In its June 21 decision in Lucia v. Securities & Exchange Commission, the U.S. Supreme Court ruled that administrative law judges (ALJs) used by the SEC are “Officers of the United States” under the Appointments Clause in Article II of the U.S. Constitution because they exercise “significant authority pursuant to the laws of the United States.”  Under the Appointments Clause, the power to appoint “Officers” is vested exclusively in the President, a court of law, or the head of a “Department.”

In Lucia, the plaintiff had challenged the validity of an SEC administrative proceeding in which the ALJ issued a decision finding that he had violated securities laws.  Mr. Lucia argued that because the ALJ in his case was appointed by SEC staff rather than the Commission itself, the ALJ’s appointment violated the Appointments Clause and made the administrative proceeding invalid.  The Supreme Court adopted Mr. Lucia’s view, holding that because ALJs perform a number of tasks—conducting trials, managing discovery, writing opinions often adopted as final—the ALJ in his proceeding qualified as an “Officer” under the Appointments Clause and the ALJ’s appointment by SEC staff did not satisfy the Appointments Clause.

Going forward, the Supreme Court’s Lucia decision will impact all federal agencies that use ALJs for administrative proceedings, including the CFPB and the federal banking agencies.  With regard to the CFPB and federal banking agencies, we make the following observations:

CFPB.  The CFPB’s Rules of Practice for Adjudication Proceedings were modeled on the SEC’s Rules of Practice and give an ALJ conducting a CFPB administrative proceeding substantially the same authority as an ALJ used in a SEC proceeding.  (The Rules of Practice are the subject of one of the series of RFIs issued by the CFPB.)  For example, applying the Supreme Court’s Lucia analysis, a CFPB ALJ, as does a SEC ALJ, has “the authority needed to ensure fair and orderly adversarial hearings” (for example, to punish an attorney’s discovery violations or other contemptuous conduct with exclusion or suspension) and the CFPB Director can decline to review an ALJ decision that has not been appealed.  As a result, it is very likely that a CFPB ALJ would be deemed an “Officer” for purposes of the Appointments Clause.

It is worth noting that in the D.C. Circuit’s order granting the petition for rehearing en banc in PHH, one of the issues the court ordered the parties to address was what the appropriate disposition would be in PHH if the court were to hold in Lucia that the ALJ was an “Officer.”  The initial PHH decision was issued in 2014 by an ALJ who was on loan to the CFPB from the SEC pursuant to an agreement between the CFPB and SEC.  In its opening en banc brief, PHH argued that if the Supreme Court were to hold that the ALJ in Lucia was improperly appointed, then the ALJ in its case was also an “Officer” whose appointment violated the Appointments Clause.  In its en banc decision in PHH, the D.C. Circuit specifically “decline[d]to reach the separate question whether the ALJ who initially considered this case was appointed consistently with the Appointments Clause.”

The CFPB’s website currently shows the name of an ALJ, Christine Kirby.  The CFPB solicited applications for an ALJ in 2015 and presumably Ms. Kirby was appointed as a result of that solicitation while Richard Cordray was still CFPB Director.  Our research indicates that all federal agencies hire ALJs through a merit-selection process administered by the Office of Personnel Management (OPM).  An agency may select an ALJ from the top three ranked applicants.  It is unclear who at the CFPB would have been responsible for selecting and hiring Ms. Kirby from the list of candidates presented by OPM.  Clearly, anyone other than Mr. Cordray would not have qualified as the “head of a Department” for purposes of the Appointments Clause.

However, even if Ms. Kirby was hired by former Director Cordray, it is not certain that the CFPB Director would qualify as the “head of a Department.”  The Dodd-Frank Act provided that “[t]here is established in the Federal Reserve System, an independent bureau to be known as the “[BCFP].”  Under U.S. Supreme Court decisions that have addressed the meaning of the term “Department,” it is unclear whether an establishment’s status as an independent agency with a principal officer who is not subordinate to any other executive officer is sufficient to render it a “Department” or whether it must also be self-contained.  While compelling arguments can be made that that the CFPB’s status as an independent agency should be sufficient to render it a “Department,” Congress’ decision to house the CFPB in the Federal Reserve means that the CFPB’s status as a “Department” is not free from doubt.

