The CFPB: No Longer the Legislative Bully of DC?

The U.S. Appeals Court takes a first step toward chipping away the Consumer Financial Protection Bureau’s power

This mid-October headline got our industry’s attention: “The Consumer Financial Protection Bureau [CFPB] Declared Unconstitutional by the United States Court of Appeals.” For those affected by CFPB enforcement actions and the agency’s general whims and fancies, there was a resounding cheer of “about time!”

Headlines, however, rarely tell the whole story, and in this case the unconstitutional ruling was limited enough to ensure the CFPB will continue operations led by its single director. The difference now is that the agency’s director, presently Richard Cordray, will serve at the pleasure of the sitting U.S. president, rather than as director for life.

The ruling came from the case PHH Corporation v. Consumer Financial Protection Bureau, and may be more important for its holdings in general, and its history.

A brief history

Since it opened for business, the CFPB has shamelessly been the biggest regulatory bully in DC, with a total disregard for Congress and elected officials. Early and often, the agency eschewed regulatory protocol and opted to alter the market landscape through enforcement actions rather than rule-making.

The object, as disclosed in an agency memorandum in automotive dealer participation cases, was to tip the market and force companies to change their business model through large fines and coercion. In automotive financing, the first agency target was Ally Financial. Ally refused to buckle under to the CFPB despite threats to interfere with its public offering.

To date, Ally has paid the single highest penalty and consumer remuneration of all auto finance companies. The CFPB clarified early that you either settle with the bureau on its terms, or suffer the consequences—if you fight.

This last message was heard by most in the industry, with virtually no company willing to risk the expense and exposure to fight back until the case of PHH Corporation, a mortgage corporation. PHH chose not to settle because it believed the CFPB was misapplying the law.

In response, the agency filed an administrative proceeding. A hearing was held before an administrative law judge, who ruled for the CFPB and recommended PHH pay $6.4 million.

PHH disagreed with the decision for several reasons and appealed. Unfortunately, CFPB appeals are decided by the director of the CFPB—the same individual whose staff targeted PHH Corporation.

Director Cordray heard the appeal and agreed with PHH: The administrative law judge had misapplied the law. Cordray said the damages were not calculated correctly, and that PHH did not owe $6.4 million as recommended by the judge, but instead, owed $109 million.

The director made his point—that there was a price to pay for failing to accept the CFPB’s settlement demands. To date, the majority of companies have steered clear of fighting with the agency. Finance company after finance company altered its market approach based on faulty government analysis, rather than stand firm and demand proof of actual violations.

I have practiced law for a long time, and honestly cannot recall another time where an appellant questioning the validity and size of a judgment was whacked with a new judgment 17 times higher. The director’s message was clear, and so too was that of the U.S. Court of Appeals.

U.S. Court of Appeals ruling

After PHH Corporation appealed the judgment to the U.S. Court of Appeals, the Court made three rulings in the case that were beneficial to PHH, and important to those watching the CFPB:

  1. The Court ruled: “Never before has an independent agency exercising substantial executive authority been headed by just one person. We therefore hold that the CFPB is unconstitutionally structured. Here, that targeted remedy will not affect the ongoing operations of the CFPB. With the for cause provision severed, the President now will have the power to remove the Director at will, and to supervise and direct the Director.”
  2. The Court also ruled: “We again agree with PHH: The CFPB’s order violated bedrock principles of due process. . . . The CFPB responds that, under Dodd-Frank, there is no statute of limitations for any CFPB administrative actions to enforce any consumer protection law. . . . We disagree with the CFPB on both points . . . a three-year statute of limitations applies to all CFPB enforcement actions to enforce Section 8, whether brought in court or administratively.”
  3. The Court vacated the $109 million order, and remanded the case for hearing consistent with the ruling.

The most important of the Court’s rulings is that the CFPB has been told the statute of limitations applies despite the venue it brings an enforcement action. Should the Court’s ruling stand, it will make a significant dent in the agency’s no-prisoners approach to reviewing corporate conduct well outside any relevant statute of limitations, and demanding redress for the same.

The constitutional ruling is important also, but will have little effect under the current administration because it appears Cordray still has the pleasure of the sitting president. The next administration will have a say on the directorship, assuming the case is not reversed.

At the time of this writing, the candidate the appears most likely to be the next president recently proclaimed in a speech that the CFPB needs to be empowered. I am not sure what that would look like, and hope not to see it.

The Republican-controlled Congress believes it is chipping away at the CFPB with no concrete results. A court case that limits the CFPB’s power, and requires it to follow the laws other agencies follow, is a nice start.

David R. Missimer,, is general counsel for Automotive Compliance Consultants Inc. He spent 28 years in private practice as a litigator representing lenders, auto dealers, and numerous other entities and individuals. He has worked with dealership compliance issues since 2003 as co-founder of Automotive Compliance Consultants. He is a member of the National Association of Dealer Counsel, American Financial Services Association, and National Automotive Finance Association.

David R. Missimer


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