Court rules Consumer Financial Protection Bureau is subject to constitutional constraints

Yesterday, in PHH Corporation v. Consumer Financial Protection Bureau, a divided panel of the U.S. Court of Appeals for the D.C. Circuit held that the CFPB, as created by Congress, is unconstitutional. Specifically, the court found that it was unconstitutional for Congress to vest so much executive authority in an agency headed by a "single, unaccountable, unchecked Director." The court also concluded that, in pursuing an enforcement action against a mortgage lender, PHH Corp., the CFPB misinterpreted its statutory authority and sought to apply its interpretation retroactively, in violation of due process.

Despite finding the CFPB to be "unconstitutionally structured," the court did not eliminate the agency, however. Instead, the panel followed the Supreme Court's recent practice of excising the agency's constitutional infirmity while leaving the rest intact. As a consequence, the CFPB will continue to operate, albeit under more direct executive branch control. What this means, as a practical matter, is that future presidents will be able to ensure that the CFPB operates consistent with such administrations' policy preferences.

Judge Brett Kavanaugh's opinion for the court is quite lengthy, topping out at page 101. His opinion is joined in full by senior circuit judge Raymond Randolph, who wrote a separate concurrence flagging an additional potential constitutional infirmity within the CFPB and its enforcement apparatus. Judge Karen Henderson concurred-in-part and dissented-in-part, agreeing with the majority on the statutory points, but concluding that it was unnecessary to reach the structural constitutional issue that occupied the bulk of Kavanaugh's opinion.

I've excerpted portions of the majority opinion below. For a shorter overview of the relevant doctrinal questions and the court's conclusions, I recommend Aaron Nielson's summary at Notice & Comment. See also my co-blogger Stuart Benjamin's post from yesterday on Kavanaugh's treatment of relevant precedent, Morrison v. Olson (the decision upholding the constitutionality of the independent prosecutor) in particular.

At this point I'd normally post the introductory summary portion of the opinion, but in this case that "introduction" spans 11 pages, so here are some of the relevant bits.

This is a case about executive power and individual liberty. The U.S. Government's executive power to enforce federal law against private citizens - for example, to bring criminal prosecutions and civil enforcement actions - is essential to societal order and progress, but simultaneously a grave threat to individual liberty.

The Framers understood that threat to individual liberty. When designing the executive power, the Framers first separated the executive power from the legislative and judicial powers. "The declared purpose of separating and dividing the powers of government, of course, was to 'diffus[e] power the better to secure liberty.'" . . . To ensure accountability for the exercise of executive power, and help safeguard liberty, the Framers then lodged full responsibility for the executive power in the President of the United States, who is elected by and accountable to the people. . . .

Of course, the President executes the laws with the assistance of subordinate executive officers who are appointed by the President, often with the advice and consent of the Senate. To carry out the executive power and be accountable for the exercise of that power, the President must be able to control subordinate officers in executive agencies. In its landmark decision in Myers v. United States . . . authored by Chief Justice and former President Taft, the Supreme Court therefore recognized the President's Article II authority to supervise, direct, and remove at will subordinate officers in the Executive Branch.

In 1935, however, the Supreme Court carved out an exception to Myers and Article II by permitting Congress to create independent agencies that exercise executive power. See Humphrey's Executor v. United States . . . An agency is considered "independent" when the agency heads are removable by the President only for cause, not at will, and therefore are not supervised or directed by the President. Examples of independent agencies include well-known bodies such as the Federal Communications Commission, the Securities and Exchange Commission, the Federal Trade Commission, the National Labor Relations Board, and the Federal Energy Regulatory Commission. Those and other established independent agencies exercise executive power by bringing enforcement actions against private citizens and by issuing legally binding rules that implement statutes enacted by Congress.

The independent agencies collectively constitute, in effect, a headless fourth branch of the U.S. Government. They exercise enormous power over the economic and social life of the United States. Because of their massive power and the absence of Presidential supervision and direction, independent agencies pose a significant threat to individual liberty and to the constitutional system of separation of powers and checks and balances.

