CFPB Arbitration Rule Receives Strong Support from Key Groups, Leaders, and Editorial Boards

Yesterday marked the end of the public comment period on the CFPB’s proposed rule to restrict forced arbitration – a tactic that allows Wall Street banks and predatory lenders to block consumers from challenging illegal behavior in court.

Over the last three months, the rule has generated at least 100,000 supportive comments from individual consumers across the country, as well as strong endorsements from major groups and leaders. Here are some excerpts from a selection of notable comment letters, statements of key leaders, and major editorials supporting the Bureau’s proposal.

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Notable Comment Letters

281 consumer, civil rights, labor, and small business groups strongly support the rule
“The CFPB rule, which will restore consumers’ ability to band together in court to pursue claims, is a significant step forward in the ongoing fight to curb predatory practices in consumer financial products and services and to make these markets fairer and safer…
“Because forced arbitration undermines compliance with laws and creates an uneven playing field between corporations that use forced arbitration and those that allow for greater consumer choice in dispute resolution, it is in the public interest and in the interest of consumer protection to prohibit or strictly curtail the use of forced arbitration clauses in consumer financial contracts.”

38 U.S. Senators commend CFPB for proposed rule, led by Minority Leader Reid and Senators Franken, Brown, and Leahy

“Recognizing the urgent need to address these troubling practices, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in 2010 to improve accountability, strengthen the financial system, and establish the CFPB. Dodd-Frank included several restrictions on the use of forced arbitration, including a mandate for the CFPB to take action on arbitration. Under Section 1028 of Dodd-Frank, Congress specifically directed the CFPB to study the use of forced arbitration in connection with the offering of consumer financial products and services, and authorized it to ‘prohibit or impose conditions or limitations on the use of’ such agreements based on the study results.”

65 members of the U.S. House of Representatives praise rule, led by Reps. Waters, Conyers, and Johnson
“Consistent with the Bureau’s exhaustive study on forced arbitration, which found that forced arbitration restricts consumers’ access to relief in disputes with financial service providers by limiting class actions, the proposed rule is a critical step to protect the public interest by ensuring that consumers receive redress for systemic unlawful conduct.
“There is overwhelming evidence that class-action waivers in financial products and services agreements undermine the public interest. Originally used primarily in commercial settings, forced arbitration clauses have proliferated in everyday consumer contracts, and are now prevalent in financial services agreements.”

18 state attorneys general support action to extend reach of state enforcement efforts

“Although we believe consumers will be best served by the total prohibition of mandatory, pre-dispute clauses in consumer financial contracts and we encourage the Bureau to consider regulations to that effect, the Proposed Rules provide a substantial benefit to consumers by restoring their fundamental right to join together to be heard in court when common disputes arise in the commercial marketplace. Many of our respective consumer protection laws include private right of action provisions, the purpose of which is to complement and extend the reach of our state enforcement efforts.”

210 law professors and scholars “heartily endorse” the proposed rule

“We believe that the proposed regulations are critically important to protect consumers and serve the interests of the American public… to the extent we allow financial services companies to use arbitration to eradicate consumer class actions, we are allowing these companies to insulate themselves from enforcement of our laws. This harms not only individual consumers but also the public at large.”

Support from Key Leaders

The White House: Three Big Reasons You Should be Fired Up About Today’s Announcement to Protect Consumers

“Actions like today’s are why the President fought so hard to create the CFPB through Wall Street reform. And there are major, tangible signs it’s working—with stronger protections in mortgage markets, student loans, and credit cards. Tens of millions more Americans would be protected by today’s proposal. And CFPB has recovered nearly $11 billion for more than 25 million consumers through enforcement actions.
“Given how many millions of Americans are being protected by the CFPB rules already in place and the importance of the work ahead, it’s appalling that Republicans are trying to repeal CFPB in its entirety. In this year’s House Republican Budget plan, they proposed getting rid of the CFPB. That’s completely unacceptable.”

Hillary Clinton Supports Ending Forced Arbitration ׀ Time

“‘With today’s proposal, the Consumer Financial Protection Bureau takes aim at yet another unfair practice on Wall Street,’ Clinton said. ‘Mandatory arbitration clauses buried deep in contracts for credit cards, student loans, and more prevent American consumers from having their day in court when they’ve been harmed.’”

