A Florida federal district court has granted the motion filed by Ocwen Financial Corporation to invite the U.S. Attorney General to express the AG’s views on the CFPB’s constitutionality.

In April 2017, the CFPB filed a lawsuit against Ocwen in which it alleged Ocwen had engaged in unlawful conduct in connection with its servicing of residential mortgages.  In anticipation of filing a motion to dismiss challenging the CFPB’s constitutionality, Ocwen filed a motion in which it asked the court to invite the AG to participate in the briefing on the motion to dismiss.  In its motion, Ocwen referenced the amicus brief filed by the AG in the D.C. Circuit’s en banc rehearing in the PHH case in which the AG agreed with PHH’s position that the CFPB’s structure is unconstitutional.  Ocwen asserted that because the AG’s views on the CFPB’s constitutionality conflict with those of the CFPB, it was necessary for the court to hear “both sides from the government entities.”

In June 2017, Ocwen filed a motion to dismiss in which it argued that the CFPB’s structure violates the U.S. Constitution’s separation of powers.  In its order entered last week granting Ocwen’s motion to invite the AG to participate, the court stated that “[i]n light of [Ocwen’s] constitutional concerns, the Court finds it appropriate and prudent to ask the Attorney General of the United States to share with the Court its views on the issues raised in [Ocwen’s motion and the CFPB’s response].”

The order provides that “[p]ursuant to 28 U.S.C. section 2403 and Federal Rule of Civil Procedure 5.1, the court certifies to the [AG] that a statute has been questioned and permits the United States to intervene.”  (Section 2403 requires district courts to notify the AG of a constitutional challenge in which the United States is not a party.)  The order sets an October 2, 2017 deadline for the AG’s brief, an October 16, 2017 deadline for the CFPB to respond, and an October 23, 2017 deadline for the AG’s reply brief.

The D.C. Circuit, in a divided decision, denied a motion for an emergency injunction pending appeal filed by a company seeking to halt all CFPB action adverse to the company, including enforcement of a CID and disclosure of the company’s identity.  The company seeking the injunction in John Doe Company v. CFPB is a California limited liability company with its principal place of business in the Philippines that is in the business of purchasing and selling income streams.

To satisfy the requirement of showing a likelihood of success on the merits, the company pointed to the D.C. Circuit’s PHH decision holding that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional.  In denying the injunction, the D.C. Circuit observed that the company was required to show not only that there is potentially persuasive authority for its legal position but also that the district court abused its discretion by not giving sufficient credit to that showing when it balanced the equities for purposes of deciding whether to grant preliminary injunctive relief.

The D.C. Circuit concluded that pointing to PHH was not enough because:

  • The PHH decision has been vacated as a result of the order granting the CFPB’s petition for rehearing en banc.  The D.C. Circuit stated that the district court “did not abuse its discretion in determining that simply pointing to the vacated majority opinion in PHH did not establish the likelihood of an identical constitutional ruling by the en banc court in PHH or the court in this case.” (emphasis provided).
  • Even assuming the en banc court were to agree with the majority opinion in PHH, the company is not in the same constitutional position as PHH.  According to the court, PHH was “on the receiving end of a completed law enforcement action by the Bureau” and the majority opinion emphasized the Constitution’s assignment of law enforcement authority to the Executive Branch.  In contrast, the company is seeking to stop “a non-self-executing investigative demand for regulatory action” and had not objected to the scope or content of the CID or argued that it is outside the CFPB’s authority.  To obtain the injunction, the company “would have to show that only the Executive Branch can demand information from regulated businesses or take such investigative steps,” something which the court deemed “far from constitutionally self-evident.” (emphasis provided).
  • The company’s argument that the alleged separation of powers violation requires the CFPB to “be stopped in its tracks” ignores that severance of the unconstitutional provision is often the chosen remedy (as it was in PHH) and that vacatur of past actions is not routine.  The court observed that the PHH decision “did not undo the Bureau enforcement action and make it start over from scratch.  The court simply remanded for the Bureau to address specific matters.”
  • An administrative proceeding rather than the D.C. Circuit is the proper forum for the company’s separation of powers claim.

