PHH Corporation v. CFPB

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 12, 2016 Decided October 11, 2016

No. 15-1177

PHH CORPORATION, ET AL.,

PETITIONERS

v.

CONSUMER FINANCIAL PROTECTION BUREAU,

RESPONDENT

On Petition for Review of an Order of

the Consumer Financial Protection Bureau

(CFPB File 2014-CFPB-0002)

Theodore B. Olson argued the cause for petitioners.

With him on the briefs were Helgi C. Walker, Mitchel H.

Kider, David M. Souders, Thomas M. Hefferon, and William

M. Jay.

C. Boyden Gray, Adam J. White, Gregory Jacob, Sam

Kazman, and Hans Bader were on the brief for amici curiae

State National Bank of Big Spring, et al. in support of

petitioners.

Kirk D. Jensen and Alexandar S. Leonhardt were on the

brief for amicus curiae Consumer Mortgage Coalition in

support of petitioners.

2

Joseph R. Palmore and Bryan J. Leitch were on the brief

for amici curiae American Financial Services Association, et

al. in support of petitioners.

Andrew J. Pincus, Matthew A. Waring, Kathryn

Comerford Todd, and Steven P. Lehotsky were on the brief for

amicus curiae The Chamber of Commerce of the United

States in support of petitioners.

Jay N. Varon and Jennifer M. Keas were on the brief for

amici curiae American Land Title Association, et al. in

support of petitioners.

Phillip L. Schulman and David T. Case were on the brief

for amicus curiae National Association of Realtors in support

of petitioners.

Lawrence DeMille-Wagman, Senior Litigation Counsel,

Consumer Financial Protection Bureau, argued the cause for

respondent. With him on the brief were Meredith Fuchs,

General Counsel, and John R. Coleman.

Julie Nepveu was on the brief for amicus curiae AARP in

support of respondent.

Before: HENDERSON and KAVANAUGH, Circuit Judges,

and RANDOLPH, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge

KAVANAUGH, with whom Senior Circuit Judge RANDOLPH

joins, and with whom Circuit Judge HENDERSON joins as to

Parts I, IV, and V.

Concurring opinion filed by Senior Circuit Judge

RANDOLPH.

Opinion concurring in part and dissenting in part filed by

Circuit Judge HENDERSON.

KAVANAUGH, Circuit Judge:

INTRODUCTION AND SUMMARY

This is a case about executive power and individual

liberty. The U.S. Government’s executive power to enforce

federal law against private citizens – for example, to bring

criminal prosecutions and civil enforcement actions – is

essential to societal order and progress, but simultaneously a

grave threat to individual liberty.

The Framers understood that threat to individual liberty.

When designing the executive power, the Framers first

separated the executive power from the legislative and judicial

powers. “The declared purpose of separating and dividing the

powers of government, of course, was to ‘diffus[e] power the

better to secure liberty.’” Bowsher v. Synar, 478 U.S. 714,

721 (1986) (quoting Youngstown Sheet & Tube Co. v. Sawyer,

343 U.S. 579, 635 (1952) (Jackson, J., concurring)). To

ensure accountability for the exercise of executive power, and

help safeguard liberty, the Framers then lodged full

responsibility for the executive power in the President of the

United States, who is elected by and accountable to the people.

The text of Article II provides quite simply: “The executive

Power shall be vested in a President of the United States of

America.” U.S. CONST. art. II, § 1. And Article II assigns

the President alone the authority and responsibility to “take

Care that the Laws be faithfully executed.” Id. § 3. As

Justice Scalia explained: “The purpose of the separation and

equilibration of powers in general, and of the unitary Executive

in particular, was not merely to assure effective government

4

but to preserve individual freedom.” Morrison v. Olson, 487

U.S. 654, 727 (1988) (Scalia, J., dissenting).

Of course, the President executes the laws with the

assistance of subordinate executive officers who are appointed

by the President, often with the advice and consent of the

Senate. To carry out the executive power and be accountable

for the exercise of that power, the President must be able to

control subordinate officers in executive agencies. In its

landmark decision in Myers v. United States, 272 U.S. 52

(1926), authored by Chief Justice and former President Taft,

the Supreme Court therefore recognized the President’s Article

II authority to supervise, direct, and remove at will subordinate

officers in the Executive Branch.

In 1935, however, the Supreme Court carved out an

exception to Myers and Article II by permitting Congress to

create independent agencies that exercise executive power.

See Humphrey’s Executor v. United States, 295 U.S. 602

(1935). An agency is considered “independent” when the

agency heads are removable by the President only for cause,

not at will, and therefore are not supervised or directed by the

President. Examples of independent agencies include

well-known bodies such as the Federal Communications

Commission, the Securities and Exchange Commission, the

Federal Trade Commission, the National Labor Relations

Board, and the Federal Energy Regulatory Commission.

Those and other established independent agencies exercise

executive power by bringing enforcement actions against

private citizens and by issuing legally binding rules that

implement statutes enacted by Congress.

The independent agencies collectively constitute, in effect,

a headless fourth branch of the U.S. Government. They

exercise enormous power over the economic and social life of

5

the United States. Because of their massive power and the

absence of Presidential supervision and direction, independent

agencies pose a significant threat to individual liberty and to

the constitutional system of separation of powers and checks

and balances.

To help mitigate the risk to individual liberty, the

independent agencies, although not checked by the President,

have historically been headed by multiple commissioners,

directors, or board members who act as checks on one another.

Each independent agency has traditionally been established, in

the Supreme Court’s words, as a “body of experts appointed by

law and informed by experience.” Humphrey’s Executor, 295

U.S. at 624 (internal quotation marks omitted). The

multi-member structure reduces the risk of arbitrary

decisionmaking and abuse of power, and thereby helps protect

individual liberty.

In other words, to help preserve individual liberty under

Article II, the heads of executive agencies are accountable to

and checked by the President, and the heads of independent

agencies, although not accountable to or checked by the

President, are at least accountable to and checked by their

fellow commissioners or board members. No head of either

an executive agency or an independent agency operates

unilaterally without any check on his or her authority.

Therefore, no independent agency exercising substantial

executive authority has ever been headed by a single person.

Until now.

In the Dodd-Frank Act of 2010, Congress established a

new independent agency, the Consumer Financial Protection

Bureau. As proposed by then-Professor and now-Senator

Elizabeth Warren, the CFPB was to be another traditional,

6

multi-member independent agency. See Elizabeth Warren,

Unsafe at Any Rate: If It’s Good Enough for Microwaves, It’s

Good Enough for Mortgages. Why We Need a Financial

Product Safety Commission, Democracy, Summer 2007, at 8,

16-18. The initial Executive Branch proposal in 2009

likewise envisioned a traditional, multi-member independent

agency. See DEPARTMENT OF THE TREASURY, FINANCIAL

REGULATORY REFORM: A NEW FOUNDATION: REBUILDING

FINANCIAL SUPERVISION AND REGULATION 58 (2009). The

House-passed bill sponsored by Congressman Barney Frank

and championed by Speaker Nancy Pelosi also contemplated a

traditional, multi-member independent agency. See H.R.

4173, 111th Cong. § 4103 (as passed by House, Dec. 11, 2009).

But Congress ultimately departed from the Warren and

Administration proposals, and from the House bill. Congress

established the CFPB as an independent agency headed not by

a multi-member commission but rather by a single Director.

Because the CFPB is an independent agency headed by a

single Director and not by a multi-member commission, the

Director of the CFPB possesses more unilateral authority – that

is, authority to take action on one’s own, subject to no check –

than any single commissioner or board member in any other

independent agency in the U.S. Government. Indeed, as we

will explain, the Director enjoys more unilateral authority than

any other officer in any of the three branches of the U.S.

Government, other than the President.

At the same time, the Director of the CFPB possesses

enormous power over American business, American

consumers, and the overall U.S. economy. The Director

unilaterally enforces 19 federal consumer protection statutes,

covering everything from home finance to student loans to

credit cards to banking practices. The Director alone decides

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what rules to issue; how to enforce, when to enforce, and

against whom to enforce the law; and what sanctions and

penalties to impose on violators of the law. (To be sure,

judicial review serves as a constraint on illegal actions, but not

on discretionary decisions within legal boundaries; therefore,

subsequent judicial review of individual agency decisions has

never been regarded as sufficient to excuse a structural

separation of powers violation.)

That combination of power that is massive in scope,

concentrated in a single person, and unaccountable to the

President triggers the important constitutional question at issue

in this case.

The petitioner here, PHH, is a mortgage lender and was

the subject of a CFPB enforcement action that resulted in a

$109 million order against it. In seeking to vacate the order,

PHH argues that the CFPB’s status as an independent agency

headed by a single Director violates Article II of the

Constitution.

The question before us is whether we may extend the

Supreme Court’s Humphrey’s Executor precedent to cover this

novel, single-Director agency structure for an independent

agency. To analyze that issue, we follow the history-focused

approach long applied by the Supreme Court in separation of

powers cases where, as here, the constitutional text alone does

not resolve the matter.

Two recent Supreme Court decisions exemplify that

historical analysis. In its 2010 decision in Free Enterprise

Fund v. Public Company Accounting Oversight Board, the

Supreme Court held that the new Accounting Oversight Board

at issue in that case – with two levels rather than one level of

for-cause protection insulating the independent agency heads

8

from the President – exceeded the bounds on traditional

independent agencies and thus violated Article II. 561 U.S.

477, 514 (2010). In so ruling, the Court emphasized, among

other things, the novelty of the Board’s structure: “Perhaps

the most telling indication of the severe constitutional problem

with the PCAOB is the lack of historical precedent for this

entity.” Id. at 505 (internal quotation marks omitted). In its

2014 decision in NLRB v. Noel Canning, the Supreme Court

held that recess appointments in Senate recesses of fewer than

10 days were presumptively unconstitutional under Article II.

134 S. Ct. 2550, 2567, slip op. at 21 (2014). Why 10 days?

The Court explained: “Long settled and established practice

is a consideration of great weight in a proper interpretation of

constitutional provisions regulating the relationship between

Congress and the President.” Id. at 2559, slip op. at 7 (internal

quotation marks and alteration omitted). And the historical

practice of Presidents and Senates had established a de facto

10-day line so that recess appointments in recesses of fewer

than 10 days were impermissible. See id. at 2567, slip op. at

20-21.

As those two cases illustrate, history and tradition are

critical factors in separation of powers cases where the

constitutional text does not otherwise resolve the matter. As

Justice Breyer wrote for the Court in Noel Canning, that

bedrock principle – namely, that the “longstanding practice of

the government can inform our determination of what the law

is” – is “neither new nor controversial.” Id. at 2560, slip op. at

7 (internal quotation marks and citation omitted) (quoting

McCulloch v. Maryland, 17 U.S. 316, 401 (1819) and Marbury

v. Madison, 5 U.S. 137, 177 (1803)).

In this case, the single-Director structure of the CFPB

represents a gross departure from settled historical practice.

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Never before has an independent agency exercising substantial

executive authority been headed by just one person.

The CFPB’s concentration of enormous executive power

in a single, unaccountable, unchecked Director not only

departs from settled historical practice, but also poses a far

greater risk of arbitrary decisionmaking and abuse of power,

and a far greater threat to individual liberty, than does a

multi-member independent agency. The overarching

constitutional concern with independent agencies is that the

agencies are unchecked by the President, the official who is

accountable to the people and who is responsible under Article

II for the exercise of executive power. Recognizing the broad

and unaccountable power wielded by independent agencies,

Congresses and Presidents of both political parties have

therefore long endeavored to keep independent agencies in

check through other statutory means. In particular, to check

independent agencies, Congress has traditionally required

multi-member bodies at the helm of every independent agency.

In lieu of Presidential control, the multi-member structure of

independent agencies acts as a critical substitute check on the

excesses of any individual independent agency head – a check

that helps to prevent arbitrary decisionmaking and thereby to

protect individual liberty.

This new agency, the CFPB, lacks that critical check and

structural constitutional protection, yet wields vast power over

the U.S. economy. So “this wolf comes as a wolf.”

Morrison v. Olson, 487 U.S. at 699 (Scalia, J., dissenting).

In light of the consistent historical practice under which

independent agencies have been headed by multiple

commissioners or board members, and in light of the threat to

individual liberty posed by a single-Director independent

agency, we conclude that Humphrey’s Executor cannot be

10

stretched to cover this novel agency structure. We therefore

hold that the CFPB is unconstitutionally structured.

What is the remedy for that constitutional flaw? PHH

contends that the constitutional flaw means that we must shut

down the entire CFPB (if not invalidate the entire Dodd-Frank

Act) until Congress, if it chooses, passes new legislation fixing

the constitutional flaw. But Supreme Court precedent dictates

a narrower remedy. To remedy the constitutional flaw, we

follow the Supreme Court’s precedents, including Free

Enterprise Fund, and simply sever the statute’s

unconstitutional for-cause provision from the remainder of the

statute. Here, that targeted remedy will not affect the ongoing

operations of the CFPB. With the for-cause provision

severed, the President now will have the power to remove the

Director at will, and to supervise and direct the Director. The

CFPB therefore will continue to operate and to perform its

many duties, but will do so as an executive agency akin to other

executive agencies headed by a single person, such as the

Department of Justice and the Department of the Treasury.

Those executive agencies have traditionally been headed by a

single person precisely because the agency head operates

within the Executive Branch chain of command under the

supervision and direction of the President. The President is a

check on and accountable for the actions of those executive

agencies, and the President now will be a check on and

accountable for the actions of the CFPB as well.

Because the CFPB as remedied will continue operating,

we must also address the statutory issues raised by PHH in its

challenge to the $109 million order against it. 1 PHH raises

three main statutory arguments.