Major Editorial Endorsements

Consumers have a right to go to court ׀ Boston Globe
“The firms have all but blocked the path to class-action lawsuits. That is a moneymaker for them. Route consumers into arbitration, and they essentially are on their own, each to fend against a powerful financial house. No surprise that few consumers take up the expensive fight.
“… If arbitration has been rendered ineffective through the structure of contracts, consumers lack tools to check corporate excesses. Arbitration clauses typically have carried provisions barring consumers from even talking about their claims.
“That factor of secrecy reinforces how the option of a class-action lawsuit becomes necessary to deter deceitful practices and ensure accountability.”

Bank customers get a fighting chance ׀ The New York Times
“Justice demands no less. A series of articles in The Times last year found that prohibiting class-action lawsuits typically results in consumers simply giving up in cases of overcharging. Private arbitration is no alternative to a day in court, because corporations effectively control the process, including the choice of the arbitrator and the rules of evidence.
“…That insult is a sign that opponents have no good arguments. The ban on class-action lawsuits is a hallmark of the anti-regulatory, anything-goes era that culminated in the financial crisis. Changing entrenched attitudes and practices has been a slow process, but the proposed new rules represent progress. Mr. Cordray and the consumer bureau are serving the public as the law requires.”

A fair shake for consumers ׀ San Francisco Chronicle

“Few customers read the fine print on credit card and bank agreements when it comes to settling disputes. If consumers want a loan or card, they have to agree to take their claims to an arbitrator, a path that sidesteps the courts and class action lawsuits that might cost Wall Street billions.
“…The real purpose of the small-type agreements is to save banks and lenders from a challenge brought by pools of unhappy customers filing class action suits in the name of broad ranks of gouged consumers. If successful, such lawsuits can run into millions, instead of the paltry sums doled out by arbitration.”

For more information, contact Amanda Werner, awerner@ourfinancialsecurity.org, (202) 973-8004.

CFPB Stops and Punishes Bank’s Deceptive Telemarketing Fueled By Sales Quotas

The Consumer Financial Protection Bureau has taken an enforcement action to force Santander Bank to stop enrolling customers in overdraft protection without their informed consent. The bank has also been ordered pay a $10 million fine.

Santander, which has nearly 700 branches in 8 northeastern states, sold high-cost overdraft protection through a telemarketing contractor that enrolled some customers without their consent and lied to other customers about its cost.

The CFPB also found that the telemarketer’s employees were incentivized to cut corners by unrealistic sales quotas. Employees were fired or had their hours reduced when they failed to hit a specific sales target, a practice that encouraged the illegal behavior. As the Committee for Better Banks, the National Employment Law Project, and AFR have previously documented, sales quotas create widespread risks for consumers in the banking industry. Recognizing the problem with these employment practices, the CFPB’s order bars Santander from using outside telemarketers or imposing sales quotas on its employees to sell its overdraft products.

Santander is not the only bank to use high overdraft fees as a profit center. Banks charge billions in overdraft fees per year, costing the average consumer who pays an overdraft fee $225 per year.

On the CFPB’s Fifth Birthday, Senator Warren Celebrates the Bureau’s Achievements

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This week, the Consumer Financial Protection Bureau (CFPB) turns five years old. AFR and a large number of consumer, civil rights, and community-based groups celebrated the anniversary, noting that life is better for American families and neighborhoods because the CFPB is at work fighting predatory lending and financial abuse. In addition to winning the praise of advocates, recent polling has shown that there is overwhelming, bipartisan support by the public for the work of the Bureau.

Senator Elizabeth Warren also delivered her own accolades to the Bureau in a video message that stresses the importance of its good work. In it, she notes that in just five short years, the CFPB has “ returned over $11 billion to consumers who were cheated on their mortgages, credit cards, checking accounts, and other financial products.”


Americans for Financial Reform is a nonpartisan coalition of over 200 organizations fighting for a safer and fairer financial system. To learn more, join our email list!