The D.C. Circuit also found that the district court had not abused its discretion (1) in finding that the company had failed to show irreparable harm, calling the company’s argument about reputational harm “nothing more than speculation about how third parties might respond to routine regulatory investigations,” and (2) in holding that the company’s name did not need to be kept confidential in public court proceedings.  (On March 7, the date of the D.C. Circuit decision, the CFPB revealed the company’s name by publishing on its website the company’s petition to modify or set aside the CID and the CFPB’s decision and order denying the petition.)

Judge Kavanaugh, who was on the PHH panel and joined the majority decision, issued a dissenting opinion in which he stated that he would grant the company’s injunction motion.  According to Judge Kavanaugh, the company had shown a likelihood of success on the merits because “given the Supreme Court’s Article II precedents, I believe that the CFPB’s structure is likely to be ruled unconstitutional, whether by this Court sitting en banc or by the Supreme Court.”  He also found that the company had shown irreparable harm because “[i]rreparable harm occurs almost by definition when a person or entity demonstrates a likelihood that it is being regulated on an ongoing basis by an unconstitutionally structured agency that has issued binding rules governing the plaintiff’s conduct and that has authority to bring enforcement actions against the plaintiff.”

The CFPB had argued that even if it is unconstitutionally structured, the remedy would be to sever the for-cause removal provision as was done in PHH.  According to the CFPB, because it would continue to regulate the company as an executive agency rather than an independent agency in that scenario, the company is not entitled to a preliminary injunction to prevent the CFPB in its current form from regulating the company.  Calling the CFPB’s analysis “badly mistaken,” Judge Kavanaugh stated that “unless and until” the for-cause removal provision is actually severed, the company “will continue to be regulated on an ongoing basis by an unconstitutional agency.”  In his view, a preliminary injunction “would alleviate that ongoing harm.”


Just before year-end, the U.S. Court of Appeals for the Tenth Circuit, in Bandimere v. United States Securities and Exchange Commission, set aside an SEC decision finding the petitioner liable for violating various securities law on the grounds that the SEC’s administrative law judge (ALJ)  who conducted the proceeding was unconstitutionally appointed.  The Tenth Circuit held that the ALJ was an “inferior officer” who, pursuant to the Appointments Clause of Article II of the U.S. Constitution, could only be appointed by the President, a court, or the head of a “Department.”  The parties agreed that the process used by the SEC to hire ALJs in which an ALJ is selected by the SEC’s Chief ALJ did not qualify as an appointment by the President, a court, or the head of a “Department.”

In holding that the SEC’s ALJ was an “inferior officer” who must be appointed in accordance with the Appointments Clause, the Tenth Circuit created a circuit split, thus making the case a good candidate for U.S. Supreme Court review.  In August 2016, the U.S. Court of Appeals for the D.C. Circuit, in Raymond J. Lucia Companies, Inc. et al. v. Securities and Exchange Commission, rejected a similar constitutional challenge and ruled that the SEC’s ALJ was an “employee” rather than “inferior officer.”  As a result, the D.C. Circuit held that the ALJ’s appointment by the SEC’s Office of Administrative Law Judges rather than an SEC commissioner was constitutional.  

The Tenth Circuit’s ruling might be used to support an Appointments Clause challenge to the CFPB’s use of ALJs.  As we have previously noted, because the CFPB is housed within the Federal Reserve, it could be argued that Director Cordray is not a “Department” head who can appoint “inferior Officers” under the Appointments Clause.  Thus, if the CFPB were unable to establish that its ALJ was an employee rather than an inferior officer, its ALJ might be deemed unconstitutionally appointed.

The D.C. federal district court has rejected the plaintiffs’ attempt in State National Bank of Big Spring, Texas, et al. v. Lew, et al. to invalidate the actions taken by Director Cordray while he was a recess appointee.  The district court deferred ruling on the plaintiffs’ separation of powers constitutional challenge to the CFPB pending a decision by the D.C. Circuit in PHH Corporation v. CFPB.

