Since it was filed in a California federal court in July 2012, we have been following CFPB v. Chance Edward Gordon, a case in which the CFPB alleged that an attorney duped consumers by falsely promising loan modifications in exchange for advance fees and, in reality, did little or nothing to help consumers. The CFPB charged the defendant with violations of the Consumer Financial Protection Act and Regulation O, the Mortgage Assistance Relief Services Rule.
As part of his affirmative defenses to the CFPB’s complaint, the defendant included a challenge to President Obama’s recess appointment of Director Cordray. In his summary judgment motion, the defendant asserted that, based on the reasoning of the D.C. Circuit’s decision in NLRB v. Noel Canning, Mr. Cordray was not validly appointed as CFPB Director. He argued that in the absence of a validly-appointed Director, the CFPB had no authority over non-banks and the CFPB’s action against him was therefore rendered invalid. The U.S. Supreme Court subsequently affirmed the D.C. Circuit’s ruling that the NLRB appointments at issue in Canning were invalid but did so on different grounds.
Alternatively, the defendant argued that he was not a “covered person” within the meaning of the Dodd-Frank Act because he did not provide a “consumer financial product or service” but instead provided “custom legal products.” The defendant also asserted that he did not provide “mortgage assistance relief services” within the meaning of Regulation O because the loan modification services he offered were provided for no compensation. According to the defendant, fees were only charged for pre-litigation, custom legal products.
The district court did not address the merits of the defendant’s argument that the CFPB lacked authority to bring the action because of Director Cordray’s unconstitutional appointment, concluding that the argument had been waived. It found that the defendant had violated the CFPA and Regulation O and ordered approximately $11.4 million in disgorgement and restitution.
In its opinion affirming the district court’s finding of liability, the Ninth Circuit considered whether the district court had Article III jurisdiction to hear the CFPB’s enforcement action (an issue which the defendant had not raised but was raised in an amicus brief). According to the Ninth Circuit, any defects in Director Cordray’s appointment did not deprive the court of Article III jurisdiction because the CFPB retained its enforcement authority, and therefore its standing to sue, despite such defects.
In January 2013, following the oral argument in the D.C. Circuit in Canning but before the D.C. Circuit issued its decision, Director Cordray was renominated by President Obama. In July 2013, he was confirmed by the Senate as CFPB Director. Director Cordray thereafter issued a notice ratifying the actions he took as Director while he was serving as a recess appointee. The Ninth Circuit ruled that Director Cordray’s invalid recess appointment did not render the enforcement action against the defendant invalid because Director Cordray’s subsequent valid appointment coupled with his ratification notice cured any initial constitutional deficiencies.
In calculating the monetary judgment, the district court had included in its judgment money earned by the defendant for a time period that began “prior to the enactment or effectiveness of Regulation O and the relevant portions of the CFPA.” Although the Ninth Circuit agreed with the district court’s liability finding, it vacated the judgment and remanded “for the district court to consider whether it is appropriate to include in its judgment” money earned by the defendant based on a retroactive application of Regulation O and the CFPA.
In a dissenting opinion, Judge Ikuta disagreed with the majority’s conclusion that Director Cordray’s invalid appointment did not deprive the court of Article III jurisdiction. According to Judge Ikuta, because his appointment was invalid, Director Cordray did not have authority to enforce public rights in federal court on behalf of the Executive Branch. In Judge Ikuta’s view, without an officer properly appointed by the President, the CFPB lacked any executive authority that would allow it to enforce public rights.
She concluded that, as a result, neither the CFPB nor Director Cordray had Article III standing to sue when the CFPB filed its enforcement action against the defendant and the action should have been dismissed by the district court for lack of jurisdiction. Judge Ikuta rejected the argument that Director Cordray’s subsequent ratification of his actions while a recess appointee could retroactively cure the district court’s lack of jurisdiction. As support, Judge Ikuta cited to federal court cases that have also rejected the argument that a later act can cure a lack of standing at the time a lawsuit is filed.
Judge Ikuta observed that her conclusion that the district court lacked jurisdiction to hear the CFPB’s enforcement action “undoubtedly applies to numerous other enforcement actions taken by the Bureau for the 18 months of its existence before [Director Cordray was confirmed by the Senate.]” She also commented that the court had a duty to dismiss the case for lack of Article III jurisdiction “practical effects notwithstanding.”
The CFPB continues to face a constitutional challenge to its structure in two pending cases. One case was recently argued before the D.C. Circuit and the other case is before the D.C. federal district court. In both cases, the parties raising the constitutional challenge argue that the Dodd-Frank Act’s placement of sweeping legislative, executive, and judicial power in the hands of a single Director who is not accountable to the President or Congress makes the CFPB’s structure unconstitutional. In particular, they point to the President’s ability to remove the CFPB Director only “for cause” and the funding of the CFPB through the Federal Reserve rather than the congressional appropriations process. (The case before the D.C. federal district court also includes a challenge to the CFPB’s constitutionality based on Director Cordray’s recess appointment.)