The best-paid hedge fund managers made $13 billion last year

That’s enough to end family homelessness in America

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Image credit: Pictures of Money (CC BY 2.0)

The 25 highest paid hedge fund managers in America took home $13 billion in compensation last year, according to Reuters.

They’re able to make such astronomical amounts thanks in part to the many loopholes in our financial regulation. So-called “activist” hedge funds, for example, abuse lax securities laws to gain large stakes in public companies, and then demand cost-cutting, layoffs, and more debt. These moves enrich the hedge funds while often dooming the companies they acquire.

To top it off, hedge funds are costly investments whose performance often just mirrors the stock market overall, despite charging exorbitant fees. In 2015, those fees added up to a cool $13 billion in compensation for the 25 managers at the top of Reuters’ list.

It’s hard to wrap your head around a number like $13 billion. To make it a little easier, here are a few comparisons — inspired by a report from the Coalition on Human Needs.

$13 billion could end family homelessness for ten years

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Image credit: Lavin Han (CC BY-ND 2.0)

The Department of Housing and Urban Development (HUD) has said that it would take $11 billion over ten years to provide housing subsidies to 550,000 more families — an amount that could effectively end family homelessness, since in January 2015, HUD found that 564,708 people were homeless on a given night.

And we’d still have $2 billion left over.
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Hard-sell Banking

At a briefing organized by Communications Workers of America and the Committee for Better Banks in the Rayburn House Office Building, a panel of front-line bank workers and representatives from Americans for Financial Reform (AFR) and the National Employment Law Project (NELP) discussed the banking industry’s growing use of aggressive sales quotas and their dangerous consequences. The event marked the release of a NELP report, Banking on the Hard Sell: Low Wages and Aggressive Sales Metrics Put Bank Workers and Customers At Risk. The panel was convened by Representative Keith Ellison (D-MN) and drew a capacity crowd that included several members of the House Progressive Caucus.

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The bank worker panelists, representing varied regions of the country and a number of large financial institutions, told similar stories about the toxic work environment created by practices designed solely to provide maximum profit margins for the banks. Khalid Taha, an Iraqi immigrant to the United States, imagined his job with Wells Fargo as the fulfillment of the American dream; but it turned into a nightmare, he testified, when the cumulative pressure of persuading multiple customers to open new banking accounts every day led to his hospitalization for exhaustion.

The bank employees spoke of their commitment to quality customer service and their dismay at being compelled to engage in transactions they knew would result in great financial damage to consumers. Modern bank teller positions are entirely “sales oriented,” said Oscar Garza, who worked at JP Morgan from 2010 to 2012. Garza testified that he and other JP Morgan workers were instructed to open new accounts at “any cost” and even to falsify financial information to help customers qualify for loans. Similarly, the bank employees explained that quotas and incentives mandated by corporate offices tacitly encourage deceptive behavior. Cassaundra Plummer, formerly an assistant sales teller at a Maryland branch of TD Bank, remembered her manager’s instructions to “only focus on the positives” rather than fully explain the terms of the financial products she was supposed to be selling.

DSC_4669Banking on the Hard Sell includes many more personal accounts like these. Caitlin Connolly, the Coordinator of NELP’s campaign on sales quotas, emphasized the need for additional regulations to address the issue of aggressive bank sales tactics. The 2008 financial crisis stirred significant public discussion of the behavior and business practices of big banks, Connolly noted; but attention hasfaded since then, she said, with bad implications for bank employees and consumers alike.

A majority of the bank employees at the hearing said they had no knowledge of the consumer protections and other provisions of the Dodd-Frank Act – the landmark financial-reform measure enacted in the aftermath of the 2008 financial crisis.

The last panelist, Brian Simmonds Marshall, Policy Counsel for AFR, pointed out that federal regulators have taken significant steps under Dodd-Frank to prohibit compensation practices that could encourage risky or deceptive behavior on the part of high-level bank executives; the NELP report and the testimony of the bank employees, he said, underscore the need to apply the same kind of scrutiny to the compensation and
management of front-line bank workers. Financial oversight agencies, Marshall said, should not just be looking for violations of the rules, but for the root causes of those violations.