Other than PHH, Integrity Advance is the only CFPB enforcement matter shown on the CFPB’s website in which a decision was issued by an ALJ.   Integrity Advance appealed from the ALJ’s recommended decision and argued in its appeal that the ALJ’s appointment violated the Appointments Clause.  (The ALJ was on loan to the CFPB from the Coast Guard.)  On March 14, 2018, Acting Director Mulvaney issued an order directing that the case be put on hold and stating that he would determine how the appeal should proceed after the Supreme Court issued its decision in Lucia.

Federal Banking Agencies.  It appears that the Fed, OCC, FDIC, and NCUA do not have their own ALJs but instead use the same ALJs who are hired by the Office of Financial Institution Adjudication (OFIA).  (The OPM’s website indicates that the OFIA currently has 2 ALJs.)   OCC regulations describe the OFIA as “the executive body charged with overseeing the administration of administrative enforcement proceedings for the [four agencies].”  In 2017, the Fifth Circuit ruled that a bank official seeking to stay a FDIC order pending review had shown a likelihood of success on the merits of his argument that the FDIC ALJ was an “Officer” whose appointment violated the Appointments Clause.  (The Fifth Circuit subsequently stayed its review pending the Supreme Court’s decision in Lucia.)

Assuming the ALJs used by the banking agencies would be deemed “Officers” for purposes of the Appointments Clause, the validity of their appointments would depend on (1) how ALJs are hired by the OFIA (i.e. are they hired by OFIA or other agency staff or by one or more agency heads), and (2) if ALJs hired by the OFIA are hired by one or more agency heads, whether those agencies qualify as “Departments” for purposes of the Appointments Clause.  For example, the OCC might not qualify as a Department because it is housed in the Treasury Department.

If the ALJs used by the banking agencies were unconstitutionally appointed, it would raise the question of how the agencies must deal with past decisions issued by those ALJs.  Lucia did not overturn all prior decisions issued by SEC ALJs.  Instead, the Supreme Court held that only parties who made timely constitutional challenges could request new hearings, which must be overseen by a different ALJ.  Last year, the SEC formally ratified the staff appointments of current ALJs to limit the impact of a negative decision in Lucia, but the Supreme Court explicitly sidestepped the question of whether that ratification was effective.  The CFPB and banking agencies will have to take steps to ensure that they use properly appointed ALJs in future administrative proceedings.

 

On January 12, 2018, the U.S. Supreme Court agreed to hear the Lucia case in which Raymond J. Lucia is challenging how the SEC appoints administrative law judges (“ALJs”). He argues that ALJs are “inferior officers” who must be appointed by the President, the courts, or a department head in accordance with the Constitution’s appointments clause. Lucia filed a petition for certiorari with the Supreme Court after the D.C. Circuit rejected his argument. A circuit split was created when the 10th Circuit reached the opposite conclusion in another case making a similar appointments clause challenge. The Supreme Court’s decision in Lucia may impact numerous past and pending ALJ decisions, including cases involving the CFPB, most notably the PHH case. We’ve discussed the potential impact of Lucia and the related 10th Circuit case before and will continue to follow them closely.

The Supreme Court is considering a cert petition requesting that it hear the Lucia case, which we have blogged about extensively due to its potential impact on the outcome of the PHH case. Significantly, the DOJ recently filed a brief in the case siding against the SEC and with Lucia, who is challenging the constitutionality of how the SEC’s Administrative Law Judges (“ALJs”) are appointed.