In that case, PHH is arguing that the Dodd-Frank Act’s placement of sweeping legislative, executive, and judicial power in the hands of a single director who is not accountable to the President or Congress makes the CFPB’s structure unconstitutional. The D.C. Circuit held oral argument this past April.  In its decision, the district court noted that the plaintiffs in State National Bank of Big Spring had filed an amicus brief in support of PHH in which they made largely the same constitutional argument that they made in their own case.

The district court had initially dismissed the second amended complaint in State National Bank of Big Spring on standing and ripeness grounds.  In July 2015, that decision was reversed in part by the D.C. Circuit, which ruled that the bank had standing to challenge the constitutionality of the CFPB and Director Cordray’s recess appointment.  With regard to the recess appointment challenge, in addition to remanding the case to the district court to consider the merits of the issue in light of the U.S. Supreme Court’s decision in Noel Canning, the D.C. Circuit also noted that it “leave[s] it to the District Court to consider the significance of Director Cordray’s later Senate confirmation and his subsequent ratification of the actions he had taken while serving under a recess appointment.”  In August 2013, following his confirmation by the Senate, Director Cordray published a notice in the Federal Register “affirm[ing] and ratify[ing] any and all actions” he took while a recess appointee.

In its decision on remand, the district court observed that the CFPB made no attempt to rebut the argument that Director Cordray’s recess appointment was unconstitutional, which the district court found to be “unsurprising in light of the Supreme Court’s decision in Noel Canning.”  The plaintiffs conceded that Director Cordray’s confirmation mooted their attempt in the lawsuit to use his recess appointment as grounds for challenging his authority to take any action as CFPB Director.  They argued, however, and the district court agreed, that the entire case was not moot because the court could still grant them partial relief by enjoining the enforcement of regulations that were promulgated prior to Director Cordray’s confirmation.  Nevertheless, the district court concluded that despite his unconstitutional recess appointment, Director Cordray’s subsequent confirmation and ratification “saves the regulations from plaintiffs’ challenge.”

In April 2016, in CFPB v. Chance Edward Gordon, a divided Ninth Circuit panel ruled that Director Cordray’s invalid recess appointment did not render the CFPB’s enforcement action against the defendant invalid because his subsequent valid appointment coupled with his ratification notice cured any initial constitutional deficiencies.



A recent decision by the U. S. Court of Appeals for the Second Circuit suggests that an attempt by a company or individual that is the target of a CFPB administrative enforcement action to bring a separate action in federal court challenging the constitutionality of the CFPB’s use of an administrative law judge (ALJ) is likely to face a significant jurisdictional hurdle.  A divided Second Circuit ruled that an individual and several of her investment firms (Appellants) against whom the SEC had commenced an administrative proceeding conducted by an ALJ could not bring a separate lawsuit in federal court challenging the constitutionality of the SEC’s use of ALJs.  Affirming the district court and resolving a split within the New York federal district courts, the Second Circuit held that the Appellants could not raise their constitutional claims in federal court until there was a final SEC decision.  Under SEC procedures, a party can petition for review of a recommended ALJ decision by the SEC and can then seek review of the SEC’s final order by a federal court of appeals.  According to the Second Circuit, the Appellants’ constitutional claims would be subject to meaningful judicial review within the SEC’s administrative scheme and were not “wholly collateral” to that scheme.  The Second Circuit’s ruling agrees with similar rulings by the D.C. and Seventh Circuits.

Last summer, we blogged about a decision by an Atlanta federal court in which the court issued a preliminarily injunction enjoining an SEC administrative proceeding based on a constitutional challenge.  The court found that the plaintiff had established a substantial likelihood of success on the merits of his claim that “the SEC has violated the Appointments Clause [of Article II of the U.S. Constitution].”  The court found that the ALJs’ powers made them “Inferior Officers” under Article II because they exercise “significant authority pursuant to the laws of the United States.”  Such authority included the power to issue subpoenas, make evidentiary rulings, and recommend decisions.