Following the briefing, bank employee panelists, along with AFR and NELP staff, held individual meetings with regulators at the Office of the Comptroller of the Currency and the Consumer Finance Protection Bureau to further discuss the issues raised at the event.

 

House Subcommittee Considers Bill to Shred the SEC’s Tires

The many problems with the Investment Advisers Modernization Act

Shredded tires

While Americans for Financial Reform and our allies are busy campaigning for closing loopholes that are special privileges for private funds, the Majority on the Hill is proposing to do away with even the limited existing reporting requirements to protect investors and increase accountability.

On May 17th, the House Financial Services Subcommittee on Capital Markets held a hearing to discuss a bill called the Investment Advisers Modernization Act of 2016. Far from actually modernizing the industry, the bill rolls the clock back to a time when private fund advisers operated in the shadows, without meaningful oversight. The bill would enable the exploitation of investors and reduce the information available to regulators to address systemic risk by rolling back key reporting requirements, and by interfering with the Securities and Exchange Commission’s ability to investigate fraud at individual firms. (For a full breakdown of the problems with this bill, please see AFR’s opposition letter).

One of the witnesses who testified was Jennifer Taub, a Professor at Vermont Law School and author of Other People’s Houses, a book on the foreclosure crisis. Professor Taub pointed out in her written testimony that the Investment Advisers Modernization Act could not only “undermine investor protection and trust, which could inhibit or drive up the cost of capital,”  but would also “allow certain private equity advisers and other private fund advisers that have been exposed as lacking in recent SEC examinations to hide their tracks.”

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Special Protections for Wall Street, No Day in Court for the Rest of Us

Last week, some members of the House Financial Services Committee lavished praise on a piece of legislation they said would “restore due process rights to all Americans.”

“All the bill says is that if somebody wants their day in court, they should have their day in court,” the bill’s sponsor, Rep. Scott Garrett (R-N.J.), explained, adding that “preserving the rights of Americans to defend themselves in a fair and impartial trial…is one of the most fundamental rights, and it is enshrined in our Constitution.”

Representative Jeb Hensarling (R-Texas), Chair of the committee, championed the measure as well. “Every American deserves to be treated with due process,” Rep. Hensarling declared. “They ought to have the opportunity to have a trial by jury. They ought to be able to engage in full discovery. They ought to be subject to the rules of evidence.”

A listener might have thought these legislators were standing up againstforced arbitration — “rip-off clauses” that big companies bury in the fine print of contracts to prevent people from suing them, even if they have broken the law.

Astoundingly and unfortunately, the legislators were actually moving in the opposite direction. They were extolling HR 3798, the so-called “Due Process Restoration Act,” which would extend special legal protections to Wall Street banks and other financial firms charged with violating federal securities law by the Securities and Exchange Commission (SEC).

This piece of legislation does nothing to restore due process to ripped-off consumers and investors. Instead, the “Due Process Restoration Act” makes it harder for the SEC to hold corporate wrongdoers accountable when they break the law.

Big banks and others charged in SEC hearings already possess several crucial legal protections that their investors and consumers lack in forced arbitration: robust opportunity for discovery, a public hearing, a trained adjudicator bound to make a ruling based in law, and — crucially — the right to two full appeal processes, including a review in federal court. Yet HR 3798 would make it harder for the SEC to prove its case and allow the accused party to unilaterally terminate the proceedings, forcing the SEC to either drop the charges or refile in federal court.

According to Professor Joseph Carcello of the University of Tennessee, giving companies this right to “choose the venue is unlikely to be in the best interest of society, and will almost certainly make it more difficult for the SEC to deter and punish securities law violations, including fraud.” Professor Carcello further emphasized that if fairness is a concern for members of the committee, then it is more unfair for citizens to be forced into arbitration in their contracts with financial institutions.

An amendment offered by Reps. Keith Ellison (D-Minn.) and Stephen Lynch (D-Mass.) threw the gap between the words and actions of HR 3798’s supporters into particularly stark relief. The amendment would have ensured that firms using forced arbitration against consumers and investors could not benefit from the bill’s special protections. Yet, in a display of staggering hypocrisy, this commonsense amendment was defeated on party lines.

