By Chris Bruce
The CFPB will have an extra opponent May 24 when it faces off against PHH Mortgage Corp. in a major test of its constitutionality: the U.S. Justice Department.
The Trump administration’s unusual but not unprecedented decision to weigh in against the CFPB has already reshuffled the order of oral arguments before the U.S. Court of Appeals for the D.C. Circuit. The Justice Department will make its arguments after PHH presents its case but before the bureau steps up.
The Justice Department’s role also raises the stakes for the D.C. Circuit appeal, because the Trump administration could block CFPB from seeking further review before the Supreme Court.
Meanwhile, the administration’s support for PHH may encourage more companies to push back against the CFPB.
“Having the Trump Administration in place does embolden companies to oppose the CFPB’s enforcement actions more aggressively,” Quyen T. Truong, a partner in the Washington offices of Stroock & Stroock & Lavan and a former CFPB assistant director and deputy general counsel, told Bloomberg BNA.
The case, which will be heard by the D.C. Circuit’s full bench, stems from an October D.C. Circuit panel decision. Two judges on the three-judge panel held unconstitutional a Dodd-Frank Act provision that allows CFPB’s director to be removed only for cause.
PHH, a Mount Laurel, N.J., company that appealed a 2015 CFPB enforcement order, said Dodd-Frank limits on the president’s ability to remove the CFPB director violated the Constitution’s separation of powers. Two judges on the panel agreed, while a third said the case could be decided without reaching that question.
The CFPB sought review by the full D.C. Circuit. In December, the Obama Justice Department lent its support to the agency’s petition, saying the October ruling was “at odds” with relevant U.S. Supreme Court precedent.
However, the Trump Justice Department took a different stance in March, backing PHH and calling the for-cause removal restriction “an unwarranted limitation on the President’s executive power.”
By itself, the Justice Department’s shift in its stance on the PHH case isn’t that unusual, several lawyers said. “There’s a new administration,” said Boston attorney David M. Bizar, a partner with Seyfarth Shaw who chairs the firm’s consumer financial services litigation practice group. “Anytime you have a change of parties, the new administration may have a different viewpoint,” he said.
Even so, defendants in at least two cases brought by the CFPB have taken notice of the change and want to use it to their advantage. Atlanta-based Ocwen Financial Corp. has asked a federal judge in Florida to schedule an early case conference on the CFPB’s constitutionality, citing the Justice Department’s March filing.
In addition, the Ninth Circuit May 17 gave Burbank, Calif.-based D&D Marketing the go-ahead to raise the CFPB’s constitutional status in an appeal in an enforcement lawsuit by the agency. A lower court in November held the CFPB unconstitutional but denied D&D Marketing’s motion to dismiss the suit. The Ninth Circuit has asked for briefing on whether the CFPB’s structure is unconstitutional, and if so, what remedy is appropriate in such cases.
More such challenges are likely in enforcement actions until the issue is resolved “in an authoritative ruling” by the D.C. Circuit or Supreme Court, said Aditya Bamzai, an associate professor at the University of Virginia School of Law.
Ashley L. Taylor Jr., a partner in the Washington and Richmond offices of Troutman Sanders, said important practical implications may arise for attorneys and their clients. In cases where an agency’s constitutionality is in question, a change in the government’s position may complicate the handling of a case, and especially the possibility of settlement.
A settlement agreement with a regulator is binding even if later on the agency is declared unconstitutional. However, an enforcement order might be different, so some companies may take a measured pace in any negotiations with the agency.
“If you enter into a settlement agreement, then you can’t unwind it, but an enforcement order issued by an agency may be void or voidable,” Taylor said. “The question is, what’s the effect on cases while the constitutional issue is being determined? You might see some companies trying to figure out how long it will take for the CFPB’s constitutionality to be decided, when they might otherwise consider settling.”
The CFPB, citing the Justice Department’s shift, successfully petitioned the D.C. Circuit to change the order of the May 24 argument by allowing the CFPB to make its case after PHH and the Justice Department present their arguments.
Truong said that’s important because it allows the CFPB to hear and respond to the Justice Department’s arguments against it. “The CFPB wouldn’t have that opportunity if the Justice Department argues last,” she said.
The wild card, she added, is whether the D.C. Circuit reaches the constitutional question. It could decide the case under the federal consumer protection statute at issue in the case, as the dissenting judge in the October ruling urged. “PHH is the first significant loss on the constitutional issue that the CFPB has suffered,” Truong said. “I think there’s a very real possibility that the court will not rule on that constitutionality issue.”
However, if the court does rule on the agency’s constitutional status, that’s when the Justice Department’s shift in its position could loom large, according to Bizar.
If the CFPB loses before the full D.C. Circuit, U.S. Attorney General Jeff Sessions, and not the CFPB, will decide whether a petition will be filed to seek U.S. Supreme Court review. That’s because the Dodd-Frank Act only allows the CFPB to represent itself in its own name before the Supreme Court if the Attorney General permits it, he said.
“If the D.C. Circuit adopts the Department of Justice’s position and rejects the CFPB’s, there likely won’t be an appeal to the Supreme Court,” Bizar said.
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