CFPB Lawsuits Could Create ‘Circuit Split’

Published August 13, 2018

Two cases challenging the constitutionality of the Consumer Financial Protection Bureau (CFPB) may require the U.S. Supreme Court to resolve conflicts between earlier decisions reached by judges in lower courts.

In June, Federal Southern District of New York Judge Loretta Preska reversed a lower court’s previous ruling favoring the Consumer Financial Protection Bureau, finding the government agency tasked with enforcing the Dodd–Frank Wall Street Reform and Consumer Protection Act should be reorganized as an agency under the authority of the executive branch of government instead of being an independent government agency.

Preska dismissed Consumer Financial Protection Bureau and The People of New York v. RD Legal Funding, LLC on June 21, removing CFPB as a party because its unconstitutional status negated its standing to sue the plaintiff.

Two cases making similar claims are pending in higher courts, potentially a “circuit split” requiring Supreme Court judges to intervene.

In the U.S. Court of Appeals for the Ninth Circuit case Consumer Financial Protection v. Seila Law LLC, CFPB lawyers responded to the plaintiff’s arguments on March 26.

In the U.S. Court of Appeals for the Fifth Circuit, CFPB will have until September 10 to respond to another lawsuit, Consumer Financial Protection Bureau v. All-American Check Cashing, Inc. et al., in which its structure is also similarly challenged on constitutional grounds.

Neither court has set a date to hear oral arguments.

In the case PHH Corporation v. CFPB, the U.S Court of Appeals for the District of Columbia Circuit decided in January the agency was not unconstitutionally isolated from executive oversight,

Currently, presidents may not terminate CFPB directors without cause, as they can do with the heads of other executive-branch agencies.

Calls for Constitutional Clarity

Daniel Press, a policy analyst for the Competitive Enterprise Institute, says a final answer from the Supreme Court on CFPB’s organization is increasingly important.

“You just cannot have a critical agency—something that is a very substantial part of the financial regulatory regime—being struck down as unconstitutional by different courts around the country,” Press said. “That’s crazy. We’re going to need some clarity from the Supreme Court.”

Press says a Supreme Court showdown over CFPB’s structure and isolation from executive oversight is increasingly likely.

“Certainly, at the very least, it looks like now the courts are starting to draw the line in saying you can insulate some of these agencies, but you can’t isolate them,” Press said. “It looks like they’re starting to draw a line in the sand on what is considered insulated, versus what is considered overly isolated from the president.”

‘Patted Us on the Head’

Brian Lynn, chief executive officer of Lending Bear, a regional short-term lending company specializing in “small-dollar” loans for $5,000 or less, says his experiences with CFPB lead him to conclude the agency has developed a paternalistic, power-hungry attitude.

In October 2017, CFPB finalized the “Payday, Vehicle Title, and Certain High-Cost Installment Loans rule” restricting how covered short-term and longer-term balloon-payment loans may be underwritten and collected.

“I went up to Washington, had a day-long meeting at the Treasury Department, along with 27 other small lenders from across the country,” Lynn said. “The feeling I got, which was backed up in the final rule which was released in October 2017, was that they basically patted us on the head and told us we didn’t know what we were talking about. The smart guys from Washington, DC were going to tell us how it was going to be.”