Despite grandiose claims of due process, HR 3798 would only further tilt the playing field in favor of special corporate interests when it comes to battling financial fraud and corporate rip-offs. If lawmakers truly wish to “restore due process rights to all Americans,” they should pass legislation to ban forced arbitration and support the upcoming Consumer Financial Protection Bureau rulemaking on this abusive practice.

Wall Street firms and brokers accused of breaking federal law do not need special legal protections, but the right of ordinary Americans to have their day in court very much does need defending. Lawmakers should legislate accordingly.

– Amanda Werner, Arbitration Campaign Manager

This post originally appeared on Medium.com.

Eight Senators Urge SEC to Finalize Rule on Conflicts of Interest

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Image via jayneandd (CC BY 2.0)

Recently, a former SEC trial attorney has placed a bright spotlight on the failure of his old agency to charge more individuals at Goldman Sachs over securities fraud in the “Abacus” deal. Abacus was composed of mortgage securities that Goldman knew were toxic. But they packaged them up and sold to investors anyway, and then actively bet against those investors. It is a stark example of a serious conflict of interest.

Unfortunately, not only have the bankers responsible for the conflicted deals gone unpunished, but also the Dodd-Frank rule targeted at stopping material conflicts of interest remains unfinished. (For more on why the rule is important, see AFR’s 2012 letter).

Last week, Senators Feinstein, Merkley, Markey, Boxer, Franken, Durbin, Warren and Reed sent a letter to the SEC urging them to prioritize completion of this long-neglected rule. The letter highlights that the SEC is over 1,730 days late on completing this rule:

“The SEC was directed to issue rules no later than 270 days after the enactment of Dodd-Frank. It has now been over 2,000 days since the President signed Dodd-Frank into law. This is unacceptable. We urge you to work quickly to finalize strong rules implementing Section 621.”

The letter also highlights the problem with leaving Dodd-Frank’s conflict of interest rule unfinished:

“As you know, Section 621 prohibits material conflicts of interest for those involved in structuring asset-backed securities and serves as a critical component of financial reform based on the lessons we learned from the financial crisis. The U.S. Senate Permanent Subcommittee on Investigations’ April 2011 report on the financial crisis detailed some of the transactions that were designed to fail so that the entities constructing them could bet against them and profit. This is an appalling practice that the SEC can address by releasing a strong final rule on Section 621.

Financial institutions should not be able to sell securities to investors and then bet against those same securities, to purposefully design securities or structures with the intent that they will fail or with defective components, or to mislead investors by structuring products specifically intended to benefit an undisclosed entity. These types of structures are built on deception, and withholding material information is fundamentally contrary to the efficient operation of our financial markets and to the protection of investors.”

 

You can find the complete letter here, or the text below.

 
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Understanding the SAFE Act

Payday lenders may seem to be everywhere, but they were not always there. The first payday stores opened in the early 1990s – a byproduct of the same anything-goes deregulatory mania that led to a wave of booby-trapped mortgages and the financial and economic meltdown of 2008.

Almost as soon as they appeared on the scene, faith leaders and consumer and civil rights advocates called for rules to rein in the abuses of an industry whose business model is to advertise a form of “help” that consistently makes things worse, trapping people in long-term high-cost debt and imposing more economic distress on communities.

After a quarter of a century, these efforts are making progress. Fourteen states have meaningful regulations and the first nationwide rules are being developed by the Consumer Financial Protection Bureau (CFPB), the new agency established after the 2008 crisis to bring basic standards of fairness to the financial marketplace.

But the industry is also pressing ahead, employing new loan models and a battery of technological and legal ploys intended to skirt the rules, both existing and anticipated.

Senator Jeff Merkley D-Ore.), a longtime champion of consumer rights, has introduced legislation to address some of these evasive maneuvers. His Stopping Abuse and Fraud in Electronic Lending (SAFE) Act would make it easier to uphold the interest-rate caps and other measures taken by the states. Merkley’s bill would also bolster the effectiveness of the Consumer Bureau’s efforts to require payday-style consumer lenders to do what other lenders do: verify a borrower’s ability to repay before a loan can be issued.