1

If PHH fully prevailed on its constitutional argument,

including with respect to severability, the CFPB could not continue

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First, PHH argues that the CFPB incorrectly interpreted

Section 8 of the Real Estate Settlement Procedures Act to bar

so-called captive reinsurance arrangements involving

mortgage lenders such as PHH and their affiliated reinsurers.

In a captive reinsurance arrangement, a mortgage lender (such

as PHH) refers borrowers to a mortgage insurer. In return, the

operating unless and until Congress enacted new legislation. As a

result, we could not and would not remand to the CFPB for any

further proceedings in this case. By contrast, even if PHH fully

prevails on the statutory issues, we still will have to remand to the

CFPB for the agency to conduct the proceeding in accordance with

the appropriate statutory requirements, under which PHH may still

be liable for certain alleged wrongdoing. In other words, PHH’s

constitutional and severability argument, if accepted, would afford it

full relief from any CFPB enforcement action and thus would afford

it broader relief than would its statutory arguments. For that reason,

we have no choice but to address the constitutional issue first. The

constitutional issue cannot be avoided in any principled way. We

therefore respectfully but firmly disagree with Judge Henderson’s

suggestion in her separate opinion that the constitutional issue can be

avoided. In our view, failing to decide the constitutional issue here

would be impermissible judicial abdication, not judicial restraint.

Moreover, apart from that necessity in this case, when a litigant

raises a fundamental constitutional challenge to the very structure or

existence of an agency enforcing the law against it, the courts

ordinarily address that issue promptly, at least so long as

jurisdictional requirements such as standing are met. See, e.g., Free

Enterprise Fund, 561 U.S. at 490-91; Morrison v. Olson, 487 U.S. at

669-70; Buckley v. Valeo, 424 U.S. 1, 12 (1976). That was the

approach we took in both Intercollegiate Broadcasting System, Inc.

v. Copyright Royalty Board, 684 F.3d 1332, 1334, 1336-37 (D.C.

Cir. 2012), and Raymond J. Lucia Cos. v. SEC, No. 15-1345, slip op.

at 7, 2016 WL 4191191, at *3 (D.C. Cir., Aug. 9, 2016). It can be

irresponsible for a court to unduly delay ruling on such a

fundamental and ultimately unavoidable structural challenge, given

the systemic ramifications of such an issue.

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mortgage insurer buys reinsurance from a mortgage reinsurer

affiliated with (or owned by) the referring mortgage lender.

We agree with PHH that Section 8 of the Act allows captive

reinsurance arrangements so long as the amount paid by the

mortgage insurer for the reinsurance does not exceed the

reasonable market value of the reinsurance.

Second, PHH claims that, in any event, the CFPB departed

from the consistent prior interpretations issued by the

Department of Housing and Urban Development, and that the

CFPB then retroactively applied its new interpretation of the

Act against PHH, thereby violating PHH’s due process rights.

We again agree with PHH: The CFPB’s order violated

bedrock principles of due process.

Third, in light of our ruling on the constitutional and

statutory issues, the CFPB on remand still will have an

opportunity to demonstrate that the relevant mortgage insurers

in fact paid more than reasonable market value to the

PHH-affiliated reinsurer for reinsurance, thereby making

disguised payments for referrals in contravention of Section 8.

PHH claims, however, that much of the alleged misconduct

occurred outside of the three-year statute of limitations and

therefore may not be the subject of a CFPB enforcement

action. The CFPB responds that, under Dodd-Frank, there is

no statute of limitations for any CFPB administrative actions to

enforce any consumer protection law. In the alternative, the

CFPB contends that there is no statute of limitations for

administrative actions to enforce Section 8 of the Real Estate

Settlement Procedures Act. We disagree with the CFPB on

both points. First of all, the Dodd-Frank Act incorporates the

statutes of limitations in the underlying statutes enforced by the

CFPB in administrative proceedings. And under the Real

Estate Settlement Procedures Act, a three-year statute of

13

limitations applies to all CFPB enforcement actions to enforce

Section 8, whether brought in court or administratively.

In sum, we grant PHH’s petition for review, vacate the

CFPB’s order against PHH, and remand for further

proceedings consistent with this opinion. On remand, the

CFPB may determine among other things whether, within the

applicable three-year statute of limitations, the relevant

mortgage insurers paid more than reasonable market value to

the PHH-affiliated reinsurer.

In so ruling, we underscore the important but limited

real-world implications of our decision. As before, the CFPB

will continue to operate and perform its many critical

responsibilities, albeit under the ultimate supervision and

direction of the President. Section 8 will continue to mean

what it has traditionally meant: that captive reinsurance

agreements are permissible so long as the mortgage insurer

pays no more than reasonable market value for the reinsurance.

And the three-year statute of limitations that has traditionally

applied to agency actions to enforce Section 8 will continue to

apply.

With apologies for the length of this opinion, we now turn

to our detailed explanation and analysis of these important

issues.

I

PHH is a large home mortgage lender. When PHH and

other lenders provide mortgage loans to homebuyers, they

require certain homebuyers to obtain mortgage insurance.

Mortgage insurance protects lenders by covering part of the

lenders’ losses if homebuyers default on their mortgages.

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Homebuyers pay monthly premiums to the mortgage insurer

for the insurance.

In turn, mortgage insurers may obtain mortgage

reinsurance. In the same way that mortgage insurance

protects lenders, mortgage reinsurance protects mortgage

insurers. Reinsurers assume some of the risk of insuring the

mortgage. In exchange, mortgage insurers pay a fee (usually

a portion of the homebuyers’ monthly insurance premiums) to

the reinsurers.

In 1994, PHH established a wholly owned subsidiary

known as Atrium Insurance Corporation. Atrium provided

reinsurance to the mortgage insurers that insured mortgages

generated by PHH. In return, PHH often referred borrowers

to mortgage insurers that used Atrium’s reinsurance services.

That is known as a “captive reinsurance” arrangement, which

was not uncommon in the industry at the time. According to

PHH, the mortgage insurers did not pay more than reasonable

market value to Atrium for the reinsurance.

Originally passed by Congress and signed by President

Ford in 1974, the Real Estate Settlement Procedures Act is a

broad statute governing real estate transactions. One of its

stated purposes was “the elimination of kickbacks or referral

fees that tend to increase unnecessarily the costs of certain

settlement services.” 12 U.S.C. § 2601(b)(2).

To achieve that objective, Section 8(a) of the Act, which is

titled “Prohibition against kickbacks and unearned fees,”

provides: “No person shall give and no person shall accept

any fee, kickback, or thing of value pursuant to any agreement

or understanding, oral or otherwise, that business incident to or

a part of a real estate settlement service involving a federally

related mortgage loan shall be referred to any person.” Id.

15

§ 2607(a). In plain English, Section 8(a) prohibits, as relevant

here, paying for a referral – for example, a mortgage insurer’s

paying a lender for the lender’s referral of homebuying

customers to that mortgage insurer.

Standing alone, Section 8(a) perhaps might have been

construed by government enforcement agencies to cast doubt

on a mortgage lender’s referrals of customers to mortgage

insurers who in turn purchased reinsurance from a reinsurer

affiliated with the lender. But another provision of the Real

Estate Settlement Procedures Act, Section 8(c), carved out a

series of expansive exceptions, qualifications, and safe harbors

related to Section 8(a). Of relevance here, Section 8(c)

provides: “Nothing in this section shall be construed as

prohibiting . . . (2) the payment to any person of a bona fide

salary or compensation or other payment for goods or facilities

actually furnished or for services actually performed . . . .”

Id. § 2607(c).

Before the creation of the CFPB in 2010, the Department

of Housing and Urban Development, known as HUD,

interpreted Section 8(c) to establish a safe harbor allowing

bona fide transactions between a lender and a mortgage insurer

(or between a mortgage insurer and a lender-affiliated

reinsurer), so long as the mortgage insurer did not pay the

lender for a referral. HUD therefore interpreted Section 8(c)

to allow captive reinsurance arrangements so long as the

mortgage insurer paid no more than reasonable market value

for the reinsurance. If the mortgage insurer paid more than

reasonable market value for the reinsurance, then a

presumption would arise that the excess payment was indeed a

disguised payment for the referral, which is impermissible

under Section 8(a). HUD repeatedly reaffirmed that

interpretation, and the mortgage lending industry relied on it.

16

When Congress created the CFPB in 2010, Congress

provided that the CFPB would take over enforcement of

Section 8 from HUD. By regulation, the CFPB carried

forward HUD’s rules, policy statements, and guidance, subject

of course to any future change by the CFPB.

Therefore, under Section 8(c), as authoritatively

interpreted by the Federal Government, PHH as a mortgage

lender could refer customers to mortgage insurers who

obtained reinsurance from Atrium – so long as the mortgage

insurers paid Atrium no more than reasonable market value for

the reinsurance.

Or so PHH thought. In 2014, notwithstanding Section

8(c) and HUD’s longstanding interpretation, the CFPB

initiated an administrative enforcement action against PHH.

The CFPB alleged that PHH’s captive reinsurance

arrangement with the mortgage insurers violated Section 8.

Under the CFPB’s newly minted interpretation, Section 8

prohibits most referrals made by lenders to mortgage insurers

in exchange for the insurer’s purchasing reinsurance from a

lender-affiliated reinsurer. The CFPB said that Section 8 bars

such a captive reinsurance arrangement even when the

mortgage insurer pays no more than reasonable market value to

the reinsurer for the reinsurance.

In its order in this case, the CFPB thus discarded HUD’s

longstanding interpretation of Section 8 and, for the first time,

pronounced its new interpretation. And then the CFPB

applied its new interpretation of Section 8 retroactively against

PHH, notwithstanding PHH’s reliance on HUD’s prior

interpretation. The CFPB sanctioned PHH for previous

actions that PHH had taken in reliance on HUD’s prior

interpretation, even though PHH’s conduct had occurred

17

before the CFPB’s new interpretation of Section 8. The CFPB

ordered PHH to pay $109 million in disgorgement and

enjoined PHH from entering into future captive reinsurance

arrangements.

PHH petitioned this Court for review. A motions panel

of this Court (Judges Henderson, Millett, and Wilkins)

previously granted PHH’s motion for a stay of the CFPB’s

order pending resolution of the merits in this case.

II

In challenging the enforcement action against it, PHH

raises a fundamental constitutional objection to the entire

proceeding. According to PHH, the CFPB’s structure violates

Article II of the Constitution because the CFPB operates as an

independent agency headed by a single Director. PHH argues

that, to comply with Article II, either (i) the agency’s Director

must be removable at will by the President, meaning that the

CFPB would operate as a traditional executive agency; or (ii) if

structured as an independent agency, the agency must be

structured as a multi-member commission. We agree.

A

We begin by describing the background of independent

agencies in general and the CFPB in particular.

As the Supreme Court has explained, our Constitution

“was adopted to enable the people to govern themselves,

through their elected leaders,” and the Constitution “requires

that a President chosen by the entire Nation oversee the

execution of the laws.” Free Enterprise Fund v. Public

Company Accounting Oversight Board, 561 U.S. 477, 499

(2010). Under the text of Article II, the President alone is

18

responsible for exercising the executive power. The first 15

words of Article II of the Constitution provide: “The

executive Power shall be vested in a President of the United

States of America.” U.S. CONST. art. II, § 1. And Article II

assigns the President alone the authority and responsibility to

“take Care that the Laws be faithfully executed.” Id. § 3.

Article II makes “emphatically clear from start to finish” that

“the president would be personally responsible for his branch.”

AKHIL REED AMAR, AMERICA’S CONSTITUTION: A BIOGRAPHY

197 (2005); see also Neomi Rao, Removal: Necessary and

Sufficient for Presidential Control, 65 Ala. L. Rev. 1205, 1215

(2014) (“The text and structure of Article II provide the

President with the power to control subordinates within the

executive branch.”).

To exercise the executive power, the President must have

the assistance of subordinates. See Free Enterprise Fund, 561

U.S. at 483. The Framers therefore provided for the

appointment of executive officers and the creation of executive

departments to assist the President “in discharging the duties of

his trust.” Id. (internal quotation marks omitted); see U.S.

CONST. art. II, § 2.

In order to maintain control over the exercise of executive

power and take care that the laws are faithfully executed, the

President must be able to supervise and direct those

subordinate executive officers. See Free Enterprise Fund,

561 U.S. at 498-502. As James Madison stated during the

First Congress, “if any power whatsoever is in its nature

Executive, it is the power of appointing, overseeing, and

controlling those who execute the laws.” 1 ANNALS OF

CONGRESS 463 (Madison) (1789) (Joseph Gales ed., 1834).

To supervise and direct executive officers, the President

must be able to remove those officers at will. See generally

19

Myers v. United States, 272 U.S. 52 (1926). Otherwise, a

subordinate could ignore the President’s supervision and

direction without fear, and the President could do nothing

about it. See Bowsher v. Synar, 478 U.S. 714, 726 (1986)

(“Once an officer is appointed, it is only the authority that can

remove him, and not the authority that appointed him, that he

must fear and, in the performance of his functions, obey.”)

(internal quotation marks omitted). The Article II chain of

command depends on the President’s removal power. As

James Madison explained: “If the President should possess

alone the power of removal from office, those who are

employed in the execution of the law will be in their proper

situation, and the chain of dependence be preserved; the lowest

officers, the middle grade, and the highest, will depend, as they

ought, on the President, and the President on the community.”

1 ANNALS OF CONGRESS 499 (Madison). The Supreme Court

recently summarized the Article II chain of command this way:

“The Constitution that makes the President accountable to the

people for executing the laws also gives him the power to do

so. That power includes, as a general matter, the authority to

remove those who assist him in carrying out his duties.

Without such power, the President could not be held fully

accountable for discharging his own responsibilities; the buck

would stop somewhere else.” Free Enterprise Fund, 561 U.S.

at 513-14.