The court rejected the SEC’s argument that the ALJs were “mere employees” in part because they could not issue final orders.  As “inferior officers,” the court concluded that the ALJs were subject to the Appointments Clause, which vests the power to appoint all “inferior officers” in “the President alone, in the Courts of Law, or in the Heads of Departments.”  Since the ALJ was hired by the SEC’s Office of Administrative Law Judges and not appointed by an SEC commissioner, the court ruled that the ALJ’s appointment was “likely unconstitutional.”  In its appeal to the Eleventh Circuit, the SEC has argued that the district court did not have jurisdiction to hear the constitutional challenge. In the Second Circuit case, the Appellants were also seeking to enjoin the SEC’s enforcement action based on a similar Appointments Clause challenge.

In our blog post, we discussed why the CFPB’s use of an ALJ could be subject to a similar Appointments Clause challenge.  However, a company or individual that is the target of a CFPB administrative enforcement action seeking to assert such a challenge in a separate federal court action can be expected to face the argument that, for the same reasons on which the Second Circuit based its decision, the constitutional claim cannot be raised in federal court until there is a final decision by the CFPB Director.  Under CFPB procedures, a party can seek review of an ALJ’s recommended decision by the CFPB Director and can then seek review of the Director’s final decision by a federal court of appeals.  (In PHH Corporation et al. v. CFPB, PHH has sought the D.C. Circuit’s review of Director Cordray’s June 2015 decision affirming an ALJ’s recommended decision that concluded PHH had violated RESPA.  While PHH’s challenge to the constitutionality of the CFPB’s structure was front and center at the April 2016 oral argument, PHH indicated in its brief that it was preserving an Appointments Clause challenge to the CFPB’s use of an ALJ for review by the en banc D.C. Circuit or the U.S. Supreme Court.)


Since it was filed in a California federal court in July 2012, we have been following CFPB v. Chance Edward Gordon, a case in which the CFPB alleged that an attorney duped consumers by falsely promising loan modifications in exchange for advance fees and, in reality, did little or nothing to help consumers.  The CFPB charged the defendant with violations of the Consumer Financial Protection Act and Regulation O, the Mortgage Assistance Relief Services Rule.

As part of his affirmative defenses to the CFPB’s complaint, the defendant included a challenge to President Obama’s recess appointment of Director Cordray.   In his summary judgment motion, the defendant asserted that, based on the reasoning of the D.C. Circuit’s decision in NLRB v. Noel Canning, Mr. Cordray was not validly appointed as CFPB Director.  He argued that in the absence of a validly-appointed Director, the CFPB had no authority over non-banks and the CFPB’s action against him was therefore rendered invalid.  The U.S. Supreme Court subsequently affirmed the D.C. Circuit’s ruling that the NLRB appointments at issue in Canning were invalid but did so on different grounds.

Alternatively, the defendant argued that he was not a “covered person” within the meaning of the Dodd-Frank Act because he did not provide a “consumer financial product or service” but instead provided “custom legal products.”  The defendant also asserted that he did not provide “mortgage assistance relief services” within the meaning of Regulation O because the loan modification services he offered were provided for no compensation.  According to the defendant, fees were only charged for pre-litigation, custom legal products.

The district court did not address the merits of the defendant’s argument that the CFPB lacked authority to bring the action because of Director Cordray’s unconstitutional appointment, concluding that the argument had been waived.  It found that the defendant had violated the CFPA and Regulation O and ordered approximately $11.4 million in disgorgement and restitution.

In its opinion affirming the district court’s finding of liability, the Ninth Circuit considered whether the district court had Article III jurisdiction to hear the CFPB’s enforcement action (an issue which the defendant had not raised but was raised in an amicus brief).  According to the Ninth Circuit, any defects in Director Cordray’s appointment did not deprive the court of Article III jurisdiction because the CFPB retained its enforcement authority, and therefore its standing to sue, despite such defects.

