On January 15, a federal district court in California rejected a constitutional challenge to the CFPB. Although similar challenges have been made previously (as reported here), this appears to be the first decision to rule on the merits of such a challenge.
Last year, a federal court in Washington, D.C. granted the CFPB’s motion to dismiss a lawsuit filed by Morgan Drexen questioning the constitutionality of the CFPB itself. The court noted in the dismissal that Morgan Drexen could raise its constitutional claims as a defense in an enforcement lawsuit filed by the CFPB in California. That suit accused the company of charging upfront fees for debt relief services in violation of federal law. Morgan Drexen filed a motion to dismiss the enforcement action on the grounds that the CFPB was unconstitutional.
Morgan Drexen listed five structural elements of the CFPB that they alleged combine to violate the established principles of the separation of powers in the federal government. According to Morgan Drexel, all three branches of the government were affected.
First, it was argued that the CFPB encroaches on executive power. Under Dodd-Frank, the President is permitted to remove the CFPB director only for “inefficiency, neglect of duty, or malfeasance.” Also, the fact that CFPB’s administration is vested in a single individual rather than a board or panel also limited executive power since that individual could only be removed “for cause” rather than at the pleasure of the President. The court found that neither the “for cause” removal nor the singular director substantially limited executive power.
The motion also argued that Congress’ exclusive constitutional authority to draw money from the Treasury was circumvented by deriving CFPB funding from the Federal Reserve, an executive agency. The court held that Congress is permitted to create “self-financing programs.”
An impermissible delegation of legislative power was also alleged. When Congress delegates decision-making authority upon agencies, federal law requires Congress to clearly state “an intelligible principle” to guide the agency. Frank-Dodd empowered the CFPB to address “abuses” it identifies. The court found that the definition of “abuses” found in Dodd-Frank was a sufficiently “intelligible principle.”
Finally, the motion alleged an encroachment on judicial power by improperly limiting judicial review of CFPB actions. Dodd-Frank states that the CFPB “shall have the exclusive authority to prescribe rules” and that where any other agency’s interpretation of a rule conflicts with CFPB’s in a legal setting, the CFPB will be given deference by the courts. Such deference, the motion argued, effectively dictates a court’s decision prior to considering the merits. However, the federal court held that since Congress intended the CFPB’s rulemaking to be exclusive, no other agency’s rule could ever conflict.
The motion was denied. The opinion can be found here. In conclusion, the court stated that “having considered the combined features of the CFPB, the Court concludes that the CFPB complies with the separation of powers principles contained in Articles I, II, and III of the Constitution.”