In the late 1800s and the early 1900s, as part of the

Progressive Movement and an emerging belief in expert,

apolitical, and scientific answers to certain public policy

questions, Congress began creating new expert agencies that

were independent of the President but that exercised executive

power. The heads of those independent agencies were

removable by the President only for cause, not at will, and were

neither supervised nor directed by the President. Some early

examples included the Interstate Commerce Commission

20

(1887) and the Federal Trade Commission (1914).

Importantly, the independent agencies were all multi-member

bodies: They were designed as non-partisan expert bodies

that would neutrally and impartially issue rules, bring law

enforcement actions, and resolve disputes in their respective

jurisdictions.

In a 1926 decision written by Chief Justice and former

President Taft, the Supreme Court ruled that, under Article II,

the President must be able to supervise, direct, and remove at

will certain executive officers. The Court stated: “[W]hen

the grant of the executive power is enforced by the express

mandate to take care that the laws be faithfully executed, it

emphasizes the necessity for including within the executive

power as conferred the exclusive power of removal.” Myers,

272 U.S. at 122.

A few years later, based on his reading of Article II and the

Court’s 1926 decision in Myers, President Franklin Roosevelt

vigorously contested the idea that Congress could create

independent agencies and thereby prevent the President from

controlling the executive power vested in those independent

agencies. President Roosevelt did not object to the existence

of the agencies; rather, he objected to the President’s lack of

control over these agencies, which after all were exercising

important executive power.

The issue came to a head in President Roosevelt’s dispute

with William E. Humphrey, a commissioner of the Federal

Trade Commission. Commissioner Humphrey was a

Republican holdover from the Hoover Administration who, in

President Roosevelt’s view, was too sympathetic to big

business and hostile to the Roosevelt Administration’s

regulatory agenda. Asserting his authority under Article II,

President Roosevelt fired Commissioner Humphrey.

21

Humphrey contested his removal, arguing that he was

protected against firing by the statute’s for-cause removal

provision, and further arguing that Congress possessed

authority to create such independent agencies without violating

Article II. The case reached the Supreme Court in 1935.

At its core, the case raised the question whether Article II

permitted Congress to create independent agencies whose

heads were not removable at will and would operate free of the

President’s supervision and direction. Representing President

Roosevelt, the Solicitor General argued that the case was

straightforward and controlled by the text and history of

Article II and the Court’s 1926 decision in Myers. But

notwithstanding Article II and the decision in Myers, the

Supreme Court upheld the constitutionality of independent

agencies – a decision that so incensed President Roosevelt that

it helped trigger his ill-fated court reorganization plan in 1937.

See Humphrey’s Executor v. United States, 295 U.S. 602, 624,

631-32 (1935). In allowing independent agencies, the

Humphrey’s Executor Court found it significant that the

Federal Trade Commission was intended “to be non-partisan,”

to “act with entire impartiality,” and “to exercise the trained

judgment of a body of experts appointed by law and informed

by experience.” Id. at 624 (internal quotation marks omitted).

Those characteristics, among others, led the Court to conclude

that Congress could create an independent agency “wholly

disconnected from the executive department.” Id. at 630.

According to the Court, Congress could therefore limit the

President’s power to remove the commissioners of the Federal

Trade Commission and, by extension, Congress could limit the

President’s power to remove the commissioners and board

directors of similar independent agencies. Id. at 628-30. 2

2

To cabin the effects of Humphrey’s Executor on the

Presidency, some have proposed reading the standard for-cause

22

In the wake of the 1935 Humphrey’s Executor decision,

independent agencies have continued to play an enormous role

in the U.S. Government. The independent agencies possess

massive authority over vast swaths of American economic and

social life.

Importantly, however, the independent agencies have

traditionally operated – and continue to operate – as

multi-member “bod[ies] of experts appointed by law and

informed by experience.” Id. at 624 (internal quotation marks

omitted). 3

removal restrictions in the statutes creating independent agencies to

allow for Presidential removal of independent agency heads based

on policy differences. But Humphrey’s Executor itself rejected that

interpretation. As the Supreme Court recently explained,

Humphrey’s Executor refuted the idea that “simple disagreement”

with an agency head’s “policies or priorities could constitute ‘good

cause’ for its removal.” Free Enterprise Fund, 561 U.S. at 502.

The correct reading of the “for-cause” restrictions, the Court stated

in Free Enterprise Fund, is that they “mean what they say” and

preclude removal except in cases of inefficiency, neglect of duty, or

malfeasance in office. Id.

3

The independent agencies have been designed, moreover, to

avoid “the suspicion of partisan direction.” Humphrey’s Executor,

295 U.S. at 625. The independent agency heads are appointed by

the President with the advice and consent of the Senate (or appointed

for a temporary period by the President alone in appropriate Senate

recesses). By statute, certain independent agencies must include

members of both major political parties. See, e.g., 15 U.S.C. § 41

(Federal Trade Commission); 15 U.S.C. § 78d(a) (Securities and

Exchange Commission); 15 U.S.C. § 2053(c) (Consumer Product

Safety Commission); 42 U.S.C. § 7171(b)(1) (Federal Energy

Regulatory Commission).

23

The independent agency at issue here, the CFPB, arose out

of an idea originally proposed by then-Professor and

now-Senator Elizabeth Warren. In 2007, concerned about

balkanized and inconsistent federal law enforcement of

consumer protection statutes, Professor Warren advocated that

Congress create a new independent agency, which she called a

Financial Product Safety Commission. This new agency

would centralize and unify federal law enforcement to protect

consumers. See Elizabeth Warren, Unsafe at Any Rate: If It’s

Good Enough for Microwaves, It’s Good Enough for

Mortgages. Why We Need a Financial Product Safety

Commission, Democracy, Summer 2007, at 8, 16-18.

The agency proposed by Professor Warren was to operate

as a traditional multi-member independent agency. The

subsequent Executive Branch proposal for such a new agency

likewise contemplated a multi-member structure. See

DEPARTMENT OF THE TREASURY, FINANCIAL REGULATORY

REFORM: A NEW FOUNDATION: REBUILDING FINANCIAL

SUPERVISION AND REGULATION 58 (2009). The originally

passed House bill sponsored by Congressman Barney Frank

and supported by Speaker Nancy Pelosi also would have

created a traditional multi-member independent agency. See

H.R. 4173, 111th Cong. § 4103 (as passed by House, Dec. 11,

2009).

But Congress ultimately strayed from the Warren and

Executive Branch proposals, and from the House bill, as well

as from historical practice, by creating an independent agency

with only a single Director. See Dodd-Frank Wall Street

Reform and Consumer Protection Act, § 1011, 12 U.S.C.

§ 5491. Congress made the Director of the CFPB removable

only for cause – that is, for “inefficiency, neglect of duty, or

malfeasance in office” – during the Director’s fixed five-year

term. See 12 U.S.C. § 5491(c)(3); Humphrey’s Executor, 295

24

U.S. at 620. Under the statute, the President therefore may not

supervise, direct, or remove at will the Director. As a result,

this statute means that a Director appointed by a President may

continue to serve in office even if the President later wants to

remove the Director based on policy disagreement, for

example. This statute also means that a Director may even

continue to serve under a new President (at least until the

Director’s statutory five-year tenure has elapsed), even though

the new President might strongly disagree with the Director

about policy issues or the overall direction of the agency.

At the same time, Congress granted the CFPB broad

authority to enforce U.S. consumer protection laws. Under

the Dodd-Frank Act, the CFPB possesses the power to

“prescribe rules or issue orders or guidelines pursuant to” 19

distinct consumer protection laws. 12 U.S.C.

§ 5581(a)(1)(A); see also id. § 5481(14). That power was

previously exercised by seven different government agencies.

See id. § 5581(b) (transferring to the CFPB “[a]ll consumer

financial protection functions” previously exercised by the

Board of Governors of the Federal Reserve, the Comptroller of

the Currency, the Office of Thrift Supervision, the Federal

Deposit Insurance Corporation, the National Credit Union

Administration, and select functions of the Department of

Housing and Urban Development and the Federal Trade

Commission). The CFPB may pursue actions to enforce the

consumer protection laws in federal court, as well as in

administrative actions before administrative law judges, and

may issue subpoenas requesting documents or testimony in

connection with those enforcement actions. See id.

§§ 5562-5564. The CFPB has the power to impose a wide

range of legal and equitable relief, including restitution,

disgorgement, money damages, injunctions, and civil

monetary penalties. Id. § 5565(a)(2). And all of this massive

power is lodged in one person – the Director – who is not

25

supervised, directed, or checked by the President or by other

directors.

Because the Director alone heads the agency without

Presidential supervision, and in light of the CFPB’s broad

authority over the U.S. economy, the Director enjoys

significantly more unilateral power than any single member of

any other independent agency. By “unilateral power,” we

mean power that is not checked by the President or by other

colleagues. Indeed, other than the President, the Director of

the CFPB is the single most powerful official in the entire

United States Government, at least when measured in terms of

unilateral power. That is not an overstatement. What about

the Speaker of the House, you might ask? The Speaker can

pass legislation only if 218 Members agree. The Senate

Majority Leader? The Leader needs 60 Senators to invoke

cloture, and needs a majority of Senators (usually 51 Senators

or 50 plus the Vice President) to approve a law or nomination.

The Chief Justice? The Chief Justice must obtain four other

Justices’ votes for his or her position to prevail. The Chair of

the Federal Reserve? The Chair needs the approval of a

majority of the Federal Reserve Board. The Secretary of

Defense? The Secretary is supervised and directed by the

President. On any decision, the Secretary must do as the

President says. So too with the Secretary of State, and the

Secretary of the Treasury, and the Attorney General.

To be sure, the Dodd-Frank Act requires the Director to

establish and consult with a “Consumer Advisory Board.”

See id. § 5494. But the advisory board is just that: advisory.

Nothing requires the Director to heed the Board’s advice.

Without the formal authority to prevent unilateral action by the

Director, the Advisory Board does not come close to equating

to the check provided by the multi-member structure of

traditional independent commissions.

26

The Act also, in theory, allows a supermajority of the

Financial Stability Oversight Council to veto certain

regulations of the Director. See id. § 5513. But by statute,

the veto power may be used only to prevent regulations (not to

prevent enforcement actions or adjudications); only when

two-thirds of the Council members agree; and only when a

regulation puts “the safety and soundness of the United States

banking system or the stability of the financial system of the

United States at risk,” a standard unlikely to be met in practice

in most cases. Id. § 5513(c)(3)(B)(ii); see S. Rep. No.

111-176, at 166 (“The Committee notes that there was no

evidence provided during its hearings that consumer protection

regulation would put safety and soundness at risk.”); see also

Todd Zywicki, The Consumer Financial Protection Bureau:

Savior or Menace?, 81 Geo. Wash. L. Rev. 856, 875 (2013)

(“[S]ubstantive checks on the CFPB can be triggered . . . only

under the extreme circumstance of a severe threat to the safety

and soundness of the American financial system. It is likely

that this extreme test will rarely be satisfied in practice.”);

Recent Legislation, Dodd-Frank Act Creates the Consumer

Financial Protection Bureau, 124 Harv. L. Rev. 2123, 2129

(2011) (“[T]he high standard for vetoing regulations . . . will

be difficult to establish.”). The veto power could not have

been used in this case to override the Director’s determination

regarding Section 8, for example. As with the consultation

requirement, the Act’s limited veto provision falls far short of

making the CFPB the equivalent of a multi-member

independent agency.

Finally, the Act technically makes the CFPB part of the

Federal Reserve for certain administrative purposes. See, e.g.,

12 U.S.C. § 5491(a); see also id. § 5493. But that is irrelevant

to the present analysis because the Federal Reserve may not

supervise, direct, or remove the Director.

27

In short, when measured in terms of unilateral power, the

Director of the CFPB is the single most powerful official in the

entire U.S. Government, other than the President. Indeed,

within his jurisdiction, the Director of the CFPB can be

considered even more powerful than the President. It is the

Director’s view of consumer protection law that prevails over

all others. In essence, the Director is the President of

Consumer Finance. The concentration of massive, unchecked

power in a single Director marks a departure from settled

historical practice and makes the CFPB unique among

traditional independent agencies, as we will now explain.

B

As a single-Director independent agency exercising

substantial executive authority, the CFPB is the first of its kind

and a historical anomaly. Until this point in U.S. history,

independent agencies exercising substantial executive

authority have all been multi-member commissions or boards.

A sample list includes:

• Interstate Commerce Commission (1887)

• Federal Reserve Board (1913)

• Federal Trade Commission (1914)

• U.S. International Trade Commission (1916)

• Federal Deposit Insurance Corporation (1933)

• Federal Communications Commission (1934)

• National Mediation Board (1934)

• Securities and Exchange Commission (1934)

• National Labor Relations Board (1935)

• Federal Maritime Commission (1961)

• National Transportation Safety Board (1967)

• National Credit Union Administration (1970)

28

• Occupational Safety and Health Review Commission

(1970)

• Postal Regulatory Commission (1970)

• Consumer Product Safety Commission (1972)

• Nuclear Regulatory Commission (1974)

• Federal Energy Regulatory Commission (1977)

• Federal Mine Safety and Health Review Commission

(1977)

• Federal Labor Relations Authority (1978)

• Merit Systems Protection Board (1978)

• Defense Nuclear Facilities Safety Board (1988)

• National Indian Gaming Commission (1988)

• Chemical Safety and Hazard Investigation Board

(1990)

• Surface Transportation Board (1995)

• Independent Payment Advisory Board (2010). 4

4

In general, an agency without a for-cause removal statute is an

executive agency, not an independent agency, because the President

can supervise, direct, and remove at will the heads of those agencies.