Under the Appointments Clause of Article II of the U.S. Constitution, an “inferior officer” must be appointed by the President, a court, or the head of a “department.” Lucia argues that  because the SEC’s ALJs are hired by the SEC’s Office of Administrative Law Judges and not appointed by an SEC commissioner, their appointments would be unconstitutional if they are “inferior officers. ”

In its brief, the DOJ acknowledged the course change on this issue, stating that, “In prior stages of this case, the government argued that the Commission’s ALJs are mere employees rather than ‘Officers’ within the meaning of the Appointments Clause. Upon further consideration, and in light of the implications for the exercise of executive power under Article II, the government is now of the view that such ALJs are officers because they exercise ‘significant authority pursuant to the laws of the United States.'”

Needless to say, it is extremely unusual for the DOJ to take up arms against another government agency like this. How it impacts the outcome of the Lucia case is yet to be seen. As we’ve explained in prior posts, the CFPB uses SEC ALJs to hear its administrative cases. So, if the Supreme Court hears the Lucia case and determines that ALJs are inferior officers, it will call into question every SEC and CFPB case that an ALJ decided. It may also impact how the en banc D.C. Circuit decides the PHH case.

We will continue to follow the issues and keep you posted.

On July 21, 2017, an investment adviser sought review by the Supreme Court of the D.C. Circuit’s recent ruling in Lucia that allowed to stand a district court decision holding that SEC administrative law judges (“ALJs”) are not officers subject to the appointments clause of the U.S. Constitution. We’ve blogged about Lucia extensively because the issue in that case has the potential to impact the outcome of the PHH case.

The initial PHH decision was decided by an SEC ALJ who was on loan to the CFPB. If the Supreme Court decides to hear Lucia and decides that SEC ALJs are subject to the appointments clause, then the initial ALJ decision in PHH may be invalidated. If that happens, the D.C. Circuit could remand PHH back to the CFPB for decision by a properly-appointed ALJ. That would provide the D.C. Circuit with another basis to decide the PHH case without addressing the constitutionality of the CFPB’s structure. Given how the PHH oral arguments went, that seems unlikely, but we will continue to follow Lucia just in case.

Despite the pendency in the Tenth Circuit of a constitutional challenge to a CFPB administrative order that requires a lender and its CEO to pay restitution and civil money penalties, a Kansas federal district court recently refused to stay enforcement of the order.

In CFPB v. Integrity Advance, LLC and James R. Carnes, the CFPB had initiated an administrative enforcement proceeding in 2015 against Integrity, a lender making short term loans, and Mr. Carnes alleging violations of the TILA, EFTA, and CFPA.  In July 2016, a hearing was held before a Coast Guard administrative law judge (ALJ) who issued a recommended decision in favor of the CFPB.  After the U.S. Supreme Court’s ruling in Lucia v. SEC that the appointment of an SEC ALJ violated the Appointments Clause of the U.S. Constitution, former CFPB Director Kraninger determined that the Coast Guard ALJ used by the CFPB had not been constitutionally appointed and remanded the matter to the CFPB’s ALJ for a new hearing.  (By the time Lucia was decided, the CFPB had its own ALJ  who was constitutionally appointed.)

The CFPB ALJ also issued a recommended decision in favor of the CFPB in which she recommended that the lender pay $132.5 million in restitution, that the CEO be held jointly and severally liable for $38.4 million of that amount, and that the lender and CEO pay, respectively, civil money penalties of $7.5 million and $5 million.  The lender and CEO appealed that decision to former Director Kraninger who issued a decision in January 2021 (after Seila Law had been decided by the Supreme Court) reducing the total restitution amount to $34.5 million.  As part of that decision, former Director Kraninger ratified the CFPB’s Notice of Charges that initiated the enforcement action.

The lender and CEO thereafter appealed former Director Kraninger’s decision to the Tenth Circuit.  In the appeal, they argue that former Director Kraninger’s ratification was not effective because the applicable statute of limitations had expired before the ratification.  They also argue that the Appointments Clause violation was not cured by the new hearing before a properly appointed ALJ because she did not in fact conduct a new hearing and instead relied on the existing record and routinely denied their requests to present evidence or make new arguments that were not raised in the first hearing.

