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SDNY District Court Judge Says CFPB is Unconstitutional

6.25.2018

Senior United States District Judge in the Southern District of New York U.S. District Court (SDNY) Loretta A. Preska is making headlines for her statement on June 21, 2018, regarding the unconstitutionality of the structure of the Consumer Financial Protection Bureau (the CFPB or Bureau). The CFPB had joined with the New York Attorney General (the NYAG) to allege that defendants RD Legal Funding, LLC, et al. had made deceptive statements in connection with allegedly usurious cash advance loans in violation of both the Consumer Financial Protection Act (Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA), or Title X) and New York state law. In a 104-page opinion denying the defendant’s motion to dismiss, Judge Preska used her conclusion regarding the unconstitutionality of the Bureau’s structure as the reason to remove the Bureau as a plaintiff in the continuing progression of the suit. Judge Preska further clarified that because the federal and state claims are founded on the same relevant facts, the NYAG’s claims under state law are appropriate for adjudication in federal court under supplemental jurisdiction, and the case will still move forward with the NYAG as the sole plaintiff under its independent authority.

Although Judge Preska acknowledged the January 2018 en banc decision of the U.S. Court of Appeals for the District of Columbia Circuit (widely recognized as the circuit court with the most administrative law expertise) in PHH Corp., et al. v. CFPB, 881 F.3d 75 (D.C. Circ. 2018) (holding that the Bureau was constitutionally structured), she chose instead to exercise her right to reach a different decision for cases under her jurisdiction.

Judge Preska primarily based her conclusion as to the unconstitutionality of the Bureau’s lone-Director structure on the reasoning of D.C. Circuit Court of Appeals Judge Brett Kavanaugh in his en banc PHH dissent. There, Judge Kavanaugh reasoned that considerations of “history, liberty and presidential authority” require a finding of an Article II violation when the structure of an independent agency is such that the agency “exercise[es] substantial executive power” and is “headed by a single Director.” Judge Kavanaugh further reasoned that the appropriate judicial remedy for such a constitutional violation would be to sever the for-cause removal provision in the DFA.

However, SDNY District Court Judge Preska disagreed with Kavanaugh’s remedial approach in her analysis. In setting forth her desired remedy in the matter before her, she instead referenced the separate en banc dissent in PHH by D.C. Circuit Court of Appeals Judge Karen LeCraft Henderson. Judge Henderson reasoned that the more appropriate remedy regarding the CFPB structure would be to strike Title X in its entirety. SDNY District Court Judge Preska thus determined that such a remedy would invalidate the very existence of the CFPB, meaning that, in the instant case, the CFPB is disqualified as a legitimate plaintiff with standing to bring suit.

One particularly puzzling aspect of Judge Preska’s reasoning is the arguable dissonance between her suggestion that Title X of the DFA should be invalidated in its entirety and her affirmation in dicta of the authority of the NYAG to bring suit under the jurisdictional authority granted all state attorneys general under Title X.

Although an interesting perspective is provided in the five pages of Judge Preska’s 104-page opinion that are devoted to the constitutionality discussion, the decision will certainly find little, if any, support in those circuit courts of appeal where the constitutionality of the Bureau’s structure has already been upheld. The more likely effect of Judge Preska’s decision is that it may have some ramifications for Title X cases brought within the SDNY. Arguably, the Bureau’s authority to enforce regulations promulgated since its founding in 2011 under the Title X rulemaking authority granted it pursuant to the DFA is now somewhat at play in the SDNY, as may be the guidance issued by the Bureau with respect to the regulations it inherited from predecessor regulatory agencies for which rulemaking authority was transferred to the Bureau pursuant to the DFA.

It is worth noting that, given the change in leadership and mission statement of the CFPB from that under the former Director who originally joined with NY to bring suit to the current Acting Director, Mick Mulvaney (or the succeeding Director, upon that individual’s nomination and Senate confirmation), the CFPB likely will not appeal the ruling by this federal district court judge.

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