One big problem, for the CFPB as well as the states, is the fact that more and more payday lenders now do business online. Some companies hide from view, using anonymous domain registrations and websites with no physical contact information. Others, while describing themselves as payday lenders, turn out to be “lead generators” who collect personal information and then auction it off to lenders and other marketers. It is very hard to take legal action against criminals who have encased themselves in online camouflage. It gets even harder when they claim to be doing business from overseas or from Native American reservations in order to assert tribal-sovereignty privileges.

Online or out on the street, the basic formula is the same. These lenders charge triple-digit interest rates (nearly 400% on average) and are prepared to issue a loan as long as they can gain access to someone’s bank account – regardless of whether the borrower can actually afford the loan. Their standard, in other words, is the ability to collect, not to repay. In fact, while the industry promotes its products as short-term loans, most of its profits come from people who remain on the hook for months at a stretch and often end up paying more in fees than they borrowed in the first place.

Those who borrow online face special perils. They are often required to provide personal and financial information in loan applications – data that may be bought and sold by unregulated lead generators, loan brokers, lenders, and others. In some cases, this information is used to defraud people two or three times over.

Senator Merkley’s bill seeks to address these problems in three ways – by helping consumers regain control of their own bank accounts; by establishing standards of transparency for online lenders; and by cracking down on lead generators and other third-party predators. More specifically, the SAFE Act would require banks and other lenders to abide by the rules of the states where they do business; prevent third parties from using remotely created checks (RCCs) to withdraw money without an account-holder’s express pre-authorization; prohibit overdraft fees on prepaid cards issued by payday lenders in order to gain access to consumers’ funds and pile on extra charges; and ban lead generators and anonymous lending.

The great majority of Americans, regardless of political party, favor strong action to end the scourge of abusive payday, car-title, and other high-cost, debt-trap consumer loans. By supporting the SAFE Act and standing up for the complementary efforts of the states and the CFPB, members of Congress can heed this loud, bipartisan call from their constituents.

— Gynnie Robnett

Robnett is Payday Campaign Director at Americans for Financial Reform. This piece was originally published on The Hill’s Congress Blog.

An Easy Case: Why a Federal Appeals Court Should Reject a Constitutional Challenge to the CFPB

The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) to invigorate consumer financial protection by consolidating responsibility for those laws’ interpretation and enforcement in a single agency. Even before the CFPB opened its doors, industry forces set out to weaken it through bills that would change its single-director structure, among other means.

They lost that fight in Congress – repeatedly. But now the CFPB’s opponents have been given a glimmer of hope by the three-judge panel deciding a mortgage firm’s appeal of a CFPB enforcement order. If those judges follow Supreme Court precedent, however, that hope will be short-lived and the challenge to the CFPB’s structure will fail, just as it has intwo prior federal district court cases.

The latest case involves a company, PHH, which has been ordered to pay $109 million in restitution for illegal kickbacks to mortgage insurers that caused PHH’s customers to pay extra. After a full hearing before an Administrative Law Judge and then the CFPB’s Director, PHH appealed the CFPB’s decision to the U.S. Court of Appeals for the D.C. Circuit. Among a slew of arguments raised by the company, the court expressed particular interest in one. The three-judge panel, which will hear oral arguments on April 12, hasasked the parties to focus on the constitutionality of statutory limits on the president’s authority to remove the sole head of an agency like the CFPB.

By statute, the president may remove the CFPB Director only for “inefficiency, neglect of duty, or malfeasance in office.” 12 U.S.C. § 549(c)(3). PHH argues that the Constitution requires an agency headed by a single officer to be removable by the president without cause. Fortunately, Supreme Court precedents defining the scope of the removal power foreclose that argument.

The central flaw of PHH’s argument is that the Constitution is silent about whether an agency should be headed by a committee or a single officer. In fact, prior litigants have argued that multi-member heads of agencies are constitutionally suspect. The Supreme Court rejected that argument in Free Enterprise Fund v. Public Company Accounting Oversight Board (2010), embracing the view that agencies with a single head or a multi-member commission are constitutionally equivalent.

