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.

The Supreme Court heard arguments yesterday in Axon Enterprise v. Federal Trade Commission (No. 21-86), as to whether federal courts can hear a challenge to the FTC’s constitutionality by a party in an administrative proceeding before the agency has issued a final order. The Court also heard arguments in a similar case, Securities and Exchange Commission v. Cochran (No. 21-1239). The outcome of these cases may significantly alter the framework for how federal courts address complaints about federal agencies and allow parties subject to enforcement actions to initiate proceedings outside of agency jurisdiction.

Specifically, in the Axon case, the Court has been asked to address (1) Whether Congress impliedly stripped federal district courts of the jurisdiction over constitutional challenges to the FTC’s structure, procedures, and existence by granting the court of appeals jurisdiction to “affirm, enforce, modify, or set aside” the Commission’s cease-and-desist orders, and (2) Whether, on the merits, the structure of the FTC, including the dual-layer for-cause removal protections afforded its administrative law judges (“ALJs”), is consistent with the Constitution.

Federal district courts have broad jurisdiction pursuant to 28 U.S.C. 1331 to hear constitutional challenges. However, the FTC in Axon and the SEC in Cochran argue that Congress may implicitly preclude district court jurisdiction over disputes by creating a review scheme that bypasses district courts and gives judicial review of agency action directly to the courts of appeals.

Axon Enterprises, an Arizona company that manufactures police body cameras and other law enforcement technology, has been under investigation by the FTC after it purchased a competitor in 2018. Axon sued the FTC in U.S. District Court for the District of Arizona, arguing that the proceeding against it is unconstitutional on due process grounds and because the appointment of ALJs violates the Constitution’s appointments clause. On appeal, the Ninth Circuit ruled in the FTC’s favor, holding that the FTC Act impliedly bars jurisdiction in district court and challenges to agency proceedings may only be made after the conclusion of the agency’s action.

The companion case, Cochran, involves a 2016 action brought by the SEC in which an ALJ fined a CPA and barred her from practice before the SEC. That decision was vacated after the Supreme Court ruled in Lucia v. SEC that the SEC’s process for appointing ALJs was unconstitutional. When the SEC brought a new proceeding against her, the CPA filed suit in U.S. District for the Northern District of Texas, arguing that the appointment of the ALJ was unconstitutional and deprived her of due process. Unlike the Ninth Circuit, the Fifth Circuit held that a party in an administrative proceeding could sue on these grounds before a final determination of the agency proceeding.

In its brief, Axon argues that it makes no sense for it to have to bring a structural separation of powers challenge about an administrative agency to that very agency, citing to the Court’s decision in Free Enterprise Fund v. Public Co. Accounting Oversight Board, 561 U.S. 477 (2010) (holding that a party alleging a structural separation of powers challenge to an agency need not endure the process over which an allegedly-unconstitutionally-insulated official presides before it can get judicial review). Axon also argues that its challenge to the constitutionality of the ALJ is wholly collateral to the merits of the issue before the FTC. The FTC argues that Congress created a comprehensive scheme for the commencement and review of FTC proceedings, and that this comprehensive enforcement structure establishes a discernible intent to preclude district court review. See, e.g., Thunder Basin Coal Co. v. Reich, 510 U.S. 200, 216 (1994) (finding congressional intent to preclude such review in mine safety laws). The FTC also points out that Axon’s claims about the FTC’s constitutionality is not wholly collateral to the administrative proceeding, as it is the vehicle by which it seeks to prevail in those proceedings. Brief for FTC, p. 10.

At oral argument, questions from several of the justices, including Chief Justice John Roberts, Justice Neil Gorsuch, and Justice Samuel Alito, challenged the FTC’s position, with Justice Alito asking, “What sense does it make for a claim that goes to the very structure of the agency having to go through the administrative process?” Justice Ketanji Brown Jackson, on the other hand, expressed concern that allowing district court jurisdiction would be an end-run around the agency enforcement process when the FTC Act makes it clear that the agency has exclusive jurisdiction.

In an amicus curiae brief, the Chamber of Commerce asked the Court to rule in Axon’s favor, arguing that “[t]he FTC is a poster child for the perils of cutting off pre-enforcement review” and [f]orcing parties to go to the FTC first thus rewards the agency for its prolific constitutional flaws.”  Brief for the Chamber of Commerce as Amicus Curiae, p. 13. Amicus curiae briefs have also been filed in support of Axon by the Washington Legal Foundation and Allied Educational Foundation, Atlantic Legal Foundation, Americans for Prosperity Foundation, Pacific Legal Foundation, the National Treasury Employees Union, the Separation of Powers Clinic at Antonin Scalia Law School, American Hospital Association, Committee for Justice, and The Justice Society.

