Federal appeals court judges hearing a case challenging the constitutionality of the Consumer Financial Protection Bureau appeared highly receptive to arguments that the agency's single-director structure violates the Constitution.
"This is a novel structure with very few precursors that I found — very few even historical" precursors, Judge Brett Kavanaugh, one of three judges considering the case, said during oral arguments on Tuesday. "If you have that kind of structure, you want it to be a group of nonpartisan or bipartisan commissioners."
Lawrence Demille-Wagman, a senior litigation counsel for the CFPB, argued that Congress had endowed different executive agencies with a variety of structures, ranging from bipartisan commissions like the Securities and Exchange Commission and the Commodity Futures Trading Commission to executive agencies like the Office of the Comptroller of the Currency and the Social Security Administration.
But Kavanaugh countered that in the cases of agencies led by a single director, the top officials serve at the pleasure of the president.
"They've always been commissions, and the reason is … it's very dangerous to [vest] such power in an individual," Kavanaugh said.
At issue was a court battle between the nonbank mortgage lender PHH, which sued the CFPB after the agency's director, Richard Cordray, issued an order against the firm for $109 million over an alleged kickback scheme. As part of the suit, PHH argued that the agency's single-director structure and its funding outside of congressional appropriations were unconstitutional.
During oral arguments, Kavanaugh appeared more supportive of the CFPB's claims that many agencies receive funding outside of Congress.
"On that issue, you're right," Kavanaugh told Demille-Wagman. "On the single-headed agency, not so much."
It was a bad sign for a case that could have critical implications for the CFPB.
Theodore Olson, the former solicitor general who appeared on behalf of New Jersey-based PHH, received far lighter treatment during his oral arguments.
He claimed that the bureau's vesting of executive authority within a single director — as opposed to a multimember commission — is unconstitutional because it gives that single director unilateral authority to bring administrative enforcement actions.
Olson argued that because the Dodd-Frank Act, which created the agency, makes it independently funded by the Federal Reserve and only allows the director to be dismissed "for cause" — as opposed to serving at the pleasure of the president — the CFPB is effectively unaccountable to either Congress or the president.
"You have a super-executive agency," Olson said. "The only check on this agency is right here. If not for the judiciary, this agency could do whatever it wanted."
Kavanaugh, a protégé of former independent prosecutor Kenneth Starr who was appointed by President George W. Bush in 2003, asked whether simply striking the "for cause" clause would suffice in resolving the constitutionality issues raised by PHH. Olson maintained that because the agency is independent of the administration and Congress in other ways — in hiring and firing and in its budget allocation process, for example — broader relief is required.
"What is the remedy?" Kavanaugh asked.
Olson replied: "The remedy is that this agency is unconstitutional. The decision of this director of this agency in this case will have to be overturned. If I were in your shoes, I would be very tempted to say that Congress can't create an agency that can ignore all of the rules of [constitutional] separation of powers."
Olson spoke for roughly ten minutes before either Kavanaugh or Judge Arthur Raymond Randolph — an appointee of President George H.W. Bush in 1990 — asked a question.
By contrast, Demille-Wagman quickly faced questions from the two judges in attendance. (Judge Karen LeCraft Henderson, also a George H.W. Bush appointee, was not in attendance but will consider the oral argument via recording.)
Demille-Wagman argued that the president has the power to remove the director of the CFPB and that the "for cause" limitation of that power did not amount to a transgression of the Constitution's separation of powers.
"Really?" Kavanaugh asked. "If the president doesn't agree with the director of the agency … they can't change [directors] for that reason."
Demille-Wagman said that if the court finds there is a conflict, the preferred constitutional remedy should be to simply strike the "for cause" aspect of the statute.
The case, PHH v. CFPB, challenges an administrative ruling by Cordray that overturned a 2014 decision by an administrative law judge that found PHH had effectively arranged kickbacks for referring its borrowers to preferred mortgage insurance companies by requiring those firms to purchase reinsurance — essentially insurance for insurance — on those policies. The judge had limited the scope of the practice based on the application of statutes of limitations included in the Real Estate Settlement Procedures Act and imposed a $6.4 million fine.
But the CFPB argued that it has no statutes of limitations on its administrative penalties, and increased that fine to more than $109 million, arguing that the money the company received in fees were ill-gotten gains.
In oral argument, Olson complained that Cordray's judgment effectively reversed longstanding administrative precedent by the Department of Housing and Urban Development, which enforced Respa before the CFPB was created in 2011, and in so doing retroactively changed the rules.
"Individuals should have the opportunity to know the conduct … that will be permitted and what will be prohibited," Olson said. "The imposition of a $109 million substantial penalty took place in the context of a clear rewriting of the statute."
But Demille-Wagman argued that simply directing business to selected mortgage insurers in exchange for reinsurance premiums to a captive subsidiary amounts to coercion in a market where referrals make up such a majority of all business. The insurance and reinsurance were not exorbitant in themselves, but that does not mean the practice was undertaken in good faith.
"There is no gecko out there marketing insurance for mortgages," Demille-Wagman said, referring to the popular Geico car insurance commercials.
But Olson countered that, as with all insurance industries, the value of insurance and reinsurance appears exorbitant until it is needed, and when the mortgage crisis hit, the reinsurance provided by PHH's subsidiary, Atrium Insurance, protected its clients as it said it would.
"We hear that reinsurance is a racket," Olson said. "It is a very profitable thing until [it is needed]. When the housing market went to pieces, all of a sudden that reinsurance was very valuable."