California Federal Court Denies CFPB Constitutional Challenge in Debt Relief Case
A federal court’s recent denial of a constitutional challenge to the structure of the Consumer Financial Protection Bureau has further cemented the CFPB’s influence over the financial services industry. On January 10, 2014, the U.S. District Court for the Central District of California in Consumer Financial Protection Bureau v. Morgan Drexen Inc. rejected the defendant’s argument that the CFPB’s structure violated the Constitution’s mandates regarding separation of powers. In particular, Morgan Drexen argued that “five structural features of the CFPB, in combination, render[ed] the agency unconstitutional under the separation of powers principles of Articles I, II, and III:
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The President may remove the Director of the CFPB only for cause (12 U.S.C. § 5491(c)(3));
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The CFPB is led by a Director, not a multi-member commission (12 U.S.C. § 5491(b)(1));
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The CFPB is funded from the earnings of the Federal Reserve System, and not by regular congressional appropriations (id. § 5497(a)(1));
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The CFPB may take action to prevent ‘unfair, deceptive, or abusive act[s] or practice[s] under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service’ (id. § 5531(a)); and
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The CFPB’s interpretations of federal consumer financial laws are afforded deference as if the CFPB were the only agency authorized to interpret those laws (id. § 5512(b)(4)(B)).”
Denying the motion to dismiss, the court ruled that none of these features violated the Constitution. Similarly, it rejected defendant’s non-Constitutional challenges to the CFPB’s structure – such as the Bureau’s one-director leadership – on the grounds that the court lacked authority to second guess Congress’s policy determinations.
The underlying lawsuit against Morgan Drexen alleges that the debt-relief company collected illegal upfront fees for its services via a deceptive contract scheme.
Practical Impact
The Morgan Drexen decision marks the first time that a court has squarely addressed the merits of a constitutional challenge to the powers of the CFPB. Congress’s confirmation of CFPB Director Richard Cordray certainly killed the notion that the CFPB’s regulatory actions before his confirmation were subject to a recess appointment-based argument – although the broader issue as applied to the NLRB remains a focus of pending litigation before the U.S. Supreme Court in NLRB v. Noel Canning. The Morgan Drexen ruling, however, provides further clarity – at least on the district court level – as to the effectiveness of a constitutional challenge on separation of powers grounds. Ultimately, the decision reinforces the view that the CFPB, with its extraordinary independence and power, is a permanent fixture in the regulatory landscape for the financial services industry.
About Troutman Sanders
Troutman Sanders is an accomplished and experienced leader in providing litigation and regulatory advice to a broad spectrum of financial services institutions. Troutman Sanders’ CFPB Team monitors the development and activities of the CFPB on its CFPB Report blog and also advises clients on CFPB and Dodd-Frank issues. Additionally, Troutman Sanders’ Financial Services Litigation practice group has successfully litigated a wide variety of individual and class action litigation, as well as other federal and state consumer protection laws now under the umbrella of the CFPB.