While the actual issue before the Court is a procedural one involving jurisdiction, the challenge to the constitutionality of the FTC structure underlying the dispute is just the latest challenge to agency regulatory authority. On October 21, 2022, the Fifth Circuit denied en banc rehearing in Jarkesy v. SEC, which (like Cochran) challenged the use of the SEC’s ALJs, finding it unconstitutional. On October 19, 2022, the Fifth Circuit held in Community Financial Services Association of America v. Consumer Financial Protection Bureau that the CFPB’s funding mechanism violates the Constitution’s appropriations clause. (An in-depth discussion of the impact of this decision can be heard on the Consumer Finance Monitor Podcast here.) That decision has already resulted in defendants in several CFPB actions seeking dismissal of their cases on constitutional grounds, and it paves the way for potential challenges for other federal agencies that are funded outside of the Congressional appropriations process, including the Federal Reserve, the OCC, FDIC, NCUA, and FHFA. Beyond Jarkesy and Community Financial Services Association, there is another recent challenge to the FTC in FTC v. Walmart, where Walmart argues that the FTC lacks constitutionally valid authority to bring the action against it because the FTC Act’s removal provision (which specifies and limits the President’s ability to remove commissioners) is unconstitutional.

Should the Court rule in favor of Axon and Cochran, it will represent a further erosion in agency enforcement authority, and open the door wider to further challenges.

In Integrity Advance LLC v. Consumer Financial Protection Bureau, a panel of the U.S. Court of Appeals for the Tenth Circuit affirmed a CFPB Order requiring Integrity, a lender making short-term loans, and its CEO, James Carnes, to pay $38.4 million in legal and equitable restitution and imposing civil penalties against Integrity ($7.5 million) and Carnes ($5 million), for alleged violations of the Consumer Financial Protection Act, the Truth in Lending Act, and the Electronic Fund Transfer Act. 

The initial Notice of Charges was filed against Integrity and Carnes (collectively, the “Petitioners”) in 2015, and an Administrative Law Judge (“ALJ”) from the U.S. Coast Guard, importantly not a CFPB ALJ, heard the case and recommended to the CFPB Director that Petitioners be ordered to pay $38 million in restitution, jointly and severally, plus civil penalties against Integrity ($8.1 million) and Carnes ($5.4 million).

In 2016, Petitioners appealed the initial ALJ decision to the Director, but the appeal was held in abeyance pending the Supreme Court’s decision in Lucia v. SEC, 138 S. Ct. 2044 (2018). This case would ultimately determine the constitutional status of Securities & Exchange Commission administrative law judges. When Lucia ruled ALJs were constitutional officers and, thus, required to be appointed under the Appointments Clause, the Director remanded the case in 2019 to be reviewed by the CFPB’s ALJ—by the time Lucia was decided, the CFPB had its own constitutionally appointed ALJ.

A second review was conducted by a new ALJ properly appointed under the Appointments Clause. Although Petitioners requested an entirely new hearing, the second ALJ stated she would review the record de novo, and weigh the parties’ arguments with respect to whether the record needed to be supplemented or whether portions of the record should be struck. The ALJ declined to conduct additional pre-hearing discovery or to conduct a new evidentiary hearing, and both parties moved for summary disposition on the existing record.

The ALJ subsequently recommended Petitioners be held liable on all counts, and recommended the Director hold Integrity liable for $132.5 million in equitable restitution, with Carnes jointly and severally liable for $38.4 million. The ALJ also recommended the imposition of civil penalties against Integrity ($7.5 million) and Carnes ($5 million).

On appeal in 2021, the Director (now former Director Kraninger) reduced the award against Integrity to $38.4 million but agreed the entire reduced restitution amount was joint and several as between Petitioners, and also affirmed the full award of civil penalties against Integrity and Carnes. While the ALJ characterized the restitution amount as equitable, the Director concluded restitution was warranted under “equity or law”. Because the CFPB’s Notice of Charges was filed in 2015 before the U.S. Supreme Court ruled in Seila Law that the CFPB was unconstitutionally structured, the Director also ratified the Notice of Charges to cure the constitutional defect.  

Petitioners raised several arguments before the Tenth Circuit, but two are particularly noteworthy. The first is the Petitioners’ argument that the Order should be set aside because the CFPB was unconstitutionally structured when the charges were filed. Even though the ratification occurred after the 3-year limitations period for filing the Notice of Charges had expired, the Court declined to set aside the enforcement action, essentially endorsing the ratification process used by the CFPB. The Court noted that a party could assert a claim for “compensable harm” caused by the CFPB’s unconstitutional structure. But the Court concluded Petitioners had not directed the Court to any such compensable harm. Also noteworthy was Petitioners’ argument that Lucia required a new hearing before a constitutionally appointed ALJ as the remedy for an Appointments Clause violation. Again, the Court approved the CFPB’s actions in this case, and held that the second ALJ’s de novo review satisfied the requirement of a “new hearing”.   

In a separate concurrence, Judge Phillips raised concerns about “legal restitution” under 12 U.S.C. § 5565(a). While noting the issue was not properly preserved in this case, Judge Phillips explained that “legal restitution” was questionable for three reasons: (1) restitution is generally an equitable remedy; (2) a claim to “legal restitution” could render superfluous “payment of damage or other monetary relief” separately listed under the statute; and (3) allowing the CFPB to obtain “legal restitution” in an administrative proceeding raises Seventh Amendment concerns because of guaranteed jury trial rights to parties sued for legal remedies.

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.