Another judge says CFPB structure is unconstitutional

A federal judge on Thursday ruled that the Consumer Financial Protection Bureau's structure is unconstitutional and disqualified the agency as a plaintiff in litigation against a New Jersey law firm that made high-cost loans to 9/11 first responders and pro football players diagnosed with brain injuries.

Chief District Judge Loretta A. Preska of the U.S. District Court for the Southern District of New York found that the CFPB lacked the authority to bring claims against RD Funding in Cresskill, N.J., its owner Roni Dersovitz and two related companies, RD Legal Finance and RD Legal Funding Partners.

The Dodd-Frank Act, in trying to establish the CFPB as an independent agency, permits the president to remove its director only "for cause" — which Preska ruled is an infringement on executive power. Since the court cannot change the statute, the CFPB should not exist, her decision said.

A three-judge panel of the U.S. Court of Appeals for the D.C. Circuit ruled in 2016 that the CFPB was unconstitutional, upholding a lower-court decision. But the full D.C. Circuit overruled the panel's decision in January.

Preska's ruling will have a limited effect since it is not binding on other judges in the southern district or elsewhere, and does not affect two decisions by the U.S. Court of Appeals for the D.C. Circuit that have upheld the CFPB's structure, lawyers said.

"There likely will be little support of the case in other courts that have upheld the constitutionality of the CFPB at the appellate level," said Richard Gottlieb, a partner at Manatt, Phelps & Phillips.

However, some lawyers said the ruling could affect whether the CFPB's rules are considered applicable in the southern district, which in turn could interfere with enforcement actions pending there.

David Willingham, a partner at Boies Schiller Flexner who represented RD Legal, applauded the ruling.

"We are pleased that the court correctly found that the CFPB is unconstitutional as structured, and this underscores that the CFPB never should have brought this action in the first place," Willingham said.

The decision was also praised by House Financial Services Committee Chairman Jeb Hensarling, who has backed legislation to reform the agency.

The ruling "confirmed what House Republicans have said all along, that the bureau’s structure is unconstitutional," Hensarling said in a news release. "By design the bureau is arguably the most powerful and least accountable Washington bureaucracy in American history."

Robert Weissman, the president of Public Citizen, an advocacy group, said the judge's ruling was contrary to Supreme Court precedent and would be overturned.

"We expect this erroneous decision to be overturned on appeal," he said.

Preska allowed the New York attorney general's office to continue its claims against the companies targeted by the lawsuit.

"Because the CFPB’s structure is unconstitutional, it lacks the authority to bring claims under the [Consumer Financial Protection Act] and is hereby terminated as a party to this action," Preska ruled. "The NYAG, however, has independent authority to bring claims under the CFPA."

The CFPB and New York's attorney general had sued the companies in 2017 alleging they engaged in deceptive and abusive practices by falsely marketing and misrepresenting up-front advances for settlement payouts to NFL players with brain injuries.

It is unclear if acting CFPB Director Mick Mulvaney would appeal the decision, which was filed by his predecessor, Richard Cordray.

The CFPB declined to comment.

Preska devoted just five pages of an 108-page rulingto the CFPB's structure. She said that on the constitutionality issue, she sided with Judge Karen LeCraft Henderon's dissent in the 2016 ruling by the three-judge panel of the appellate court in D.C.

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