Banking and Finance Law Daily CFPB is constitutional, company must comply with bureau’s information demand
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Thursday, May 25, 2017

CFPB is constitutional, company must comply with bureau’s information demand

By Richard A. Roth, J.D.

A claim by an income stream marketing company that the Consumer Financial Protection Bureau’s structure is unconstitutional, raised by the company as part of its challenge to a civil investigative demand, has been rejected by a U.S. district judge. The Constitution’s separation of powers requirements are not offended by organizing the CFPB with a single director who can be discharged only for cause, the judge decided. She also determined that there were no other impediments to enforcing the CID and ordered the company, Future Income Payments, LLC, to turn over the described information within 15 days (CFPB v. Future Income Payments, LLC, May 17, 2017, Staton, J.).

The decision marks FIP’s second major defeat this year. In March, the U.S. Court of Appeals for the District of Columbia Circuit denied the company’s request for an injunction halting the CFPB’s investigation during the appeal of an order that the bureau was constitutional and was acting within its authority. The appellate court also decided that the company could not sue the bureau anonymously (see John Doe Co. v. CFPBBanking and Finance Law Daily, March 6, 2017). That suit remains pending in the U.S. District Court for the District of Columbia.

Separation of powers. FIP, and others who challenge the CFPB’s authority, have asserted that the Dodd-Frank Act’s discharge-for-cause provision violates the Constitution because it impermissibly restricts the President’s power to remove executive officials. Supreme Court precedents make clear that the "guiding question" is whether the provision interferes with the President’s executive power and his obligation to "take care that the laws be faithfully executed," according to the judge.

The most important precedent is Humphrey’s Executor v. U.S., 295 U.S. 602 (1935), the judge said. This case upheld the for-cause restriction that protected Federal Trade Commission members, and the CFPB now "executes essentially the same responsibilities that the FTC did" in 1935. The judge also noted that the President has more power to affect the CFPB because (1) cause would need to be found to remove only one CFPB director, while there are five FTC members, and (2) FTC members serve staggered seven-year terms as opposed to the bureau director’s five-year term.

The judge observed that the Social Security Administration, Federal Housing Finance Agency, and Office of Special Counsel clearly have the same single-head, for-cause organization as the CFPB. The Comptroller of the Currency probably does as well, she noted.

Rejection of PHH Corp. FIP based much of its argument on the D.C. Circuit majority opinion in PHH Corp. v. CFPB, which would have reformed the bureau by making the director subject to discharge at the President’s discretion (see Banking and Finance Law Daily, Oct. 11, 2016). However, that decision was vacated when the appellate court agreed to rehear the appeal en banc, the judge pointed out (those arguments are described in Banking and Finance Law Daily, May 24, 2017).

More importantly, the judge made her disagreement with the PHH Corp. decision clear. The panel majority by implication improperly rejected the Supreme Court’s Humphrey’s Executor reasoning, she charged. The two reasons relied on by the appellate court panel for its decision—that there was no historical precedent for the CFPB structure and that a multimember commission would better prevent abuses of power and protect individual liberty—were not persuasive.

CID enforcement. The CID should be enforced even if the for-cause provision was unconstitutional, the judge continued. Enforcement could be denied for constitutional reasons only if the executive branch of government was the sole branch with the authority to demand information from businesses or investigate them. This clearly was not the case.

As far as the more ordinary reasons to challenge an administrative subpoena, the judge decided that:

  • FIP could not complain that its business was not under the CFPB’s jurisdiction because that would call for a fact-based inquiry that was not permitted unless charges were brought.
  • The scope of the CID was properly limited to information under the company’s control.
  • The time period described did not violate the statute of limitations.
  • The information demanded was relevant to the CFPB’s inquiry.
  • FIP had not described why the demand was unduly burdensome, relying only on the amount of information sought and saying nothing about how compliance would burden the company.

The judge concluded by denying FIP’s request for a stay of the bureau’s enforcement case until the D.C. Circuit rules in PHH Corp. The company had neither clearly described what purpose a stay would serve nor why any potential harm to the company was more important than the prejudice to the bureau’s investigation, she said.

The case is No. SACV 17-00303-JLS.

Attorneys: Alanna Gayle Buchanan Carbis for the Consumer Financial Protection Bureau. Isabelle Louise Ord (DLA Piper LLP) for Future Income Payments, LLC.

Companies: Future Income Payments, LLC

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