (quoting Whitman v. American Trucking Associations, Inc., 531 U.S. 457, 468 (2001)).

If by means of the Dodd-Frank Act, “Congress intended to alter” the fundamental details of the statutes of limitations for enforcement of this critical consumer protection law, “we would expect the text of the amended” statute “to say so.” Id. (internal quotation marks omitted). In other words, we would expect Congress to actually say that there is no statute of limitations for CFPB administrative actions to enforce Section 8, especially given that the CFPB has full discretion to pursue administrative actions instead of court proceedings and can obtain all of the same remedies through administrative actions that it can obtain in court. But the text of Dodd-Frank says no such thing. 99 Nor, moreover, has the CFPB cited any legislative history that says anything like that.

The courts here is saying that if Congress wanted to materially alter the statute it essentially transferred from one entity to another, it would have specifically done so. If it didn’t, we should assume the basis of the previous statute remains.

So, should the three Judges in Perry adopt this reasoning, and there is no reason they wouldn’t, then we must assume the court will be guided by decades of conservatorship case law from the FDIC. Should that happen, I am of the opinion the government’s case disintegrates and plaintiffs emerge victorious.

Then there is this:

In 1935, however, the Supreme Court carved out an exception to Myers and Article II by permitting Congress to create independent agencies that exercise executive power. See Humphrey’s Executor v. United States, 295 U.S. 602 (1935). An agency is considered “independent” when the agency heads are removable by the President only for cause, not at will, and therefore are not supervised or directed by the President. Examples of independent agencies include well-known bodies such as the Federal Communications Commission, the Securities and Exchange Commission, the Federal Trade Commission, the National Labor Relations Board, and the Federal Energy Regulatory Commission. Those and other established independent agencies exercise executive power by bringing enforcement actions against private citizens and by issuing legally binding rules that implement statutes enacted by Congress.

The independent agencies collectively constitute, in effect, a headless fourth branch of the U.S. Government. They exercise enormous power over the economic and social life of the United States. Because of their massive power and the absence of Presidential supervision and direction, independent agencies pose a significant threat to individual liberty and to the constitutional system of separation of powers and checks and balances.

To help mitigate the risk to individual liberty, the independent agencies, although not checked by the President, have historically been headed by multiple commissioners, directors, or board members who act as checks on one another. Each independent agency has traditionally been established, in the Supreme Court’s words, as a “body of experts appointed by law and informed by experience.” Humphrey’s Executor, 295 U.S. at 624 (internal quotation marks omitted). The multi-member structure reduces the risk of arbitrary decisionmaking and abuse of power, and thereby helps protect individual liberty.

In other words, to help preserve individual liberty under Article II, the heads of executive agencies are accountable to and checked by the President, and the heads of independent agencies, although not accountable to or checked by the President, are at least accountable to and checked by their fellow commissioners or board members. No head of either an executive agency or an independent agency operates unilaterally without any check on his or her authority. Therefore, no independent agency exercising substantial executive authority has ever been headed by a single person.

Until now.

In the Dodd-Frank Act of 2010, Congress established a new independent agency, the Consumer Financial Protection Bureau. As proposed by then-Professor and now-Senator Elizabeth Warren, the CFPB was to be another traditional, multi-member independent agency. See Elizabeth Warren, Unsafe at Any Rate: If It’s Good Enough for Microwaves, It’s Good Enough for Mortgages. Why We Need a Financial Product Safety Commission, Democracy, Summer 2007, at 8, 16-18. The initial Executive Branch proposal in 2009 likewise envisioned a traditional, multi-member independent agency. See DEPARTMENT OF THE TREASURY, FINANCIAL REGULATORY REFORM: A NEW FOUNDATION: REBUILDING FINANCIAL SUPERVISION AND REGULATION 58 (2009). The House-passed bill sponsored by Congressman Barney Frank and championed by Speaker Nancy Pelosi also contemplated a traditional, multi-member independent agency. See H.R. 4173, 111th Cong. § 4103 (as passed by House, Dec. 11, 2009).

But Congress ultimately departed from the Warren and Administration proposals, and from the House bill. Congress established the CFPB as an independent agency headed not by a multi-member commission but rather by a single Director.

Because the CFPB is an independent agency headed by a single Director and not by a multi-member commission, the Director of the CFPB possesses more unilateral authority – that is, authority to take action on one’s own, subject to no check – than any single commissioner or board member in any other independent agency in the U.S. Government. Indeed, as we will explain, the Director enjoys more unilateral authority than any other officer in any of the three branches of the U.S. Government, other than the President.

At the same time, the Director of the CFPB possesses enormous power over American business, American consumers, and the overall U.S. economy. The Director unilaterally enforces 19 federal consumer protection statutes, covering everything from home finance to student loans to credit cards to banking practices. The Director alone decides what rules to issue; how to enforce, when to enforce, and against whom to enforce the law; and what sanctions and penalties to impose on violators of the law. (To be sure, judicial review serves as a constraint on illegal actions, but not on discretionary decisions within legal boundaries; therefore, subsequent judicial review of individual agency decisions has never been regarded as sufficient to excuse a structural separation of powers violation.)

That combination of power that is massive in scope, concentrated in a single person, and unaccountable to the President triggers the important constitutional question at issue in this case.


The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decisionmaking and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency. The overarching constitutional concern with independent agencies is that the agencies are unchecked by the President, the official who is accountable to the people and who is responsible under Article II for the exercise of executive power. Recognizing the broad and unaccountable power wielded by independent agencies, Congresses and Presidents of both political parties have therefore long endeavored to keep independent agencies in check through other statutory means. In particular, to check independent agencies, Congress has traditionally required multi-member bodies at the helm of every independent agency. In lieu of Presidential control, the multi-member structure of independent agencies acts as a critical substitute check on the excesses of any individual independent agency head – a check that helps to prevent arbitrary decisionmaking and thereby to protect individual liberty.

This new agency, the CFPB, lacks that critical check and structural constitutional protection, yet wields vast power over the U.S. economy. So “this wolf comes as a wolf.” Morrison v. Olson, 487 U.S. at 699 (Scalia, J., dissenting).

In light of the consistent historical practice under which independent agencies have been headed by multiple commissioners or board members, and in light of the threat to individual liberty posed by a single-Director independent agency, we conclude that Humphrey’s Executor cannot be stretched to cover this novel agency structure. We therefore hold that the CFPB is unconstitutionally structured.

Now is the time the note FHFA has the same structure as CFPB (it is an independent agency). It also means that FHFA is similarly unconstitutionally structured and if so, could the very conservatorship and those decisions made under it be nullified also???

This ruling could have earth shattering ramifications..


PHH v CFPM (pdf)

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