That said, in the period from Myers (1926) to Humphrey’s Executor

(1935), Congress created several multi-member agencies that did not

include for-cause provisions, apparently because Congress believed

that Myers had outlawed making agencies independent. Those

agencies included the FCC and the SEC. After Humphrey’s

Executor, those multi-member agencies were nonetheless treated as

independent agencies. Cf. Free Enterprise Fund v. Public

Company Accounting Oversight Board, 561 U.S. 477, 487 (2010)

(deciding case on assumption that SEC is an independent agency);

Wiener v. United States, 357 U.S. 349, 352-54 (1958). But because

those agencies’ statutes do not contain express for-cause provisions,

some suggest that those agencies should be treated as executive

agencies. See Kirti Datla & Richard L. Revesz, Deconstructing

Independent Agencies (and Executive Agencies), 98 Cornell L. Rev.

769, 834-35 (2013); Note, The SEC Is Not an Independent Agency,

126 Harv. L. Rev. 781, 801 (2013). We need not tackle that

29

Have there been any independent agencies headed by a

single person? Prior to oral argument, in an effort to be

comprehensive, the Court issued an order asking the CFPB for

all historical or current examples it could find of independent

agencies headed by a single person removable only for cause.

The CFPB found only three examples: the Social Security

Administration, the Office of Special Counsel, and the Federal

Housing Finance Agency. Tr. of Oral Arg. at 19. But none

of the three examples has deep historical roots. Indeed, the

Federal Housing Finance Agency was created only in 2008,

about the same time as the CFPB. The other two are likewise

relatively recent. And those other two have been

constitutionally contested by the Executive Branch, and they

do not exercise the core Article II executive power of bringing

law enforcement actions or imposing fines and penalties

against private citizens for violation of statutes or agency rules.

For those reasons, as we will explain, the three examples are

different in kind from the CFPB and other independent

agencies such as the FCC, the SEC, and FERC. Those

examples therefore do not count for much when weighed

against the deeply rooted historical practice demonstrating that

independent agencies are multi-member agencies. To borrow

the words of Justice Breyer in Noel Canning, as compared to

the settled historical practice, “we regard these few scattered

examples as anomalies.” NLRB v. Noel Canning, 134 S. Ct.

2550, 2567, slip op. at 21 (2014); see also Free Enterprise

Fund v. Public Company Accounting Oversight Board, 561

U.S. 477, 505-06 (2010).

question in this case and do not imply an answer one way or the other

about the executive or independent status of the multi-member

agencies without express for-cause removal provisions.

30

First, the CFPB cited and primarily relied on the example

of the Social Security Administration, which is an independent

agency headed by a single Social Security Commissioner.

See 42 U.S.C. §§ 901(a), 902(a). But the current structure of

the agency is relatively recent. The Social Security

Administration long existed first as a multi-member

independent agency and then as a single-Director executive

agency within various executive departments, most recently

the Department of Health and Human Services. Only in 1994

did Congress change the Social Security Administration to a

single-Director independent agency. Importantly, when the

agency structure was altered in 1994, President Clinton issued

a signing statement expressing his view that the change in the

agency’s structure was constitutionally problematic. See

President William J. Clinton, Statement on Signing the Social

Security Independence and Program Improvements Act of

1994, 2 Pub. Papers 1471, 1472 (Aug. 15, 1994). The status

of that agency’s structure therefore is constitutionally

contested. In those circumstances, the historical precedent

counts for little because it is not settled. Cf. Noel Canning,

134 S. Ct. at 2563-64, 2567, slip op. at 14-15, 20-21

(discounting prior example of appointments during “fictitious”

inter-session recess because of Senate Committee’s strong

opposition to those appointments); INS v. Chadha, 462 U.S.

919, 942 n.13 (1983) (discounting prior statutory legislative

veto provisions because Presidents had objected to those

provisions). If anything, when considered against the “settled

practice,” the Social Security example only highlights the

“anomal[y]” of an independent agency headed by a single

person. Noel Canning, 134 S. Ct. at 2567, slip op. at 21.

Moreover, the Social Security Administration is not a

precedent for the CFPB because the Social Security

Commissioner does not possess unilateral authority to bring

law enforcement actions against private citizens, which is the

31

core of the executive power and the primary threat to

individual liberty posed by executive power. See Morrison v.

Olson, 487 U.S. 654, 706 (1988) (Scalia, J., dissenting). The

Social Security Administration does not have unilateral power

to impose fines or penalties on private citizens in Social

Security benefits cases. Instead, the bulk of the Social

Security Administration’s authority involves supervision of the

adjudication of private claims for benefits. Although the

agency does possess limited power to seek civil sanctions

against those who file improper claims, the Commissioner may

initiate such a proceeding “only as authorized by the Attorney

General” – who is an executive officer accountable to the

President. 42 U.S.C. § 1320a-8(b).

Second, the CFPB also cited the example of the Office of

Special Counsel, an independent agency headed by a single

Special Counsel. The Office has a narrow jurisdiction and

mainly enforces certain personnel rules against government

employers and employees, such as the prohibition against

improper political activity by government employees. Like

the Social Security Administration, the Office of Special

Counsel lacks deep historical roots. Its single-Director

structure was established in 1978. Also like the Social

Security Administration, the constitutionality of the Special

Counsel has been contested since its creation. Under

President Carter, the Department of Justice opined that the

Special Counsel “must be removable at will by the President”

and expressed opposition to a for-cause removal restriction for

the Special Counsel. Memorandum Opinion for the General

Counsel, Civil Service Commission, 2 Op. O.L.C. 120, 120

(1978). When Congress passed subsequent legislation

regarding the Office of Special Counsel, President Reagan

vetoed the bill due to “serious constitutional concerns” about

the Office’s status as an independent agency. See President

Ronald Reagan, Memorandum of Disapproval on a Bill

32

Concerning Whistleblower Protection, 2 Pub. Papers 1391,

1392 (Oct. 26, 1988). The history of the Office of Special

Counsel confirms what one Special Counsel himself has

acknowledged: the agency is “a controversial anomaly in the

federal system.” K. William O’Connor, Foreword to SHIGEKI

J. SUGIYAMA, PROTECTING THE INTEGRITY OF THE MERIT

SYSTEM: A LEGISLATIVE HISTORY OF THE MERIT SYSTEM

PRINCIPLES, PROHIBITED PERSONNEL PRACTICES AND THE

OFFICE OF THE SPECIAL COUNSEL, at v (1985). The status of

the agency remains constitutionally contested and does not

supply a persuasive historical precedent for the CFPB’s

structure. Cf. Noel Canning, 134 S. Ct. at 2563-64, 2567, slip

op. at 14-15, 20-21; Chadha, 462 U.S. at 942 n.13.

Moreover, the Office of Special Counsel is not a precedent

for the CFPB because the Office of Special Counsel is

primarily responsible for enforcing personnel laws against

government agencies and government employees. Unlike the

CFPB, the Office of Special Counsel does not have authority to

enforce laws against private citizens, and does not have power

to impose fines and penalties on private citizens. 5

5

Because the Social Security Administration and the Office of

Special Counsel do not exercise the core executive power of

bringing law enforcement actions and because they have narrow

jurisdiction, a holding invalidating the single-Director structure of

the CFPB would not necessarily invalidate the single-Director

structure of the Social Security Administration and the Office of

Special Counsel. That said, if those two agencies are

unconstitutionally structured, the remedy would presumably be the

same remedy as in Free Enterprise Fund: severing the for-cause

provision so that the agencies would continue to fully operate, albeit

as traditional executive agencies rather than independent agencies.

Cf. infra pp. 65-69. We do not address those questions here.

33

Third, the CFPB cited Congress’s 2008 creation of a

single head of the new Federal Housing Finance Agency. See

Housing and Economic Recovery Act of 2008, Pub. L. No.

110-289, § 1101, 122 Stat. 2654, 2662 (codified at 12 U.S.C.

§§ 4511-4512). That agency is a contemporary of the CFPB

and merely raises the same question we confront here. A

body created only in 2008 obviously does not constitute a

historical precedent for the CFPB.

Although not a regulatory agency precedent and not an

example cited by the CFPB as precedent for its single-Director

structure (for good reason), there is at least one other modern

example of an independent entity headed by one person. It is

the now-defunct independent counsel law that was upheld in

Morrison v. Olson, 487 U.S. 654 (1988). But that decision

did not expressly consider whether an independent agency

could be headed by a single director. The independent

counsel, moreover, had only a limited jurisdiction for

particular defined investigations. Id. at 671-72. In addition,

the independent counsel experiment ended with nearly

universal consensus that the experiment had been a mistake

and that Justice Scalia had been right back in 1988 to view the

independent counsel system as an unconstitutional departure

from historical practice and a serious threat to individual

liberty. See id. at 699 (Scalia, J., dissenting) (“this wolf

comes as a wolf”); see also Stanford Lawyer, Spring 2015, at 4

(quoting Justice Kagan’s statement that Justice Scalia’s dissent

in Morrison is “one of the greatest dissents ever written and

every year it gets better”). The independent counsel

experience, if anything, strongly counsels caution with respect

to single-Director independent agencies. 6

6

Some have suggested that the CFPB Director is similar to the

Comptroller of the Currency. But unlike the Director, the

Comptroller is not independent. The Comptroller is removable at

34

So that’s all the CFPB has, and that’s not much. As

Justice Breyer stated when facing a similar (actually, a more

robust) historical record in Noel Canning, the few examples

offered by the CFPB are “anomalies.” 134 S. Ct. at 2567, slip

op. at 21. Or as the Court put it in Free Enterprise Fund when

confronting a novel structure, a “handful of isolated” examples

does not count for much when assessed against an otherwise

settled historical practice. 561 U.S. at 505. To be sure, in

“all the laws enacted since 1789, it is always possible that

Congress” created some other independent agencies like the

CFPB “that exercise[] traditional executive functions” but are

headed by single Directors. Free Enterprise Fund v. Public

Company Accounting Oversight Board, 537 F.3d 667, 699 n.8

(D.C. Cir. 2008) (Kavanaugh, J., dissenting); see also Noel

Canning, 134 S. Ct. at 2567, slip op. at 21 (“There may be

others of which we are unaware.”). But “the research of the

parties and the Court has not found such a needle in the

haystack.” Free Enterprise Fund, 537 F.3d at 699 n.8

(Kavanaugh, J., dissenting). “Even if such an example were

uncovered,” there is no question that this kind of

single-Director independent agency “has been rare at best.”

Id.

The bottom line is that there is no settled historical

practice of independent agencies headed by single Directors

who possess the substantial executive authority that the

Director of the CFPB enjoys. The CFPB is exceptional in our

constitutional structure and unprecedented in our constitutional

history. See Who’s Watching the Watchmen? Oversight of the

will by the President. See 12 U.S.C. § 2 (“The Comptroller of the

Currency shall be appointed by the President, by and with the advice

and consent of the Senate, and shall hold his office for a term of five

years unless sooner removed by the President, upon reasons to be

communicated by him to the Senate.”).

35

Consumer Financial Protection Bureau: Hearing Before the

Subcomm. on TARP, Financial Services and Bailouts of Public

and Private Programs of the H. Comm. on Oversight and

Government Reform, 112th Cong. 77 (2011) (statement of

Andrew Pincus) (“Dodd-Frank sets up for the Bureau an

unprecedented structure that consolidates more power in the

director than in the head of any other agency that regulates

private individuals and entities.”); Recent Legislation,

Dodd-Frank Act Creates the Consumer Financial Protection

Bureau, 124 Harv. L. Rev. 2123, 2130 (2011) (“[T]he CFPB’s

design is troubling because of its unprecedented nature.”);

Note, Independence, Congressional Weakness, and the

Importance of Appointment: The Impact of Combining

Budgetary Autonomy with Removal Protection, 125 Harv. L.

Rev. 1822, 1824 n.15 (2012) (CFPB’s lack of a multi-member

board is “atypical for independent agencies and will amplify

the Director’s independence”); Todd Zywicki, The Consumer

Financial Protection Bureau: Savior or Menace? 81 Geo.

Wash. L. Rev. 856, 899 (2013) (“[T]he agency structure

Congress chose for the CFPB – a single-director structure,

devoid of accountability, and with vast, ill-defined powers –

appears to be unique in recent American history.”). 7

7

The historical practice is further illustrated by the quorum

provisions that are applicable to independent agencies. Those

quorum provisions reinforce the settled understanding that

independent agencies are to have multiple members. Cf. New

Process Steel, L.P. v. NLRB, 560 U.S. 674 (2010); Marshall J. Breger

& Gary J. Edles, Established by Practice: The Theory and Operation

of Independent Federal Agencies, 52 Admin. L. Rev. 1111, 1182 &

app. (2000) (summarizing independent agency quorum

requirements).

36

C

The CFPB’s departure from historical practice matters.

A long line of Supreme Court precedent tells us that history

and tradition are important guides in separation of powers

cases that, like this one, are not resolved by the constitutional

text alone. As Justice Breyer wrote for the Supreme Court in

Noel Canning, the “longstanding practice of the government

can inform our determination of what the law is.” NLRB v.

Noel Canning, 134 S. Ct. 2550, 2560, slip op. at 7 (2014)

(internal quotation marks and citation omitted). Justice

Breyer quoted James Madison’s statement that it was “foreseen

at the birth of the Constitution, that difficulties and differences

of opinion might occasionally arise in expounding terms &

phrases necessarily used in such a charter . . . and that it might

require a regular course of practice to liquidate & settle the

meaning of some of them.” Id., slip op. at 8 (internal

quotation marks omitted). Justice Breyer explained,

moreover, that the Court “has treated practice as an important

interpretive factor even when the nature or longevity of that

practice is subject to dispute, and even when that practice

began after the founding era.” Id., slip op. at 7-8.