Through its petition, the CFPB sought to enforce its final order issued pursuant to former Director Kraninger’s January 2021 decision.  The final order directed the lender and CEO to pay the required amounts within 30 days but provided that if they appealed the decision, they could instead pay the amounts into an escrow account within 30 days.  Pursuant to the CFPA, the appeal of a CFPB order to a court of appeals does not operate as a stay of the order unless a stay is specifically authorized by the appellate court.  The lender and CEO did not seek a stay of the CFPB’s order from the Tenth Circuit.

In opposing the CFPB’s petition, the CEO argued that the CFPB’s final order was not valid and enforceable.  While conceding that only the Tenth Circuit could address the merits of these arguments, he nevertheless asked the district court to exercise its discretion to delay its resolution of the CFPB’s petition pending the Tenth Circuit’s ruling on the appeal.  The district court concluded that because the CFPA did not permit it to stay enforcement of the CFPB’s order, it could not grant the CEO’s request which it considered to be “tantamount to a request for…a stay or suspension.”  Accordingly, the district court granted the CFPB’s petition and ordered the lender and CEO to comply with the final order by paying the restitution and civil money penalties.

In response to the U.S. Supreme Court’s decision in Lucia v. SEC, President Trump has issued an executive order that changes the process used by federal agencies for administrative law judges (ALJs).

In Lucia, the Supreme Court ruled that administrative law judges (ALJs) used by the SEC are “Officers of the United States” under the Appointments Clause in Article II of the U.S. Constitution because they exercise “significant authority pursuant to the laws of the United States.”  Under the Appointments Clause, the power to appoint “Officers” is vested exclusively in the President, a court of law, or the head of a “Department.”

Currently, federal agencies hire ALJs through a competitive merit-selection process administered by the Office of Personnel Management (OPM).  The Executive Order removes ALJs from the “competitive service,” a federal worker classification that follows the OPM’s hiring rules, and places them into the “excepted service,” a category of federal workers who are subject to a different hiring process, by creating a new excepted service category specifically for ALJs.

Federal regulations provide that appointments of workers who are in the excepted service are to be made “in accordance with such regulations and practices as the head of the agency concerned finds necessary.”  The executive order amends such regulations to provide that for ALJs, such regulations and practices must include the requirement that an ALJ who is other than an incumbent ALJ must be licensed to practice law by a state, the District of Columbia, the Commonwealth of Puerto Rico, or any territorial court established under the U.S. Constitution.

Presumably, to address Lucia’s conclusion that ALJs must be appointed by an agency official who qualifies as the “head of a Department” for purposes of the Appointments Clause, the agency regulations for hiring ALJs issued pursuant to the executive order will provide that a final hiring decision must be made by the agency head rather than a subordinate official.  However, even if ALJs are only hired by agency heads, it is not certain that the heads of all agencies would qualify as the “head of a Department.”

As we have previously observed with regard to the CFPB, the Dodd-Frank Act provided that “[t]here is established in the Federal Reserve System, an independent bureau to be known as the “[BCFP].”  Under U.S. Supreme Court decisions that have addressed the meaning of the term “Department,” it is unclear whether an establishment’s status as an independent agency with a principal officer who is not subordinate to any other executive officer is sufficient to render it a “Department” or whether it must also be self-contained.  While compelling arguments can be made that that the CFPB’s status as an independent agency should be sufficient to render it a “Department,” Congress’ decision to house the CFPB in the Federal Reserve means that the CFPB’s status as a “Department” is not free from doubt.  Similarly, because the OCC is housed in the Treasury Department, there is a question whether the Comptroller would qualify as the “head of a Department.”