The Supreme Court decided in Humphrey’s Executor v. United States (1935) that statutory restrictions on the removal of Federal Trade Commission (FTC) commissioners, and by extension the heads of other administrative agencies, were constitutional. To support the flimsy claim that there is a constitutional difference between single-director and multi-commissioner agencies, PHH relies on stray language in Humphrey’s Executorreferring to the FTC’s character as a multi-member body and suggesting those passages add up to a constitutional limitation. But Humphrey’s Executor itself says that whether the Constitution requires the president to enjoy unfettered authority to remove the head of an agency “depend[s] upon the character of the office.”

As the Supreme Court explained in Wiener v. United States(1958), “the most reliable factor for drawing an inference regarding the president’s power of removal . . . is the nature of the function that Congress vested” in the agency. The CFPB is characteristic of the administrative agencies for which the Supreme Court has upheld for-cause removal. InHumphrey’s Executor, the Court explained that “[i]n administering the [prohibition] of ‘unfair methods of competition’ — that is to say in filling in and administering the details embodied by that general standard — the [FTC] acts in part quasi-legislatively and in part quasi-judicially.” The CFPB has the same quasi-legislative and quasi-judicial responsibilities to define and enforce the prohibition of “unfair, deceptive, or abusive act[s] or practice[s]” in consumer finance, 12 U.S.C. § 5531, as well as to make rules and enforce enumerated consumer finance statutes, 12 U.S.C. § 5481(12).

Ultimately, the concern animating the removal cases is whether, as the Court said in Morrison v. Olson (1988), “the Executive Branch [retains] sufficient control . . . to ensure that the President is able to perform his constitutionally assigned duties.” It’s certainly plausible that the president could find that a single officer was guilty of “inefficiency, neglect of duty, or malfeasance in office.” In Bowsher v. Synar (1986), the Supreme Court said those “terms are very broad and . . . could sustain removal . . . for any number of actual or perceived transgressions . . . .” But it is quite difficult to envision a scenario in which the president could plausibly claim that a majority of an agency’s commissioners met the criteria for removal. Moreover, responsibility for the failures of an agency headed by a multi-member commission are inherently more diffuse than for an agency with a single-director, giving the president less ability to identify the source of “inefficiency” and “neglect” in a multi-member commission than a single director. So PHH’s proposed rule – that the president’s removal power can only be limited for multi-member agencies – has it backwards. If anything, limitations on the removal power for a multi-member agency would be more suspect than those limitations on single-director agencies, so it’s not surprising that PHH cannot cite a single case adopting their proposed rule.

A decision striking down the CFPB’s structure would not only break new constitutional ground, it would have wide-reaching practical consequences as well. Such a holding would mean that the structures of at least three other agencies are also unconstitutional because they are headed by a single official removable only for cause:

  • the Federal Housing Finance Administration, 12 U.S.C. § 4512(b)(2) (removal “for cause”);
  • the Office of Special Counsel, 5 U.S.C. § 1211(b) (removal “only for inefficiency, neglect of duty, or malfeasance in office”); and
  • the Social Security Administration, 42 U.S.C. § 902(a)(3) (removal “only pursuant to a finding by the President of neglect of duty or malfeasance in office”).

For the president to remove the head of a fifth agency, the Office of the Comptroller of the Currency, “reasons” for the removal must be “communicated by [the President] to the Senate,” 12 U.S.C. § 2, suggesting that the president does not have the power to do so without cause. So if the attack on the CFPB’s structure succeeds, it will not hit the CFPB alone.

Unfortunately, PHH could hardly be more fortunate in thepanel drawn to decide this issue. All three judges were appointed by Republican presidents. One judge on the panel has suggested in a prior case that he believes the Constitution would be best interpreted to require that all agency heads be removable by the president without cause and that the Supreme Court was mistaken when it decided otherwise 80 years ago. But even if the three-judge panel rules that the CFPB’s structure is unconstitutional, it will hardly have the last word: The CFPB can seek further review by the full D.C. Circuit and the Supreme Court.

— Brian Simmonds Marshall

Cross-posted from American Constitution Society blog.