In January 2013, following the oral argument in the D.C. Circuit in Canning but before the D.C. Circuit issued its decision, Director Cordray was renominated by President Obama.  In July 2013, he was confirmed by the Senate as CFPB Director.  Director Cordray thereafter issued a notice ratifying the actions he took as Director while he was serving as a recess appointee.  The Ninth Circuit ruled that Director Cordray’s invalid recess appointment did not render the enforcement action against the defendant invalid because Director Cordray’s subsequent valid appointment coupled with his ratification notice cured any initial constitutional deficiencies.

In calculating the monetary judgment, the district court had included in its judgment money earned by the defendant for a time period that began “prior to the enactment or effectiveness of Regulation O and the relevant portions of the CFPA.”  Although the Ninth Circuit agreed with the district court’s liability finding, it vacated the judgment and remanded “for the district court to consider whether it is appropriate to include in its judgment” money earned by the defendant based on a retroactive application of Regulation O and the CFPA.

In a dissenting opinion, Judge Ikuta disagreed with the majority’s conclusion that Director Cordray’s invalid appointment did not deprive the court of Article III jurisdiction.  According to Judge Ikuta, because his appointment was invalid, Director Cordray did not have authority to enforce public rights in federal court on behalf of the Executive Branch.  In Judge Ikuta’s view, without an officer properly appointed by the President, the CFPB lacked any executive authority that would allow it to enforce public rights.

She concluded that, as a result, neither the CFPB nor Director Cordray had Article III standing to sue when the CFPB filed its enforcement action against the defendant and the action should have been dismissed by the district court for lack of jurisdiction.  Judge Ikuta rejected the argument that Director Cordray’s subsequent ratification of his actions while a recess appointee could retroactively cure the district court’s lack of jurisdiction.  As support, Judge Ikuta cited to federal court cases that have also rejected the argument that a later act can cure a lack of standing at the time a lawsuit is filed.

Judge Ikuta observed that her conclusion that the district court lacked jurisdiction to hear the CFPB’s enforcement action “undoubtedly applies to numerous other enforcement actions taken by the Bureau for the 18 months of its existence before [Director Cordray was confirmed by the Senate.]”  She also commented that the court had a duty to dismiss the case for lack of Article III jurisdiction “practical effects notwithstanding.”

The CFPB continues to face a constitutional challenge to its structure in two pending cases.  One case was recently argued before the D.C. Circuit and the other case is before the D.C. federal district court.  In both cases, the parties raising the constitutional challenge argue that the Dodd-Frank Act’s placement of sweeping legislative, executive, and judicial power in the hands of a single Director who is not accountable to the President or Congress makes the CFPB’s structure unconstitutional.  In particular, they point to the President’s ability to remove the CFPB Director only “for cause” and the funding of the CFPB through the Federal Reserve rather than the congressional appropriations process.  (The case before the D.C. federal district court also includes a challenge to the CFPB’s constitutionality based on Director Cordray’s recess appointment.)


An Indiana federal court recently granted in part and denied in part the motion of ITT Educational Services, Inc. to dismiss the CFPB’s complaint.  As we previously reported, the CFPB’s complaint alleged that ITT engaged in misrepresentations and other unlawful conduct to lead ITT students to obtain financing with onerous terms to pay tuition.  The CFPB asserted various claims for alleged “unfair” and “abusive” conduct under the Consumer Financial Protection Act (CFPA), and a claim for an alleged TILA violation.

ITT moved to dismiss on three broad grounds: that the CFPA is unconstitutional, that ITT is not subject to the CFPA, and that the CFPB’s complaint failed to state a claim.  While rejecting ITT’s various constitutional and other arguments for dismissal of the CFPA claims, the court dismissed the CFPB’s TILA claim.  In a matter of first impression in federal court, the court held that a CFPB civil action under TILA is governed by TILA’s one-year statute of limitations.  This is an important restriction on the CFPB’s ability to obtain relief for violations of TILA and the other federal consumer laws enforceable by the CFPB.