 

On January 31, 2018, the en banc D.C. Circuit handed down its opinion in the PHH v. CFPB case, which we’ve discussed at length. It held, 7 to 3, that the CFPB’s single-director-removable-only-for-cause structure is constitutional but that the CFPB’s interpretation of RESPA was wrong.

En Banc Court Reinstates Panel’s RESPA Ruling

The en banc Court reinstated the RESPA-related portions of the D.C. Circuit’s October 2016 panel decision. The panel had held that the plain language of RESPA permits captive mortgage re-insurance arrangements like the one at issue in the PHH case, if the mortgage re-insurers are paid no more than the reasonable value of the services they provide. This is consistent with HUD’s prior interpretation. For the first time in 2015, in prosecuting the case against PHH, the CFPB announced a new interpretation of RESPA under which captive mortgage reinsurance arrangements were prohibited. The panel rejected this on the ground that the statute unambiguously allows the kinds of payments that the CFPB’s 2015 interpretation prohibited.

In remanding the case to the CFPB for further proceedings, the panel had admonished the CFPB by alternatively holding that—even assuming that the CFPB’s interpretation was permitted under any reading of RESPA—the CFPB’s attempt to retroactively apply its 2015 interpretation, which departed from HUD’s prior interpretation, violated due process. It held that “the CFPB violated due process by retroactively applying that new interpretation to PHH’s conduct that occurred before the date of the CFPB’s new interpretation.” The en banc Court cited the panel’s due process analysis with approval.

The panel’s RESPA decision remanded the case to the CFPB to determine whether PHH violated RESPA under the longstanding interpretation previously articulated by HUD. The en banc Court’s reinstatement of that aspect of the panel decision led it to order that the case be remanded to the CFPB for further proceedings.

Statute of Limitations Continues to Apply to RESPA Cases Before CFPB

At the administrative stage of the case, the CFPB argued that no statute of limitations applies to any CFPB administrative action. The panel soundly rejected that argument, holding that RESPA’s three-year statute of limitations applies to any RESPA claims that the CFPB brings, whether administratively or otherwise. That aspect of the panel decision, because it pertains to RESPA, is also reinstated by the en banc Court’s ruling.

CFPB’s Structure Deemed Constitutional

The panel of the D.C. Circuit had also held that the CFPB’s structure was unconstitutional because it improperly prevented the President from “tak[ing] Care that the Laws be faithfully executed.” Rejecting this holding, the en banc Court held that “[w]ide margins separate the validity of an independent CFPB from any unconstitutional effort to attenuate presidential control over core executive functions.” In other words, the en banc Court found (wrongly, in our view) that it wasn’t even a close call.

In reaching this conclusion, the en banc Court considered two questions: First, it asked whether the “means” that Congress employed to make the CFPB independent was permissible? That is, were the independence-creating tools used ones that the Supreme Court approved of, such as for-cause removal or budgetary independence? The en banc Court found that the Supreme Court approved each of the “means” Congress used to achieve CFPB “independence” individually. It reasoned then, that those “means” could all be combined in a single agency without running afoul of the U.C. Constitution.

Second, the en banc Court asked whether “the nature of the function that Congress vested in the agency calls for that means of independence?” In answer to the second question, the en banc Court found it was consistent with historical practice to grant financial regulators like the CFPB such independence.

The en banc Court went further, however, and dismissed the panel’s other constitutional concerns under the heading “Broader Theories of Unconstitutionality.” For example, it rejected the panel’s concern that having a powerful unaccountable CFPB Director was a threat to individual liberty. It suggested that such an argument “elevat[ed] regulated entities’ liberty over those of the rest of the public.” “It remains unexplained why we would assess the challenged removal restriction with reference to the liberty of financial services providers, and not more broadly to the liberty of the individuals and families who are their customers,” it said. In doing so, it seems to have forgotten that Dodd-Frank gives the CFPB Director broad powers to go after individuals, “mom and pop” businesses, and large “regulated entities.”