All of this, Justice Breyer stated, is “neither new nor

controversial.” Id., slip op. at 7. Consider the following:

• “In separation-of-powers cases this Court has often put

significant weight upon historical practice.”

Zivotofsky v. Kerry, 135 S. Ct. 2076, 2091, slip op. at

20 (2015) (internal quotation marks omitted) (quoting

Noel Canning, 134 S. Ct. at 2559, slip op. at 6).

• “We therefore conclude, in light of historical practice,

that a recess of more than 3 days but less than 10 days is

presumptively too short to fall within the Clause.”

Noel Canning, 134 S. Ct. at 2567, slip op. at 21.

37

• “Perhaps the most telling indication of the severe

constitutional problem with the [agency] is the lack of

historical precedent for this entity.” Free Enterprise

Fund v. Public Company Accounting Oversight Board,

561 U.S. 477, 505 (2010) (internal quotation marks

omitted).

• “[W]hen we face difficult questions of the

Constitution’s structural requirements, longstanding

customs and practices can make a difference.”

Commonwealth of Puerto Rico v. Sanchez Valle, 136 S.

Ct. 1863, 1884, slip op. at 13 (2016) (Breyer, J.,

dissenting).

• “[T]raditional ways of conducting government give

meaning to the Constitution.” Mistretta v. United

States, 488 U.S. 361, 401 (1989) (internal quotation

marks and alteration omitted) (quoting Youngstown

Sheet & Tube Co. v. Sawyer, 343 U.S. 579, 610 (1952)

(Frankfurter, J., concurring)).

• “Deeply embedded traditional ways of conducting

government cannot supplant the Constitution or

legislation, but they give meaning to the words of a text

or supply them.” Youngstown, 343 U.S. at 610

(Frankfurter, J., concurring).

• “A legislative practice such as we have here, evidenced

not by only occasional instances, but marked by the

movement of a steady stream for a century and a half of

time, goes a long way in the direction of proving the

presence of unassailable ground for the

constitutionality of the practice, to be found in the

origin and history of the power involved, or in its

nature, or in both combined.” United States v.

Curtiss-Wright Export Corp., 299 U.S. 304, 327-28

(1936).

• “Long settled and established practice is a

consideration of great weight in a proper interpretation

38

of constitutional provisions of this character.” The

Pocket Veto Case, 279 U.S. 655, 689 (1929).

• “Such long practice under the pardoning power and

acquiescence in it strongly sustains the construction it

is based on.” Ex parte Grossman, 267 U.S. 87, 118-19

(1925).

• “[A] page of history is worth a volume of logic.” New

York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921).

• “[I]n determining the meaning of a statute or the

existence of a power, weight shall be given to the usage

itself – even when the validity of the practice is the

subject of investigation.” United States v. Midwest

Oil Co., 236 U.S. 459, 473 (1915).

• “[W]here there is ambiguity or doubt [in the words of

the Constitution], or where two views may well be

entertained, contemporaneous and subsequent practical

construction are entitled to the greatest weight.”

McPherson v. Blacker, 146 U.S. 1, 27 (1892).

• “[A] doubtful question, one on which human reason

may pause, and the human judgment be suspended, in

the decision of which the great principles of liberty are

not concerned, but the respective powers of those who

are equally the representatives of the people, are to be

adjusted; if not put at rest by the practice of the

government, ought to receive a considerable

impression from that practice.” McCulloch v.

Maryland, 17 U.S. 316, 401 (1819).

Stated simply, in separation of powers cases not resolved

by the constitutional text alone, historical practice matters a

great deal in defining the constitutional limits on the Executive

and Legislative Branches. 8 The Supreme Court’s recent

8

The Supreme Court has heavily relied on historical practice as

a guide not just in separation of powers cases, but also in federalism

39

decisions in Noel Canning and Free Enterprise Fund illustrate

how the Court considers historical practice in this context. 9

cases. In several federalism cases in the last 25 years, the Court has

invalidated novel congressional statutes that alter the traditional

federal-state balance. See New York v. United States, 505 U.S. 144,

177 (1992) (“The take title provision appears to be unique. No

other federal statute has been cited which offers a state government

no option other than that of implementing legislation enacted by

Congress.”); Printz v. United States, 521 U.S. 898, 905 (1997) (“[I]f,

as petitioners contend, earlier Congresses avoided use of this highly

attractive power, we would have reason to believe that the power

was thought not to exist.”); Alden v. Maine, 527 U.S. 706, 744

(1999) (“Not only were statutes purporting to authorize private suits

against nonconsenting States in state courts not enacted by early

Congresses; statutes purporting to authorize such suits in any forum

are all but absent from our historical experience. . . . The provisions

of the FLSA at issue here, which were enacted in the aftermath of

Parden, are among the first statutory enactments purporting in

express terms to subject nonconsenting States to private suits.”);

United States v. Windsor, 133 S. Ct. 2675, 2692, slip op. at 18-19

(2013) (“DOMA, because of its reach and extent, departs from this

history and tradition of reliance on state law to define marriage.”); cf.

National Federation of Independent Business v. Sebelius, 132 S. Ct.

2566, 2586, slip op. at 18 (2012) (binding opinion of Roberts, C.J.)

(“But Congress has never attempted to rely on that power to compel

individuals not engaged in commerce to purchase an unwanted

product.”); id. at 2649, slip op. at 14 (joint dissent of Scalia,

Kennedy, Thomas, and Alito, JJ.) (“[T]he relevant history is not that

Congress has achieved wide and wonderful results through the

proper exercise of its assigned powers in the past, but that it has

never before used the Commerce Clause to compel entry into

commerce.”).

9

Of course, if the constitutional text is sufficiently clear, then

the existence of any historical practice departing from that text is not

persuasive. See, e.g., INS v. Chadha, 462 U.S. 919, 944-46 (1983);

Powell v. McCormack, 395 U.S. 486, 546-47 (1969). Here, the

question concerns the scope of Humphrey’s Executor – which,

40

In Noel Canning, the Supreme Court speaking through

Justice Breyer stressed the importance of history when

assessing the constitutionality of a novel practice – in that case,

Presidential recess appointments in Senate recesses of fewer

than 10 days. The Court said: “Long settled and established

practice is a consideration of great weight in a proper

interpretation of constitutional provisions regulating the

relationship between Congress and the President.” Noel

Canning, 134 S. Ct. at 2559, slip op. at 7 (internal quotation

marks and alteration omitted). Based on that history, the

Supreme Court ruled that a Senate recess of “less than 10 days

is presumptively too short” for constitutional purposes. Id. at

2567, slip op. at 21. Importantly, the text of the Constitution

did not draw any such 10-day line. But the historical practice

between the President and the Senate had settled on a 10-day

line.

In ruling out recess appointments in recesses of fewer than

10 days, the Noel Canning Court stated that it had “not found a

single example of a recess appointment made during an

intra-session recess that was shorter than 10 days.” Id. at

2566, slip op. at 20. The Court explained that the “lack of

examples suggests that the recess-appointment power is not

needed in that context.” Id. Although the Court did find “a

few historical examples of recess appointments made during

inter-session recesses shorter than 10 days,” the Court stated:

“But when considered against 200 years of settled practice, we

depending on one’s perspective, requires either an analysis of a

court-created exception to Article II or an analysis of ambiguous

constitutional text in Articles I and II. Either way, in resolving

those kinds of separation of powers questions, history and tradition

play a critical role. See Noel Canning, 134 S. Ct. at 2559-60, slip

op. at 6-8; Free Enterprise Fund, 561 U.S. at 505-06.

41

regard these few scattered examples as anomalies.” Id. at

2567, slip op. at 20-21.

According to the Court, therefore, allowing recess

appointments in Senate recesses of fewer than 10 days would

depart from the settled historical practice and alter the relative

powers of the President and Senate over appointments. So,

too, disallowing recess appointments in Senate recesses of 10

or more days would depart from settled historical practice. In

Noel Canning, the Supreme Court therefore converted that

historical 10-day practice into a constitutional rule. 10

The Supreme Court engaged in the same kind of

history-based analysis in Free Enterprise Fund. Independent

agency heads are ordinarily removable for cause by the

President. In that case, however, the new Accounting

Oversight Board’s members were removable only for cause by

the Commissioners of the SEC, and the SEC Commissioners in

turn were understood to be removable only for cause by the

10

Justice Scalia concurred in the judgment for four Justices in

Noel Canning, arguing as relevant here that the text of the

Constitution rendered intra-session recess appointments

unconstitutional even in Senate recesses of 10 or more days. But

Justice Scalia did not disagree with the Court’s claim that historical

practice often matters in separation of powers cases, which is the

relevant point for our purposes. See Noel Canning, 134 S. Ct. at

2594, slip op. at 5 (Scalia, J., concurring in the judgment) (“Of

course, where a governmental practice has been open, widespread,

and unchallenged since the early days of the Republic, the practice

should guide our interpretation of an ambiguous constitutional

provision.”). Rather, Justice Scalia stated that the constitutional

text in that case was sufficiently clear and dispositive that resort to

historical practice was unnecessary and unwarranted. See id. at

2592, slip op. at 2; see generally John F. Manning, Separation of

Powers as Ordinary Interpretation, 124 Harv. L. Rev. 1939 (2011).

42

President. In other words, there were two levels of for-cause

removal between the President and the Accounting Oversight

Board.

The Supreme Court drew a line between one level of

for-cause removal, which was the structure of traditional

independent agencies, and two levels of for-cause removal, the

novel structure of the new Accounting Oversight Board. See

Free Enterprise Fund, 561 U.S. at 484. The Court ruled that

the latter was unconstitutional. The Court drew that line in

part because historical practice had settled on one level of

for-cause removal for a President to remove the head of an

independent agency. There were at most “only a handful of

isolated” precedents for the new Board. Id. at 505. The vast

majority of the extant independent agencies had only one level

of for-cause removal. And as the Court noted, there was a

meaningful difference between one level of for-cause removal

and two levels of for-cause removal in terms of an agency’s

insulation from Presidential control. See id. at 495-96.

Therefore, the Court invalidated the structure of the new

Board. 11

Those two cases well illustrate the broader jurisprudential

principle long applied by the Supreme Court: In separation of

powers cases not resolved by the constitutional text alone,

historical practice matters.

11

Justice Breyer dissented for four Justices in Free Enterprise

Fund. But importantly, he dissented not because he disagreed with

the Court’s point that historical practice matters, but rather primarily

because he did not see a meaningful difference – in practical,

analytical, or constitutional terms – between one and two levels of

for-cause removal. See Free Enterprise Fund, 561 U.S. at 525-26

(Breyer, J., dissenting).

43

D

The CFPB marks a major departure from the settled

historical practice requiring multi-member bodies at the helm

of independent agencies. Because this case is not resolved

solely by the constitutional text, at least as the text was

interpreted in Humphrey’s Executor, the CFPB’s departure

from historical practice matters to the analysis. And the

departure from historical practice matters even more in this

instance because this departure from historical practice

threatens individual liberty. The historical practice of

structuring independent agencies as multi-member

commissions or boards is the historical practice for a reason:

It reflects a deep and abiding concern for safeguarding the

individual liberty protected by the Constitution.

“The Framers recognized that, in the long term, structural

protections against abuse of power were critical to preserving

liberty.” Bowsher v. Synar, 478 U.S. 714, 730 (1986); see

also id. at 721 (“The declared purpose of separating and

dividing the powers of government, of course, was to ‘diffus[e]

power the better to secure liberty.’”) (quoting Youngstown

Sheet & Tube Co. v. Sawyer, 343 U.S. 579, 635 (1952)

(Jackson, J., concurring)). When describing Article II, Justice

Scalia put the point this way: “The purpose of the separation

and equilibration of powers in general, and of the unitary

Executive in particular, was not merely to assure effective

government but to preserve individual freedom.” Morrison v.

Olson, 487 U.S. 654, 727 (1988) (Scalia, J., dissenting).

The basic constitutional concern with independent

agencies is that the agencies are unchecked by the President,

the official who is accountable to the people and who is made

responsible by Article II for the exercise of executive power.

Recognizing the broad and unaccountable power wielded by

44

independent agencies, Congress has traditionally required

multi-member bodies at the helm of independent agencies. In

the absence of Presidential control, the multi-member structure

of independent agencies acts as a critical substitute check on

the excesses of any individual independent agency head – a

check that helps to prevent arbitrary decisionmaking and abuse

of power, and thereby to protect individual liberty.

But this new agency, the CFPB, lacks that critical check

and structural constitutional protection. And the lack of the

traditional safeguard threatens the individual liberty protected

by the Constitution’s separation of powers.

How do multi-member independent agencies fare better

than single-Director independent agencies in protecting

individual liberty? As compared to single-Director

independent agencies, multi-member independent agencies

help prevent arbitrary decisionmaking and abuses of power,

and thereby help protect individual liberty, because they do not

concentrate power in the hands of one individual. The point is

simple but profound. In a multi-member independent agency,

no single commissioner or board member possesses authority

to do much of anything. Before the agency can infringe your

liberty in some way – for example, initiating an enforcement

action against you or issuing a rule that affects your liberty or

property – a majority of commissioners must agree. That in

turn makes it harder for the agency to infringe your liberty.

As the current Chair of the Federal Trade Commission has

explained, it takes “a consensus decision of at least a majority

of commissioners to authorize, or forbear from, action.”

Edith Ramirez, The FTC: A Framework for Promoting

Competition and Protecting Consumers, 83 Geo. Wash. L.

Rev. 2049, 2053 (2015). In a multi-member agency, even

though each individual commissioner is not accountable to or

checked by the President, each commissioner is at least still

45

accountable to his or her fellow commissioners and needs the

assent of a majority of commissioners to take significant

action.

