In a June 21, 2018 opinion, Judge Loretta Preska of the U.S. District Court for the Southern District of New York held that the structure of the Bureau of Consumer Financial Protection ("BCFP" or the "Bureau") is unconstitutional. This ruling is inconsistent with the D.C. Circuit's en banc decision in PHH Corp. v. CFPB ("PHH").

The case, CFPB v. RD Legal Funding, LLC, involves joint claims brought by the Bureau and the New York State Office of the Attorney General. RD Legal offers cash advances to consumers waiting on payouts from settlement agreements or judgments entered in their favor. The claims allege that the company defrauded 9/11 first responders and NFL retirees by misleading them regarding cash advances that were represented as valid sales but instead were loans made in violation of state usury law.

RD Legal argued that the BCFP's structure as an independent bureau within the Federal Reserve System violates Article II of the United States Constitution, as the Bureau's Director can be removed only "for inefficiency, neglect of duty, or malfeasance in office." In reviewing that claim, Judge Preska sided with one of the dissenting opinions in PHH. Specifically, she noted that she "disagrees with the holding of the en banc court and instead adopts Sections I-IV of Judge Brett Kavanaugh's dissent..., where, based on considerations of history, liberty, and presidential authority, Judge Kavanaugh concluded that the CFPB 'is unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single director.'"

The Bureau separately filed a Notice of Ratification with the court, seeking to ratify the decision to file an enforcement action that had originally been made prior to the appointment of Acting Director Mick Mulvaney. The Notice argues that, because the President may remove Mr. Mulvaney at will, RD Legal cannot obtain dismissal on the grounds that the Bureau's enforcement action was initially filed by a Director removable only for cause. Judge Preska rejected the Bureau's argument, noting that Acting Director Mulvaney's appointment is time-barred, and a permanent Director will be appointed who will be subject to the "for cause" protections of the Dodd-Frank Act. The court also noted that the provisions in the Dodd-Frank Act that "render the CFPB's structure unconstitutional remain intact." On those grounds, the court held the Bureau's structure unconstitutional and dismissed its claims. The N.Y. Attorney General remains a party.

The Bureau could appeal Judge Preska's decision — it has filed briefs arguing in support of its constitutionality in several other cases since Acting Director Mulvaney took over. If the Bureau appeals and the Second Circuit affirms the lower court's decision, the resulting split in the circuits could convince the Supreme Court to consider the politically-charged issue of the constitutionality of the Bureau's structure. As it stands, Judge Preska's view, as that of a single district court judge, is not dispositive of the issue. The judge did not order the Bureau to close its doors and turn off the lights. It merely dismissed the Bureau's claims in the RD Legal Funding suit. Given the D.C. Circuit's decision holding that the Bureau is constitutionally structured, the controversy is likely to continue.

Originally published June 23, 2018

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