For a more detailed discussion of the decision, see our legal alert.

Briefs were filed last week by the “private” and “state” appellants in State National Bank of Big Spring, Texas, et al. v. Lew, et al., the case on appeal to the U.S. Court of Appeals for the D.C. Circuit that includes a challenge to the CFPB’s constitutionality.  In August 2013, the district court granted the CFPB’s and other defendants’ motion to dismiss on standing and ripeness grounds.  

The private appellants are State National Bank of Big Spring (SNB) and the two D.C. area non-profit organizations that joined SNB as plaintiffs when the original complaint was filed in June 2012.  The state appellants are the eleven Republican state Attorneys General who subsequently joined as plaintiffs on the amended complaint filed in September 2012.  In the original complaint, the private plaintiffs challenged the constitutionality of Director Cordray’s recess appointment and also alleged that the CFPB’s structure and authority violated the Constitution’s separation of powers.  The AGs did not join that portion of the amended complaint and instead only joined a newly-added challenge that had nothing to do with the CFPB but dealt with their states’ status as potential creditors of a failed financial institution in the event of an “orderly liquidation” under Title II of Dodd-Frank.  

The private appellants’ brief to the D.C. Circuit is primarily directed at challenging the district court’s holding that SNB lacked standing to challenge the CFPB’s constitutionality based on SNB’s alleged exit from the mortgage business and reduction in its remittance transfer business because of the increased risks and compliance costs resulting from the CFPB’s regulations and UDAAP authority.  According to SNB, its alleged lost profits and increased compliance costs are sufficient injuries to establish standing. 

According to the state appellants, because Title II gives the FDIC, as receiver for a failed financial institution in an orderly liquidation, discretion to discriminate among similarly situated creditors, all creditors lose the right to be repaid equally with other similarly situated creditors.  In their brief to the D.C. Circuit, the state appellants argue that, contrary to the holding of the district court, this loss of legal rights represents an immediate injury to their states as potential creditors that confers standing and also makes their claims ripe.


The programming at the ABA Consumer Financial Services Committee meeting included an excellent panel discussion addressing whether the creation of the CFPB and the appointment of Director Richard Cordray were Constitutional.  Currently pending in federal district court, a lawsuit filed by State National Bank of Big Spring against the CFPB, the Department of Treasury, Richard Cordray, and a number of other federal officials alleges that the formation and operation of the CFPB violate the Separation of Powers Doctrine.  Panelist C. Boyden Gray, counsel for the plaintiff, asserted that the combined effect of the CFPB’s extraordinary powers and freedom from legislative, presidential and judicial oversight violate the Constitution. 

The recess appointment of Richard Cordray ultimately dominated the panel discussion.  Deepak Gupta, formerly of the CFPB but now in private practice, opined that the case would likely be dismissed for lack of standing, pointing out, among other things, that the plaintiff is a small bank exempt from supervision by the CFPB and arguing that the creation of the CFPB has not harmed the bank in any appreciable manner.  Mr. Gupta also asserted that the appointment of Director Cordray will likely survive challenge because the President is in fact authorized to make recess appointments under the Constitution.  He explained that senators were holding “pro forma” sessions that lasted just a few minutes in order to thwart any recess appointments by the President.  The President made the appointment between sessions and it has been the subject of much criticism and debate.  Mr. Gupta also stated that even if the court were to hold that Director Cordray’s appointment is invalid, it would likely not invalidate every action already taken by the CFPB under the Director.  

We note that, contrary to Mr. Gupta’s position, the Senate in fact took important legislative action during its purported recess. On
December 23, 2011, during one of the “pro forma” sessions, Harry Reid arranged for passage of a payroll tax bill and communicated with both the House and the President on that legislation. For what it’s worth, we also note that the use of a recess appointment to circumvent Senate objections to a nominee departs from Mr. Deepak’s description of the original purpose of recess appointments—to keep the Government running when a vacancy in an important position arises during an extended Senate recess.