In addition, unlike single-Director independent agencies,

multi-member independent agencies “can foster more

deliberative decision making.” Kirti Datla & Richard L.

Revesz, Deconstructing Independent Agencies (and Executive

Agencies), 98 Cornell L. Rev. 769, 794 (2013). Relatedly,

multi-member independent agencies benefit from diverse

perspectives and different points of view among the

commissioners and board members. The multiple voices and

perspectives make it more likely that the costs and downsides

of proposed decisions will be more fully ventilated. See

Marshall J. Breger & Gary J. Edles, Established by Practice:

The Theory and Operation of Independent Federal Agencies,

52 Admin. L. Rev. 1111, 1113 (2000) (independent agencies

“are also multi-member organizations, a fact that tends toward

accommodation of diverse or extreme views through the

compromise inherent in the process of collegial

decisionmaking”); Jacob E. Gersen, Administrative Law Goes

to Wall Street: The New Administrative Process, 65 Admin. L.

Rev. 689, 696 (2013) (“[A] multimember board allows for a

representation of divergent interests in a way that a single

decisionmaker simply cannot.”); Glen O. Robinson, On

Reorganizing the Independent Regulatory Agencies, 57 Va. L.

Rev. 947, 963 (1971) (“It is not bipartisanship as such that is

important; it is rather the safeguards and balanced viewpoint

that can be provided by plural membership.”); cf. Harry T.

Edwards, The Effects of Collegiality on Judicial Decision

Making, 151 U. Pa. L. Rev. 1639, 1645 (2003) (“[C]ollegiality

plays an important part in mitigating the role of partisan

politics and personal ideology by allowing judges of differing

perspectives and philosophies to communicate with, listen to,

46

and ultimately influence one another in constructive and

law-abiding ways.”).

In short, the deliberative process and multiple viewpoints

in a multi-member independent agency can help ensure that an

agency does not wrongly bring an enforcement action or adopt

rules that unduly infringe individual liberty.

As compared to a single-Director structure, a

multi-member independent agency also helps to avoid

arbitrary decisionmaking and to protect individual liberty

because the multi-member structure – and its inherent

requirement for compromise and consensus – will tend to lead

to decisions that are not as extreme, idiosyncratic, or otherwise

off the rails. Cf. Stephen M. Bainbridge, Why a Board?

Group Decisionmaking in Corporate Governance, 55 Vand. L.

Rev. 1, 12-19 (2002) (summarizing experimental evidence

finding group decisionmaking to be superior to individual

decisionmaking). A multi-member independent agency can

only go as far as the middle vote is willing to go. Conversely,

under a single-Director structure, an agency’s policy goals

“will be subject to the whims and idiosyncratic views of a

single individual.” Joshua D. Wright, The

Antitrust/Consumer Protection Paradox: Two Policies at War

with Each Other, 121 Yale L.J. 2216, 2260 (2012) (internal

quotation marks omitted); cf. Recent Legislation, Dodd-Frank

Act Creates the Consumer Financial Protection Bureau, 124

Harv. L. Rev. 2123, 2128 (2011) (multi-member commission

structure “reduces the variance of policy and improves

accuracy through aggregation”); Michael B. Rappaport, Essay,

Replacing Independent Counsels with Congressional

Investigations, 148 U. Pa. L. Rev. 1595, 1601 n.17 (2000)

(“[I]ndependent agencies tend to be headed by multimember

commissions, which function to prevent aberrant

actions . . . .”).

47

Relatedly, as compared to a single-Director independent

agency, a multi-member independent agency provides the

added benefit of “a built-in monitoring system for interests on

both sides because that type of body is more likely to produce a

dissent if the agency goes too far in one direction.” Rachel E.

Barkow, Insulating Agencies: Avoiding Capture Through

Institutional Design, 89 Tex. L. Rev. 15, 41 (2010). A

dissent, in turn, can serve “as a ‘fire alarm’ that alerts Congress

and the public at large that the agency’s decision might merit

closer scrutiny.” Id.; see also Dodd-Frank Act Creates the

Consumer Financial Protection Bureau, 124 Harv. L. Rev. at

2128 (the “presence of dissenters” in agency proceedings

“provides new information and forces the proponent to

articulate a coherent rationale, thus acting as a constraining

force”).

Moreover, multi-member independent agencies are better

structured than single-Director independent agencies to guard

against “capture” of – that is, undue influence over – the

independent agencies by regulated entities or interest groups,

for example. As then-Professor Elizabeth Warren noted in

her original proposal for a multi-member consumer protection

agency: “With every agency, the fear of regulatory capture is

ever-present.” Elizabeth Warren, Unsafe at Any Rate: If It’s

Good Enough for Microwaves, It’s Good Enough for

Mortgages. Why We Need a Financial Product Safety

Commission, Democracy, Summer 2007, at 8, 18. Capture

can infringe individual liberty because capture can prevent a

neutral, impartial agency assessment of what rules to issue and

what enforcement actions to undertake. In a multi-member

agency, however, the capturing parties “must capture a

majority of the membership rather than just one individual.”

Lisa Schultz Bressman & Robert B. Thompson, The Future of

Agency Independence, 63 Vand. L. Rev. 599, 611 (2010); see

48

also ROBERT E. CUSHMAN, THE INDEPENDENT REGULATORY

COMMISSIONS 153 (Octagon Books 1972) (1941) (noting, in

reference to Federal Reserve Act of 1913, that it “seemed

easier to protect a board from political control than to protect a

single appointed official”); Barkow, Insulating Agencies, 89

Tex. L. Rev. at 38 (“[O]nly one person at the apex can also

mean that the agency is more easily captured.”); Robinson, On

Reorganizing the Independent Regulatory Agencies, 57 Va. L.

Rev. at 962 (“[T]he single administrator may be more

vulnerable” to interest group pressures “because he provides a

sharper focus for the concentration of special interest power

and influence.”).

Importantly, all of those features and benefits of

multi-member independent agencies are not merely accidental

or coincidental byproducts. Those points were in the minds of

the Members of Congress who helped launch independent

agencies. For example, Senator Newlands, the sponsor of the

legislation creating the Federal Trade Commission,

emphasized the need for a commission rather than a single

Director: “If only powers of investigation and publicity are

given[,] a single-headed organization, like the Bureau of

Corporations, might be the best for the work; but if judgment

and discretion are to be exercised, or if we have in

contemplation the exercise of any corrective power hereafter,

or if the broad ends above outlined are to be attained, it seems

to me that a commission is required.” 51 Cong. Rec. 11,092

(1914). In his leading study of independent commissions,

Robert Cushman, former staff member of President Franklin

Roosevelt’s Committee on Administrative Management,

analyzed the creation of the Federal Trade Commission and

explained: “The two ideas, a commission and independence

for the commission, were inextricably bound together. At no

point was it proposed that a commission ought to be set up

unless it be independent or that an independent officer should

49

be created rather than a commission.” CUSHMAN, THE

INDEPENDENT REGULATORY COMMISSIONS, at 188; see also

THE PRESIDENT’S COMMITTEE ON ADMINISTRATIVE

MANAGEMENT, REPORT OF THE COMMITTEE WITH STUDIES OF

ADMINISTRATIVE MANAGEMENT IN THE FEDERAL

GOVERNMENT 216 (1937) (noting “popular belief that

important rule-making functions ought to be performed by a

group rather than by a single officer, by a commission rather

than by a department head” as one reason “for the

establishment of independent regulatory agencies”).

Examining the consistent historical practice here, we can

see, moreover, that the consistent historical practice reflects the

deep values of the Constitution. The Constitution as a whole

embodies the bedrock principle that dividing power among

multiple entities and persons helps protect individual liberty.

The Framers created a federal system with the national power

divided among three branches. The Framers “viewed the

principle of separation of powers as the absolutely central

guarantee of a just Government.” Morrison v. Olson, 487

U.S. at 697 (Scalia, J., dissenting).

And to protect liberty, the same kind of checks and

balances principle also influenced how the Framers allocated

power within the three national branches. For example, the

Framers divided the Legislative Branch into two houses, each

with multiple members. No one person operates as the

Legislator-in-Chief. Rather, 535 Members of Congress do so,

divided among two Houses. Likewise, the Framers

established “one supreme Court” composed of multiple

“Judges” rather than a single judge. No one person operates

as the lone Justice of the Supreme Court. Rather, the Court

consists of one Chief Justice and several Associate Justices, all

of whom have equal votes on cases. “Even a cursory

examination of the Constitution reveals the influence of

50

Montesquieu’s thesis that checks and balances were the

foundation of a structure of government that would protect

liberty.” Bowsher, 478 U.S. at 722.

Of course, the one exception to the Constitution’s division

of power among multiple parties within the branches is the

President, who is the lone head of the entire Executive Branch.

But the President is the exception that proves the rule. For

starters, the Framers were concerned that dividing the

executive power among multiple individuals would render the

Executive Branch too weak as compared to the more

formidable Legislative Branch. See THE FEDERALIST NO. 48,

at 309-10 (James Madison) (Clinton Rossiter ed., 1961) (“[I]t

is against the enterprising ambition” of the Legislative Branch

“that the people ought to indulge all their jealousy and exhaust

all their precautions. The legislative department derives a

superiority in our governments . . . .”). The Framers sought

“energy in the executive.” THE FEDERALIST NO. 70, at 424

(Alexander Hamilton).

At the same time, the Framers certainly recognized the

risk that a single President could lead to tyranny or arbitrary

decisionmaking. To mitigate the risk to liberty from a single

President, the Framers ensured that the President had “a due

dependence on the people.” Id. The President is nationally

elected by the people. In choosing the President, “the whole

Nation has a part, making him the focus of public hopes and

expectations.” Youngstown, 343 U.S. at 653 (Jackson, J.,

concurring). Presidential candidates are put through the

wringer precisely because of the power they may someday

wield. In other words, the Framers concentrated executive

power in a single President on the condition that the President

would be nationally elected and nationally accountable.

51

The President is therefore the exception to the ordinary

constitutional practice of dividing power among multiple

entities and persons. Apart from the President, the

Constitution reflects the basic commonsense principle that

multi-member bodies – the House, the Senate, the Supreme

Court – do better than single-member bodies in avoiding

arbitrary decisionmaking and abuses of power, and thereby

protecting individual liberty. That background constitutional

principle further supports the conclusion here that a

single-Director independent agency lies outside the norm and

poses a risk to individual liberty. After all, the Director of the

CFPB is not elected by the people and is of course not remotely

comparable to the President in terms of accountability to the

people.

Having identified the ways in which multi-member

independent agencies surpass single-Director independent

agencies in protecting liberty, we must acknowledge that

multi-member independent agencies do not always meet that

potential. For example, some members of multi-member

independent agencies may occasionally move in lockstep,

thereby diminishing the benefits of multi-member bodies. It

can be harder to find five highly qualified commissioners than

just one highly qualified commissioner. Moreover,

multi-member bodies are often not as efficient as

single-headed agencies and can be beset by contentious

relations among the members. See Breger & Edles,

Established by Practice, 52 Admin. L. Rev. at 1181 (“even a

single member” can throw a wrench into the works); Datla &

Revesz, Deconstructing Independent Agencies, 98 Cornell L.

Rev. at 794 (“The downside that accompanies increased

deliberation is the slowness inherent in group action.”)

(internal quotation marks omitted). That said, “[c]onvenience

and efficiency are not the primary objectives – or the hallmarks

– of democratic government.” Bowsher, 478 U.S. at 736

52

(internal quotation marks omitted). Indeed, so as to avoid

falling back into the kind of tyranny that they had declared

independence from, the Framers often made trade-offs against

efficiency in the interest of enhancing liberty.

In any event, notwithstanding some failings and

downsides, multi-member independent agencies are superior

to single-Director independent agencies in preventing arbitrary

decisionmaking and abuse of power, and thereby protecting

individual liberty.

For that reason and others, both before and after

Humphrey’s Executor, Congress has structured independent

agencies as multi-member agencies. Indeed, the

multi-member agency form has become “synonymous with

independence.” Breger & Edles, Established by Practice, 52

Admin. L. Rev. at 1137. As Justice Breyer noted in Free

Enterprise Fund: “Agency independence is a function of

several different factors . . . includ[ing] . . . its composition as

a multimember bipartisan board . . . .” Free Enterprise Fund

v. Public Company Accounting Oversight Board, 561 U.S.

477, 547 (2010) (Breyer, J., dissenting). Likewise, Professor

Barkow has explained that “multimember design” is one of the

“[t]raditional [l]odestars” of agency independence. Barkow,

Insulating Agencies, 89 Tex. L. Rev. at 26; see also PETER L.

STRAUSS, AN INTRODUCTION TO ADMINISTRATIVE JUSTICE IN

THE UNITED STATES 15 (1989) (defining “independent

regulatory commission[s]” as “governmental agencies headed

by multi-member boards acting collegially on the regulatory

matters within their jurisdiction”) (internal quotation marks

omitted); Bressman & Thompson, The Future of Agency

Independence, 63 Vand. L. Rev. at 610 (independent agencies,

unlike Executive Branch agencies, are “generally run by

multi-member commissions or boards”); Dodd-Frank Act

Creates the Consumer Financial Protection Bureau, 124 Harv.

53

L. Rev. at 2128 (“Most independent agencies have

multimember boards . . . .”); Paperwork Reduction Act of

1980, Pub. L. No. 96-511, 94 Stat. 2812, 2814 (defining

“independent regulatory agency” by reference to 17

multi-member agencies) (internal quotation marks omitted).

E

To sum up so far: In order to preserve individual liberty

and ensure accountability, Article II of the Constitution assigns

the executive power to the President. The President operates

with the assistance of subordinates, but the President acts as a

critical check on those subordinates. That check provides

accountability and protects against arbitrary decisionmaking

by executive agencies, thereby helping to safeguard individual

liberty. Article II has been interpreted by the Supreme Court

to allow independent agencies in certain circumstances.

