Richard Cordray’s Pink Slip

by Geoffrey Parsons Miller

Like a hurricane forming off Cape Verde, an important constitutional issue may be on track to reach the Supreme Court in 2017.

As so often happens in great cases, the controversy arose in routine fashion. An administrative law judge employed by the Consumer Financial Protection Bureau imposed a $6 million fine on PHH Corporation for violating the Real Estate Settlement Procedures Act.[1]  Rather than meekly accepting the fine, as most private parties would have done, PHH appealed the matter to the director of the agency.

Here’s where things got interesting.

The director, Richard Cordray, not only rejected PHH’s appeal but also upped the fine to $109,188,618 – an increase of 1,700 percent!  On top of this astounding escalation, Director Cordray imposed restrictions that, if implemented, would significantly increase PHH’s cost of doing business.

Some in the industry saw the director’s decision as a thinly disguised abuse of power. This was the first appeal of a contested adjudication within the CFPB. By dramatically increasing PHH’s fine, Director Cordray sent a not-subtle message to firms under his supervision: they have a right to judicial review; but if they wish to exercise that right, they must first pass through his office.

If Director Cordray intended to intimidate, the strategy backfired. PHH petitioned for review of his order in the United States Court of Appeals for the District of Columbia Circuit. On October 11, 2016, Circuit Judge Brett Kavanaugh ruled in favor of PHH on all of its key contentions.[2]

Judge Kavanaugh’s decision is important for many reasons. The most far-reaching is his analysis of the CFPB’s governance structure. Regardless of the constitutionality of independent agencies such as the SEC or the FTC, which are headed by multi-member commissions, Judge Kavanaugh held that the CFPB’s governing statute violates the separation of powers because it places excessive authority in the hands of a single unaccountable official.  Judge Kavanaugh declared, accordingly, that the director of the CFPB must be removable by the president.

Prior to the recent election, the ruling had no practical consequences. President Obama was not going to remove Director Cordray. Nor was Hillary Clinton, Mr. Obama’s likely successor. In the meantime Director Cordray could continue doing exactly what he had been doing all along.

Enter Mr. Trump.

Equipped with authority to act, committed under his party’s platform to reining in the administrative state, and confronting an agency head who is unpopular with the companies he regulates, President Trump is likely to fire Director Cordray at the first available opportunity.

After receiving his pink slip, Director Cordray might go quietly into that good night. More likely, he would challenge the decision to fire him, arguing that the statute creating the CFPB denies the president the authority to remove him from office. Any such challenge would get to the Supreme Court in short order.

The issues at the Supreme Court level would extend beyond the constitutionality of the CFPB. Judge Kavanaugh’s distinction between multimember commissions and agencies with a single head provides a plausible basis for distinguishing the CFPB from other independent agencies, but the line is not easy to draw. The danger of concentrated power with limited accountability is present in multi-member agencies as well.

If the matter reaches the Supreme Court, PHH or amici curiae will invite the Justices to overrule Humphrey’s Executor,[3] the now-antiquated precedent that props up the legality of all independent agencies.[4]  The PHH case, accordingly, could provide a vehicle through which the Court can re-examine the basic concept of agency independence.  Depending on how the Justices rule, the result could be one of the great constitutional decisions of the 21st century.

Footnotes

[1] In the Matter of PHH Corporation, Decision of the Director, Docket No. 2014-CFPB-0002, Dkt. 226 (PDF: 14,387 KB) (June 4, 2015); Final Order, Docket No. 2014-CfPB-0002, Dkt. 227 (PDF: 947 KB) (June 4, 2015).

[2] PHH Corporation v. Consumer Financial Protection Bureau, No. 15-1177 (PDF: 463 KB) (D.C. Cir. 2016).

[3] Humphrey’s Executor v. United States, 295 U.S. 602 (1935).

[4] PHH preserved its right to challenge the continuing validity of Humphrey’s Executor.  PHH v. CFPB, supra, at 59, n. 15.

Geoffrey Parsons Miller is the Stuyvesant Comfort Professor at NYU Law School, Director of the law school’s Program on Corporate Compliance and Enforcement, and author of “The Law of Governance, Risk Management and Compliance” (Wolters Kluwer 2014).

Disclaimer

The views, opinions and positions expressed within all posts are those of the author alone and do not represent those of the Program on Corporate Compliance and Enforcement or of New York University School of Law.  The accuracy, completeness and validity of any statements made within this article are not guaranteed.  We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.