To help mitigate the risk to individual liberty, the independent agencies, although not checked by the President, have historically been headed by multiple commissioners, directors, or board members who act as checks on one another. Each independent agency has traditionally been established, in the Supreme Court's words, as a "body of experts appointed by law and informed by experience." . . . The multi-member structure reduces the risk of arbitrary decisionmaking and abuse of power, and thereby helps protect individual liberty.

In other words, to help preserve individual liberty under Article II, the heads of executive agencies are accountable to and checked by the President, and the heads of independent agencies, although not accountable to or checked by the President, are at least accountable to and checked by their fellow commissioners or board members. No head of either an executive agency or an independent agency operates unilaterally without any check on his or her authority. Therefore, no independent agency exercising substantial executive authority has ever been headed by a single person.

Until now.

In the Dodd-Frank Act of 2010, Congress established a new independent agency, the Consumer Financial Protection Bureau. . . . Congress established the CFPB as an independent agency headed not by a multi-member commission but rather by a single Director.

Because the CFPB is an independent agency headed by a single Director and not by a multi-member commission, the Director of the CFPB possesses more unilateral authority - that is, authority to take action on one's own, subject to no check - than any single commissioner or board member in any other independent agency in the U.S. Government. Indeed, as we will explain, the Director enjoys more unilateral authority than any other officer in any of the three branches of the U.S. Government, other than the President.

At the same time, the Director of the CFPB possesses enormous power over American business, American consumers, and the overall U.S. economy. The Director unilaterally enforces 19 federal consumer protection statutes, covering everything from home finance to student loans to credit cards to banking practices. The Director alone decides what rules to issue; how to enforce, when to enforce, and against whom to enforce the law; and what sanctions and penalties to impose on violators of the law. (To be sure, judicial review serves as a constraint on illegal actions, but not on discretionary decisions within legal boundaries; therefore, subsequent judicial review of individual agency decisions has never been regarded as sufficient to excuse a structural separation of powers violation.)

That combination of power that is massive in scope, concentrated in a single person, and unaccountable to the President triggers the important constitutional question at issue in this case. . . .

The question before us is whether we may extend the Supreme Court's Humphrey's Executor precedent to cover this novel, single-Director agency structure for an independent agency. To analyze that issue, we follow the history-focused approach long applied by the Supreme Court in separation of powers cases where, as here, the constitutional text alone does not resolve the matter. . . .

In this case, the single-Director structure of the CFPB represents a gross departure from settled historical practice. Never before has an independent agency exercising substantial executive authority been headed by just one person.

The CFPB's concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decisionmaking and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency. The overarching constitutional concern with independent agencies is that the agencies are unchecked by the President, the official who is accountable to the people and who is responsible under Article II for the exercise of executive power. Recognizing the broad and unaccountable power wielded by independent agencies, Congresses and Presidents of both political parties have therefore long endeavored to keep independent agencies in check through other statutory means. In particular, to check independent agencies, Congress has traditionally required multi-member bodies at the helm of every independent agency. In lieu of Presidential control, the multi-member structure of independent agencies acts as a critical substitute check on the excesses of any individual independent agency head - a check that helps to prevent arbitrary decisionmaking and thereby to protect individual liberty. . . .

In light of the consistent historical practice under which independent agencies have been headed by multiple commissioners or board members, and in light of the threat to individual liberty posed by a single-Director independent agency, we conclude that Humphrey's Executor cannot be stretched to cover this novel agency structure. We therefore hold that the CFPB is unconstitutionally structured. . . .

To remedy the constitutional flaw, we follow the Supreme Court's precedents, including Free Enterprise Fund, and simply sever the statute's unconstitutional for-cause provision from the remainder of the statute. Here, that targeted remedy will not affect the ongoing operations of the CFPB. With the for-cause provision severed, the President now will have the power to remove the Director at will, and to supervise and direct the Director. The CFPB therefore will continue to operate and to perform its many duties, but will do so as an executive agency akin to other executive agencies headed by a single person, such as the Department of Justice and the Department of the Treasury. Those executive agencies have traditionally been headed by a single person precisely because the agency head operates within the Executive Branch chain of command under the supervision and direction of the President. The President is a check on and accountable for the actions of those executive agencies, and the President now will be a check on and accountable for the actions of the CFPB as well.

UPDATE: Here's some initial commentary from Stephen Bainbridge and Adam Levitin.