Independent agencies lack the ordinary constitutional checks

and balances that come from Presidential supervision and

direction. But to ensure some check against arbitrary

decisionmaking and to help preserve individual liberty,

independent agencies have traditionally been structured as

multi-member bodies where the commissioners or board

members can check one another. The check from other

commissioners or board members substitutes for the check by

the President. As an independent agency with just a single

Director, the CFPB represents a sharp break from historical

practice, lacks the critical internal check on arbitrary

decisionmaking, and poses a far greater threat to individual

liberty than does a multi-member independent agency. All of

that raises grave constitutional doubts about the CFPB’s

single-Director structure. 12

12

In identifying and cataloging the problems with a

single-Director independent agency, we do not in any way question

54

Before rendering a final conclusion on the CFPB’s

constitutionality as currently structured, however, we must

address several other arguments.

First, in considering precedents for the single-Director

structure of the CFPB, one might wonder about all of the

executive departments and agencies headed by a single person.

Why don’t they provide a precedent for the CFPB? Consider

for example the Department of Justice, the Department of the

Treasury, the Department of State, the Department of Defense,

and the EPA, all headed by a single person.

As should be clear by now, the distinction, of course, is

that those departments and agencies are executive agencies.

They operate within the Executive Branch chain of command

under the supervision and direction of the President, and those

agency heads are removable at will by the President. The

President is a check on those agencies. Those agencies are

accountable to the President. The President in turn is

accountable to the people of the United States for the exercise

of executive power in the executive agencies. So a single

person at the helm of an executive agency is perfectly

constitutional. 13

the integrity of the current Director, a man of substantial

accomplishment and of longstanding and dedicated devotion to

public service and the public good. Cf. Morrison v. Olson, 487 U.S.

654, 731 (1988) (Scalia, J., dissenting) (similarly describing the

Special Division judges and independent counsel at issue in that

case). But the constitutionality of an agency structure “must be

adjudged on the basis of what it permits to happen.” Id.

13

Congress may of course establish executive agencies that are

headed by multiple individuals (although it rarely does so), but each

member must be removable at will by the President for the agency to

maintain its status as an executive agency.

55

By contrast, independent agencies are unaccountable to

the President and pose a greater threat to individual liberty

because they operate free of the President’s supervision and

direction. Therefore, they traditionally have been headed by

multiple members who check one another. An independent

agency operates as “a body of experts appointed by law and

informed by experience.” Humphrey’s Executor v. United

States, 295 U.S. 602, 624 (1935) (internal quotation marks

omitted).

Second, some may say that Congress’s creation of the

single-Director structure is unlikely to give Congress any

greater influence over the CFPB than Congress possesses over

a multi-member independent agency. That is perhaps true,

although perhaps not. Either way, however, the Supreme

Court has emphasized that congressional aggrandizement is

not a necessary feature of a separation of powers violation in

this context. The Court squarely said as much in Free

Enterprise Fund. See Free Enterprise Fund v. Public

Company Accounting Oversight Board, 561 U.S. 477, 500

(2010) (“Even when a branch does not arrogate power to itself,

therefore, it must not impair another in the performance of its

constitutional duties.”) (internal quotation marks omitted).

And to take an obvious example of the point, if Congress

enacted legislation converting the Department of Justice into

an independent agency, there would be no formal

congressional aggrandizement. But there is little doubt that

such legislation would violate Article II. See Morrison v.

Olson, 487 U.S. 654, 695 (1988) (Congress may not impair the

President in performance of constitutionally assigned

functions). Congressional aggrandizement is not a necessary

condition for an Article II violation in this context.

56

Relatedly, one might think that a single head of an

independent agency might actually be more responsive to the

President than multiple heads of an independent agency are,

thereby reducing the risk of arbitrary decisionmaking and

mitigating the Article II concern with a novel single-Director

independent agency. But there is no meaningful difference in

responsiveness and accountability to the President. Whether

headed by one, three, or five members, an independent agency

is not supervised or directed by the President, and its heads are

not removable at will by the President. With independent

agencies, the President is limited in essence to indirect

cajoling. Cf. Elena Kagan, Presidential Administration, 114

Harv. L. Rev. 2245, 2323 (2001) (“[A] for-cause removal

provision would buy little substantive independence if the

President, though unable to fire an official, could command or,

if necessary, supplant his every decision.”). 14 As Justice

14

The for-cause removal restrictions attached to independent

agencies ordinarily prohibit removal except in cases of inefficiency,

neglect of duty, or malfeasance. Those restrictions have significant

impact both in law and in practice. See Free Enterprise Fund, 561

U.S. at 502 (for-cause restrictions “mean what they say”); Freytag v.

Commissioner of Internal Revenue, 501 U.S. 868, 916 (1991)

(Scalia, J., concurring in part and concurring in the judgment)

(“independent regulatory agencies such as the Federal Trade

Commission and the Securities and Exchange Commission” are

“specifically designed not to have the quality . . . of being subject to

the exercise of political oversight and sharing the President’s

accountability to the people”) (internal quotation marks and

alteration omitted); Mistretta v. United States, 488 U.S. 361, 411

(1989) (for-cause provisions are “specifically crafted to prevent the

President from exercising coercive influence over independent

agencies”) (internal quotation marks omitted). Humphrey’s

Executor and Wiener v. United States show, for example, that

for-cause removal requirements prohibit dismissal by the President

due to lack of trust in the administrator, see Humphrey’s Executor,

295 U.S. at 625-26, differences in policy outlook, id., or the mere

57

Scalia once memorably noted, an attempt by the President to

direct (or threaten to remove) the head of an independent

agency with respect to a particular substantive decision is

statutorily impermissible and likely to trigger “an

impeachment motion in Congress.” Tr. of Oral Arg. at 60,

Free Enterprise Fund, 561 U.S. 477. That is true whether

there are one, three, or five heads of the independent agency.

The independent status of an independent agency erects a high

barrier between the President and the independent agency,

regardless of how many people head the independent agency

on the other side of the barrier. So a structure with a single

independent agency head entails no meaningful benefit over a

multi-member independent agency in terms of Presidential

control over the independent agency.

Although the single-Director structure does not

necessarily give more control to the President over an

independent agency, one might say from the other direction

that the structure at least does not diminish the President’s

power beyond the diminishment already caused by

Humphrey’s Executor, and thus should not form the basis of an

Article II violation. In other words, some might say that

desire to install administrators of the President’s choosing, Wiener,

357 U.S. 349, 356 (1958). In Morrison v. Olson, the Court

therefore took it as a given that “the degree of control exercised by

the Executive Branch over an independent counsel is clearly

diminished in relation to that exercised over other prosecutors, such

as the United States Attorneys, who are appointed by the President

and subject to termination at will.” 487 U.S. at 696 n.34; see also

Buckley v. Valeo, 424 U.S. 1, 133 (1976) (“The Court in

[Humphrey’s Executor] carefully emphasized that . . . the members

of such agencies were to be independent of the Executive in their

day-to-day operations . . . .”); Humphrey’s Executor, 295 U.S. at 628

(independent agencies “cannot in any proper sense be characterized

as an arm or an eye of the executive”).

58

Humphrey’s Executor already greatly reduced Presidential

power, and this novel structure is merely a variation on

Humphrey’s Executor rather than a further diminishment of

Presidential power. To begin with, that may not be true. A

President may be stuck for his or her entire four-year term with

a single Director appointed by a prior President with different

views. Generally, the members of multi-member agencies

serve staggered terms, and the President will at least have an

opportunity to appoint some new commissioners over the

course of his or her first term.

In any event, although it is true that Article II violations

often involve diminishment of Presidential power, neither

Humphrey’s Executor nor any later case gave Congress a free

pass, without any boundaries, to create independent agencies

that depart from history and threaten individual liberty.

Humphrey’s Executor does not mean that anything goes. See

Free Enterprise Fund, 561 U.S. at 514. In that respect, keep

in mind (in case we have not mentioned it enough already) that

the Constitution’s separation of powers is not solely or even

primarily concerned with preserving the powers of the

branches. The separation of powers is primarily designed to

protect individual liberty. See Stern v. Marshall, 564 U.S.

462, 483 (2011) (“Yet the dynamic between and among the

branches is not the only object of the Constitution’s concern.

The structural principles secured by the separation of powers

protect the individual as well.”) (internal quotation marks

omitted) (quoting Bond v. United States, 564 U.S. 211, 222

(2011)); Bowsher v. Synar, 478 U.S. 714, 721 (1986) (“The

declared purpose of separating and dividing the powers of

government, of course, was to ‘diffus[e] power the better to

secure liberty.’”) (quoting Youngstown Sheet & Tube Co. v.

Sawyer, 343 U.S. 579, 635 (1952) (Jackson, J., concurring));

Clinton v. City of New York, 524 U.S. 417, 450 (1998)

(Kennedy, J., concurring) (“Liberty is always at stake when

59

one or more of the branches seek to transgress the separation of

powers.”). As with the broader separation of powers,

moreover, a key purpose of Article II is to preserve individual

liberty. See Morrison v. Olson, 487 U.S. at 727 (Scalia, J.,

dissenting) (“The purpose of the separation and equilibration

of powers in general, and of the unitary Executive in particular,

was not merely to assure effective government but to preserve

individual freedom.”).

So the single-Director independent agency – which, as we

have explained, is a structure that departs from settled

historical practice and threatens individual liberty far more

than a multi-member independent agency does – poses a

constitutional problem even if it does not occasion any

additional diminishment of Presidential power beyond the

significant diminishment already caused by Humphrey’s

Executor itself. 15

15

In its brief, PHH has expressly preserved the argument that

Humphrey’s Executor should be overruled. The reasoning of

Humphrey’s Executor of course was inconsistent with the reasoning

in the Court’s prior decision in Myers. See Humphrey’s Executor,

295 U.S. at 626 (“In so far as” the expressions in Myers are “out of

harmony with the views here set forth, these expressions are

disapproved.”). The Humphrey’s Executor decision subsequently

has received significant criticism. See Geoffrey P. Miller,

Independent Agencies, 1986 Sup. Ct. Rev. 41, 93 (“Humphrey’s

Executor, as commentators have noted, is one of the more egregious

opinions to be found on pages of the United States Supreme Court

Reports.”); Peter L. Strauss, The Place of Agencies in Government:

Separation of Powers and the Fourth Branch, 84 Colum. L. Rev.

573, 611-12 (1984) (“Remarkably, the Court did not pause to

examine how a purpose to create a body ‘subject only to the people

of the United States’ – that is, apparently, beyond control of the

constitutionally defined branches of government – could itself be

sustained under the Constitution.”). Moreover, the reasoning of

Humphrey’s Executor is in tension with some of the reasoning of the

60

Third, in considering the constitutionality of the CFPB’s

structure, some might speak of the CFPB as a one-off

congressional experiment and say we should let it go as a

matter of judicial restraint. But even apart from the

fundamental point that our job as judges is to enforce the law,

not abdicate to the political branches, cf. Boumediene v. Bush,

553 U.S. 723, 765-66 (2008), we cannot think of this as a

one-off case because we could not cabin the consequences in

any principled manner if we were to uphold the CFPB’s

single-Director structure. As the Supreme Court has warned:

“Slight encroachments create new boundaries from which

legions of power can seek new territory to capture.” Stern,

564 U.S. at 503 (internal quotation marks omitted). Justice

Frankfurter captured it well in his opinion in Youngstown:

“The accretion of dangerous power does not come in a day. It

does come, however slowly, from the generative force of

unchecked disregard of the restrictions that fence in even the

most disinterested assertion of authority.” 343 U.S. at 594

(Frankfurter, J., concurring). That fairly describes what a

Supreme Court’s recent decision in Free Enterprise Fund. See In re

Aiken County, 645 F.3d 428, 444-46 (D.C. Cir. 2011) (Kavanaugh,

J., concurring); Neomi Rao, Removal: Necessary and Sufficient for

Presidential Control, 65 Ala. L. Rev. 1205, 1208 (2014). Of

course, overruling Humphrey’s Executor would not mean the end of

the agencies that are now independent. The agencies would simply

transform into executive agencies supervised and directed by the

President. So the question is not the existence of the agencies; the

question is the President’s control over the agencies and the resulting

accountability of those agencies to the people. In any event, as a

lower court, we of course must follow Supreme Court precedent. It

is not our job to decide whether to overrule Humphrey’s Executor.

But it is emphatically our job to make sure that Humphrey’s

Executor is applied in a manner consistent with settled historical

practice and the Constitution’s protection of individual liberty.

61

ruling upholding the CFPB’s single-Director structure would

mean. As the CFPB acknowledged at oral argument, a ruling

in its favor would necessarily allow all extant independent

agencies to be headed by one person. Tr. of Oral Arg. at

18-19. We would be green-lighting Congress to make other

heads of independent agencies a single Director rather than a

multi-member commission. A single-Director SEC, with the

power to unilaterally impose $500 million penalties? A

single-Director FCC, with the power to unilaterally require

“net neutrality”? A single-Director NLRB, with the power to

unilaterally supervise employer-employee relations

nationwide? That’s what we would be ushering in with a

ruling upholding the CFPB’s single-Director structure.

At a more general level, however, some might think that

judges should simply defer to the elected branches’ design of

the administrative state. But that hands-off attitude would

flout a long, long line of Supreme Court precedent.