Lucia Issue Regarding ALJ Appointment Not Addressed

Notably, the en banc Court in PHH specifically “decline[d]to reach the separate question whether the ALJ who initially considered this case was appointed consistently with the Appointments Clause.” That was the issue in Lucia, which we have blogged about extensively. In that case, Raymond J. Lucia challenged the manner in which the SEC appointed administrative law judges (“ALJs”), arguing that ALJs are “inferior officers” who must be appointed by the president, a department head, or the courts under the Appointments Clause of the U.S. Constitution.  The Supreme Court recently agreed to hear Lucia.

The CFPB has issued a request for information that seeks comment on how the CFPB can improve its administrative adjudication processes, including its “Rules of Practice for Adjudication Proceedings” codified at 12 CFR part 1081, Subpart E (Rules).  The Rules address the general conduct of administrative enforcement proceedings, the initiation of such proceedings and prehearing rules, decisions and appeals, and temporary cease-and-desist proceedings.  Comments on the RFI must be received by April 6, 2018.

In the background discussion, the CFPB states that, to date, there have been eight administrative adjudication proceedings under the Rules that were not immediately resolved through a consent order.  Six of those proceedings were settled during the course of adjudication, one is pending, and one has resulted in a final decision.  In explaining its rationale for issuing the RFI, the CFPB states that it understands “that the administrative adjudication process can result in undue burdens, impacts, or costs on the parties subject to these proceedings.”

The RFI seeks feedback on all aspects of the CFPB’s administrative adjudication process but lists 13 general areas, which according to the CFPB “represents a preliminary attempt by the Bureau to identify elements of Bureau processes related to administrative adjudication that may be deserving of more immediate focus.”  In addition to the requirements and other aspects of specific provisions of the Rules, the 13 general areas include “[w]hether, as a matter of policy, the Bureau should pursue contested matters only in Federal court rather than through the administrative adjudication process.”  Given that the administrative adjudication process puts the CFPB simultaneously in the role of prosecutor, judge and jury, we believe the CFPB should give careful consideration to discontinuing the use of the administrative adjudication processes.

In addition, a serious constitutional question exists as to whether the CFPB Director has the authority to appoint administrative law judges.  The U.S. Supreme Court recently agreed to decide whether SEC ALJs  are “inferior officers” who must be appointed by the President, the courts, or a department head in accordance with the U.S. Constitution’s appointments clause.  A similar question exists as to ALJs used by the CFPB in its administrative adjudication proceedings.  If they are “inferior officers,” it would raise the further questions of whether the CFPB is a “department” and thus whether the CFPB Director is department head who can appoint an ALJ.

The new RFI represents the second in a series of RFIs announced by Mick Mulvaney, President Trump’s designee as Acting Director.  Mr. Mulvaney described the CFPB’s plans to issue the RFIs as “a call for evidence to ensure the Bureau is fulfilling its proper and appropriate functions to best protect consumers.”  In its press release announcing the second RFI, the CFPB stated that the next RFI in the series “will address the Bureau’s enforcement processes, and will be issued next week.”

The first RFI, which was published last week in the Federal Register and has a March 27, 2018 comment deadline, was entitled a “Request for Information Regarding Bureau Civil Investigative Demands and Associated Processes.”  In that RFI, the CFPB asks for comments on its processes surrounding Civil Investigative Demands and investigational hearings.  As we indicated in connection with the first RFI, with the recent change of leadership and philosophy, we anticipate a CFPB that will be more receptive to the concerns of industry.  We therefore view the RFIs as an important opportunity for the industry to argue for permanent changes in the areas addressed by the RFIs.

On June 26, 2017, the en banc D.C. Circuit was equally divided on the question of whether SEC administrative law judges (“ALJs”) are “inferior officers.”  This leaves intact the D.C. Circuit panel decision in Lucia which held that SEC ALJs are not officers and do not have to be appointed by the President.  Because SEC ALJs are not appointed that way, a different decision may have called into question virtually every SEC ALJ decision ever issued.

