The CFPB will soon need to decide how it will respond to the decision issued last week by Judge Preska of the Southern District of New York in RD Legal Funding finding that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional and striking Title X of Dodd-Frank in its entirety.  In her opinion and order, Judge Preska directed counsel “to inform the Court by letter no later than July 9 how they propose to proceed.”

While the decision is not binding on any other court, including other judges in the Southern District, it could be used as precedent by other courts to reach a similar result.  Most significantly, in striking Title X in its entirety, the decision goes further than the Trump Administration’s stance on the CFPB’s constitutionality in prior litigation.

In the rehearing en banc of the D.C. Circuit’s PHH decision, the DOJ filed an amicus brief in which it agreed with PHH’s position that the CFPB’s structure is unconstitutional but advocated a more limited remedial measure than PHH was seeking.  In contrast to PHH which argued that the CFPB should be dismantled in its entirety, the DOJ supported keeping the CFPB intact with a director removable at will by the President.  (The CFPB, which was then still under the leadership of former Director Cordray, defended its constitutionality.)

In addition to deciding whether it will appeal Judge Preska’s decision, the CFPB must decide the timing of such an appeal.  The decision was a ruling on the defendants’ motion to dismiss and did not dismiss the claims of the New York Attorney General (which filed the lawsuit jointly with the CFPB).  As a result, because the decision does not represent a final order, the CFPB would have to seek permission from the district court if it wants to appeal now.  Alternatively, the CFPB could wait to appeal when there is a final disposition in the lawsuit.

Assuming the CFPB appeals Judge Preska’s decision, it is unclear what its position will be on the CFPB’s constitutionality.  It is possible the CFPB will adopt the position taken by the DOJ in PHH and agree with RD Legal Funding that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional but argue that the proper remedy is to only strike Dodd-Frank’s for-cause removal provision rather than all of Title X.

On the other hand, the Notice of Ratification filed by the CFPB in the case suggests that the CFPB might defend its constitutionality.  Under former Director Cordray’s leadership, the CFPB defended its constitutionality in opposing the defendants’ motion to dismiss.  Last month, the CFPB filed the Notice of Ratification in which it asserted that because Acting Director Mulvaney is removable at will by the President, his ratification of the CFPB’s decision to bring the lawsuit cured any constitutional defect with the initiation of the case and made it unnecessary for the court to reach the constitutional issue.  More specifically, the CFPB stated: ” A recent ratification has cured any such constitutional defect (even if one even existed—which it does not, as the Bureau explained in its opposition to Defendants’ motion to dismiss).” (emphasis added)

The CFPB’s constitutionality is currently the subject of an interlocutory appeal in the Fifth Circuit.  In April 2018, the Fifth Circuit agreed to hear an interlocutory appeal on the issue of the CFPB’s constitutionality which was requested by the defendants in a CFPB lawsuit alleging that the defendants had engaged in abusive, deceptive, and unfair conduct in connection with activities that included making payday loans.  The defendants’ petition to the Fifth Circuit seeking interlocutory review was opposed by the CFPB, which argued that the issue did not present a “controlling question of law” because Acting Director Mulvaney’s ratification of the CFPB’s decision to bring the lawsuit cured any constitutional defect that may have existed with the CFPB’s initiation of the lawsuit and made the for-cause removal provision’s constitutionality irrelevant to the case.  (The existence of a “controlling question of law” is one of the requirements for granting an interlocutory appeal in addition to a substantial ground for difference of opinion and that an immediate appeal may materially advance the termination of the case).

The D.C. Circuit is currently the only circuit to have ruled on the CFPB’s constitutionality.  (In its en banc PHH decision, it held that the CFPB’s structure is constitutional.)  Since the issue is now before the Fifth Circuit, an appeal to the Second Circuit by the CFPB in RD Legal Funding would create the potential for at least three circuit court rulings on the CFPB’s constitutionality.  (Footnote 7 of Judge Preska’s decision lists other cases that have addressed the constitutionality issue.)