Because it was an SEC ALJ who rendered the initial PHH decision, there was talk that a different decision in Lucia may have given the en banc D.C. Circuit a way to decide the PHH case in PHH’s favor without addressing the constitutional issues surrounding the CFPB’s structure.  Indeed, in its final merits brief at the panel level, PHH raised the same argument at issue in Lucia.  While the panel decision in PHH did not address the issue, in his concurrence, Judge Randolph stated that the problem with the ALJ’s appointment “itself rendered the proceedings against petitioners unconstitutional.”  It may be that the Lucia issue ends up being decided in the PHH case, which has an eleven-judge panel that cannot split evenly.

On May 24, 2017, the US Court of Appeals for the D.C. Circuit (D.C. Circuit) held oral argument in the PHH case, which we have blogged about extensively. The constitutionality of the CFPB’s structure was the central issue at the oral argument, occupying the vast majority of the time and the judges’ questions. It appears that the court intends to decide whether the CFPB’s single-director-removable-only-for-cause structure violates the Constitution’s separation of powers doctrine, even if the court rules in PHH’s favor on the RESPA issues.

The judges’ questioning signaled that, in their minds, the resolution turns on three questions: First, how does the CFPB structure diminish Presidential power more than a multi-member commission structure, which the Supreme Court has approved? Second, doesn’t the CFPB’s structure make it more accountable and transparent than a multi-member commission? Third, what are the consequences of approving the CFPB structure? Judges that appeared not to be concerned with the CFPB’s structure generally focused on the first two questions. Judges that appeared to be concerned with the CFPB’s structure focused on the third question. Another key theme addressed at various points throughout the oral argument is whether the CFPB’s structure is sufficiently close to the structures validated in prior Supreme Court cases, such that the court must uphold the CFPB’s structure.

At the oral argument, PHH’s counsel urged the court to recognize the serious affront that the various features of the CFPB’s structure, taken together, present to Presidential power, including: (i) the single director, (ii) the for cause removal provision, (iii) the funding outside the Congressional appropriations process, (iii) the director’s ability to appoint all inferior officers with no outside input, (iv) the director’s five-year term, (v) the deferential standard of review given to the director’s decisions, (vi) the director’s ability to promulgate regulations unilaterally, and (vii) the director’s sole ability to interpret and enforce regulations.

Before PHH’s counsel could even fully articulate his argument, however, judges started questioning him on how these features diminished Presidential power more than the multi-member commissions running other agencies, which the Supreme Court approved in Humphrey’s Executor. The DOJ, which was given time at the oral argument, forcefully responded to the judges’ questions. The “quintessential” character of the executive is the ability to act “with energy and dispatch,” counsel argued. Multi-member panels, as deliberative bodies, lack that quality and are thus more legislative and judicial than executive. Thus, they encroach on Presidential power to a much lesser degree.

DOJ’s counsel also pointed out that the rationale justifying the for cause removal provision that that the Supreme Court approved in Humphrey’s Executor was not present in agencies endowed with the CFPB’s structural features. The DOJ’s counsel pointed to language in Humphrey’s Executor approving the for-cause removal provisions only as to “officers of the kind here under consideration,” namely FTC commissioners. The Humphrey’s Executor court extensively described the FTC and the officers “here under consideration” in a way that precluded any applicability of the case to the CFPB. In Humphrey’s Executor, the FTC was described as a “non-partisan,” non-political body of experts that exercised quasi-judicial and quasi-legislative powers. The CFPB does not fit that mold, the DOJ ‘s counsel argued.

Counsel for both PHH and the DOJ also stressed that the CFPB did not fit the mold of the inferior officer at issue in Morrison v Olson, in which the Supreme Court approved a for-cause removal provision applicable to a special prosecutor. A few judges asked counsel questions apparently aimed at establishing that the existence of special prosecutors was as great an affront to Presidential power as is the CFPB’s structure.

During these lines of questioning, one judge suggested that the CFPB’s structure makes it more accountable to the President. She pointed out that, with a single director, there is one person to blame for problems and that, unlike multi-member commissions, the President has the power to appoint leadership with complete control over the agency. Counsel for PHH and the DOJ responded to this by reminding the court that the President can only appoint a director after the last director’s five-year term expires or the for-cause removal provision is triggered. Interestingly, no one raised the point that the for cause removal provision and five-year term also limit the ability of a President to remove a director that he or she appointed, even if the appointee did not act in a manner satisfactory to the President. Thus, the argument that the CFPB director is somehow more accountable than a multi-member commission does not hold water.

Some judges’ questions presented the issue that “if” the CFPB director is the same as a special prosecutor or FTC commissioner, then the D.C. Circuit is bound by Humphrey’s Executor and Morrison v. Olson. Without missing a beat, however, the DOJ picked up on that “if” and argued the point that the CFPB director is nothing like either position. DOJ’s counsel asserted that the director is not an inferior officer, as was the special prosecutor in Morrison v. Olson, nor is the director part of a non-partisan body of experts, as was the FTC commissioner in Humphrey’s Executor.

During the argument, Judge Brown and Judge Kavanaugh, who wrote the panel’s majority opinion, attempted to draw the rest of the court’s attention to the consequences of extending Humphrey’s Executor to a single-director agency and Morrison v. Olson to principal, as opposed to inferior, officers. Judge Brown suggested that, if the CFPB’s structure is constitutional, nothing would prevent Congress from slapping lengthy terms and for-cause removal restrictions on cabinet-level officials. That, she argued, would reduce the presidency to a “nominal” office with no real executive power. Judge Kavanaugh addressed the same issue making an apparent reference to the speculation that Elizabeth Warren may run for President after Trump leaves office. How would it be, he questioned, if she ran on a consumer protection platform, got elected, and was stuck with a Trump-appointed CFPB director, who would presumably take a much different position on issues central to her platform?

The CFPB’s counsel defended the Bureau’s structure at the hearing using the same technical arguments that the CFPB has been making all along. The CFPB’s counsel asserted that the CFPB’s structure was constitutional because each of the features taken individually has support in Supreme Court jurisprudence, principally Humphrey’s Executor and Morrison v. Olson.

In discussing the CFPB’s problematic structural features, CFPB counsel argued that, because each feature is a “zero” in terms of a problematic Congressional encroachment on Presidential power, that adding them together resulted in zero constitutional problems. “Zero plus zero plus zero, is zero,” he said. In rebuttal, PHH’s counsel pointed out that, as catchy as the argument may be rhetorically, it completely ignores the fact that even Supreme Court jurisprudence supportive of the individual features recognizes them as departures from the norm, acceptable only under certain circumstances. PHH’s counsel observed that the features at issue are not “zeros.”

The RESPA and statute of limitations issues did not occupy much time at the oral argument. Counsel for PHH urged the D.C. Circuit to reinstate the panel’s RESPA and statute of limitations rulings, all of which were in favor of PHH, and to rule on one issue not addressed by the panel.  While the panel decided, contrary to the CFPB’s views, that the CFPB is subject to statutes of limitations in administrative proceedings, the panel left for the CFPB on remand to decide if, as argued by the CFPB, each reinsurance premium payment triggered a new three-year statute of limitations, or whether, as argued by PHH, the three year statute of limitations is measured from the time of loan closing.  The judges did not raise any questions in response to counsel’s arguments on the RESPA and statutes of limitation issues.

Even though Lucia v. SEC was argued that same day, no questions surfaced during the PHH oral argument about the impact that Lucia may have on the PHH case.

* * *

It is likely that the earliest the D.C. Circuit’s decision will be issued is toward year-end. We will continue to monitor developments in this case.