Agreement by the two elected branches at a particular moment

or period in time has never been a ground for the courts to

simply defer regardless of whether the legislation violates the

Constitution’s separation of powers. Far from it. See Free

Enterprise Fund, 561 U.S. at 497, 508 (invalidating structure

of Public Company Accounting Oversight Board);

Boumediene, 553 U.S. at 765-66, 792 (invalidating provision

of Military Commissions Act); Clinton, 524 U.S. at 448-49

(invalidating Line Item Veto Act); Metropolitan Washington

Airports Authority v. Citizens for the Abatement of Aircraft

Noise, Inc., 501 U.S. 252, 266-69 (1991) (invalidating

structure of Metropolitan Washington Airports Authority

Board of Review); Bowsher, 478 U.S. at 733-34 (invalidating

Comptroller General’s powers under “reporting provisions” of

Balanced Budget and Emergency Deficit Control Act); INS v.

Chadha, 462 U.S. 919, 942 n.13, 957 (1983) (invalidating

legislative veto provision of Immigration and Nationality Act);

62

Buckley v. Valeo, 424 U.S. 1, 134-35, 140 (1976) (invalidating

structure of Federal Election Commission); Myers v. United

States, 272 U.S. 52 (1926) (invalidating provision requiring

Senate consent to President’s removal of executive officer).

In that same vein, even though a particular President might

accept a novel practice that violates Article II, “the separation

of powers does not depend on the views of individual

Presidents, nor on whether the encroached-upon branch

approves the encroachment.” Free Enterprise Fund, 561 U.S.

at 497 (internal quotation marks and citation omitted). A

President cannot “choose to bind his successors by diminishing

their powers.” Id.

In this case, moreover, it bears mention that Congress’s

choice of a single-Director CFPB was not an especially

considered legislative decision. There are no committee

reports, nor substantial legislative history, delving into the

benefits of single-Director independent agencies versus

multi-member independent agencies. The CFPB has

identified no congressional hearings studying the question.

Congress apparently stumbled into this single-Director

structure as a compromise or landing point between the

original Warren multi-member independent agency proposal

and a traditional executive agency headed by a single person.

Fourth, one might argue that the CFPB’s decisions are

checked by the courts, so we should not worry about the

single-Director structure. But much of what an agency does –

determining what rules to issue within a broad statutory

authorization and when, how, and against whom to bring

enforcement actions to enforce the law – occurs in the twilight

of judicially unreviewable discretion. Those discretionary

actions have a critical impact on individual liberty. And

courts do not review or only deferentially review such

exercises of agency discretion. See Chevron U.S.A. Inc. v.

63

Natural Resources Defense Council, Inc., 467 U.S. 837,

844-45 (1984); Motor Vehicle Manufacturers Association of

U.S., Inc. v. State Farm Mutual Automobile Insurance Co., 463

U.S. 29, 41-43 (1983); Heckler v. Chaney, 470 U.S. 821,

831-33 (1985). Therefore, the probability of judicial review

of some agency action has never excused or mitigated an

otherwise extant Article II problem in the structure of the

agency. See, e.g., Free Enterprise Fund, 561 U.S. 477;

Buckley, 424 U.S. 1.

From another direction, one might argue that the CFPB is

checked by Congress through Congress’s oversight and

ultimate control over appropriations. To begin with, Congress

does not have the power to direct the Director or to remove the

Director at will. Congress cannot supervise or direct the

Director regarding what rules to issue, what enforcement

actions to bring (or decline to bring), or how to resolve

adjudications. More to the point, by further impairing the

President’s control over the Executive Branch, day-to-day

congressional control over an executive or independent agency

generally would exacerbate, rather than mitigate, any Article II

problem with the structure of the agency. To satisfy Article II,

the check on an agency must come from the President or from

other internal Executive Branch or agency checks, not from

Congress. The bottom line, as the Supreme Court said in

Bowsher, is that the “separated powers of our Government

cannot be permitted to turn on judicial assessment of whether

an officer exercising executive power is on good terms with

Congress.” 478 U.S. at 730. “The Framers did not rest our

liberties on such bureaucratic minutiae.” Free Enterprise

Fund, 561 U.S. at 500. 16

16

On top of the Director’s unilateral power to issue rules and

take enforcement actions to enforce 19 separate consumer protection

statutes, the CFPB is not subject to the ordinary annual

64

In sum, the CFPB departs from settled historical practice

regarding the structure of independent agencies. And that

departure makes a significant difference for the individual

liberty protected by the Constitution’s separation of powers.

Applying the Supreme Court’s separation of powers

precedents, we therefore conclude that the CFPB is

unconstitutionally structured because it is an independent

agency headed by a single Director. 17

appropriations process. Instead, the Dodd-Frank Act requires the

Board of Governors of the Federal Reserve to transfer “from the

combined earnings of the Federal Reserve System” the amount

“determined by the Director,” not to exceed 12 percent of the “total

operating expenses of the Federal Reserve System.” 12 U.S.C.

§ 5497(a)(1)-(2). As those who have labored in Washington well

understand, the appropriations process brings at least some measure

of oversight by Congress. According to PHH, the CFPB’s

exemption from that process enhances the concern in this case about

the massive power lodged in a single, unaccountable Director. That

said, the single Director would constitute a constitutional problem

even if the CFPB were subject to the usual appropriations process.

The CFPB’s exemption from the ordinary appropriations process is

at most just “extra icing on” an unconstitutional “cake already

frosted.” Yates v. United States, 135 S. Ct. 1074, 1093, slip op. at 6

(2015) (Kagan, J., dissenting). In any event, Congress can always

alter the CFPB’s funding in any appropriations cycle (or at any other

time). Section 5497 is not an entrenched statute shielded from

future congressional alteration, nor could it be. See, e.g., Manigault

v. Springs, 199 U.S. 473, 487 (1905).

17

Nothing in our opinion casts any doubt on traditional

structures under which Congress may establish a process for

designating the Chair of an independent board or independent

commission, and for assigning the Chair various additional

administrative responsibilities. Those responsibilities are distinct

from substantive authority. A Chair may not unilaterally issue a

rule, unilaterally bring an enforcement action, or unilaterally decide

65

III

Having concluded that the CFPB is unconstitutionally

structured because it is an independent agency headed by a

single Director, we must decide on the appropriate remedy.

When the constitutional problem involves a provision of a

statute, the legal term for that question is severability. In light

of this one specific constitutional flaw in the Dodd-Frank Act,

must we strike down that whole Act? Or must we strike down

at least those statutory provisions creating the CFPB and

defining the CFPB’s duties and authorities? Or do we just

narrowly strike down and sever the one for-cause removal

provision that is the source of the constitutional problem?

Not surprisingly, PHH wants us, at a minimum, to strike

down the CFPB and prevent its continued operation, if not

strike down the entire Dodd-Frank Act. But Supreme Court

precedent on severability demands a narrower remedy for the

CFPB’s constitutional flaw.

an adjudication. See Marshall J. Breger & Gary J. Edles,

Established by Practice: The Theory and Operation of Independent

Federal Agencies, 52 Admin. L. Rev. 1111, 1166-67 (2000) (“As our

survey of some thirty federal multi-member agencies suggests, all of

the reorganization statutes and their progeny fundamentally assign

substantive authority to the agency as a whole and administrative

authority to the chairman.”). We note, moreover, that many Chairs

traditionally are removable at will by the President from their

position as Chair, albeit not from the commission. See Rachel E.

Barkow, Insulating Agencies: Avoiding Capture Through

Institutional Design, 89 Tex. L. Rev. 15, 38 & n.124 (2010).

Nor does our decision cast any doubt on the independent status

of administrative law judges who are protected by for-cause

provisions. Those judges conduct only adjudications (of a sort) and

are not covered or affected in any way by our decision here.

66

“Generally speaking, when confronting a constitutional

flaw in a statute, we try to limit the solution to the problem,

severing any problematic portions while leaving the remainder

intact.” Free Enterprise Fund v. Public Company Accounting

Oversight Board, 561 U.S. 477, 508 (2010) (internal quotation

marks omitted). The “normal rule is that partial, rather than

facial, invalidation is the required course.” Id. (internal

quotation marks omitted). That is true so long as we conclude

that (i) Congress would have preferred the law with the

offending provision severed over no law at all; and (ii) the law

with the offending provision severed would remain “fully

operative as a law.” Id. at 509 (internal quotation marks

omitted).

First, in considering Congress’s intent with respect to

severability, courts must decide – or often speculate, truth be

told – whether Congress would “have preferred what is left of

its statute to no statute at all.” Ayotte v. Planned Parenthood

of Northern New England, 546 U.S. 320, 330 (2006); see also

Alaska Airlines, Inc. v. Brock, 480 U.S. 678, 685 (1987)

(“[T]he unconstitutional provision must be severed unless the

statute created in its absence is legislation that Congress would

not have enacted.”). Importantly, courts need not speculate

and can presume that Congress wanted to retain the

constitutional remainder of the statute when “Congress has

explicitly provided for severance by including a severability

clause in the statute.” Alaska Airlines, 480 U.S. at 686; see

also id. (“[T]he inclusion of such a clause creates a

presumption that Congress did not intend the validity of the

statute in question to depend on the validity of the

constitutionally offensive provision.”).

In this case, as was the case in Free Enterprise Fund,

“nothing in the statute’s text or historical context makes it

67

evident that Congress, faced with the limitations imposed by

the Constitution, would have preferred no” CFPB at all (or no

Dodd-Frank Act at all) to a CFPB whose Director is removable

at will. 561 U.S. at 509 (internal quotation marks omitted).

Indeed, the Dodd-Frank Act itself all but answers the question

of presumed congressional intent through its express

severability clause, which instructs: “If any provision” of the

Act “is held to be unconstitutional, the remainder of” the Act

“shall not be affected thereby.” 12 U.S.C. § 5302. It will be

the rare case when a court may ignore a severability provision

set forth in the text of the relevant statute. See Alaska

Airlines, 480 U.S. at 686. We have no reason or basis to tilt at

that windmill in this case.

Second, we also must look at “the balance of the

legislation” to assess whether the statute is capable “of

functioning” without the offending provisions “in a manner

consistent with the intent of Congress.” Id. at 684-85

(emphasis omitted); see also United States v. Booker, 543 U.S.

220, 227 (2005) (“[T]wo provisions . . . must be invalidated in

order to allow the statute to operate in a manner consistent with

congressional intent.”). That prong of the severability

analysis in essence turns on whether the truncated statute is

“fully operative as a law.” Free Enterprise Fund, 561 U.S. at

509 (internal quotation marks omitted). To take just one

example, in Marbury v. Madison, the Court concluded that

Section 13 of the Judiciary Act of 1789 was unconstitutional in

part. 5 U.S. 137, 148, 179-80 (1803). But the Court did not

disturb the remainder of the Judiciary Act. Id. at 179-80.

Here, the Dodd-Frank Act and its CFPB-related

provisions will remain “fully operative as a law” without the

for-cause removal restriction. Free Enterprise Fund, 561

U.S. at 509 (internal quotation marks omitted). Operating

without the for-cause removal provision and under the

68

supervision and direction of the President, the CFPB may still

“regulate the offering and provision of consumer financial

products or services under the Federal consumer financial

laws,” 12 U.S.C. § 5491(a), much as the Accounting Oversight

Board has continued fulfilling its regulatory mission in the

wake of the Supreme Court’s decision in Free Enterprise

Fund. 18 Moreover, the CFPB’s operation as an executive

agency will not in any way prevent the overall Dodd-Frank Act

from remaining operative as a law.

To be sure, one might ask whether, instead of severing the

for-cause removal provision, we should rewrite and add to the

Dodd-Frank Act by restructuring the CFPB as a multi-member

independent agency. But doing so would require us to create

a variety of new offices, designate one of the offices as Chair,

and specify various administrative details of the reconstituted

agency. All of that “editorial freedom” would take us far

beyond our judicial capacity. Free Enterprise Fund, 561 U.S.

at 510. In addition, that approach would thwart the ongoing

operations of the CFPB unless and until the President

nominated and the Senate confirmed new members, potentially

18

The Dodd-Frank Act contains a five-year tenure provision

for the Director, see 12 U.S.C. § 5491(c)(1), akin to the similar

10-year tenure provision for the Director of the FBI and the 5-year

tenure provision for the Commissioner of the IRS. See Crime

Control Act of 1976, § 203, reprinted in 28 U.S.C. § 532 note (FBI

Director “may not serve more than one ten-year term”); 26 U.S.C.

§ 7803(a)(1)(B) (term of the IRS Commissioner “shall be a 5-year

term”). But under Supreme Court precedent, such tenure provisions

do not prevent the President from removing at will a Director at any

time during the Director’s tenure. See Parsons v. United States, 167

U.S. 324, 343 (1897). Therefore, we need not invalidate and sever

the tenure provision. If such a provision did impair the President’s

ability to remove the Director at will, then it too would be

unconstitutional, and it would be invalidated and severed.

69

shutting the agency down for months if not years. No

Supreme Court case in comparable circumstances has adopted

such an approach. We may not do so here. Of course, if

Congress prefers to restructure the CFPB as a multi-member

independent agency rather than as a single-Director executive

agency, Congress may enact new legislation that creates a

Bureau headed by multiple members instead of a single

Director. Cf. id. (“Congress of course remains free to pursue

any of these options going forward.”).

In similar circumstances, the Supreme Court in Free

Enterprise Fund severed the unconstitutional for-cause

provision but did not otherwise disturb the Sarbanes-Oxley Act

or the operation of the new Accounting Oversight Board

created by that Act. See id. at 508-10. Similarly, in a recent

case involving the Copyright Royalty Board, we severed the

for-cause provision that rendered that Board unconstitutional,

but did not otherwise disturb the copyright laws or the

operation of the Copyright Royalty Board. See

Intercollegiate Broadcasting System, Inc. v. Copyright Royalty

Board, 684 F.3d 1332, 1340-41 (D.C. Cir. 2012). We do the

same here.

In light of Congress’s clear textual expression of its intent

regarding severability, and because the Dodd-Frank Act and

the CFPB may function without the CFPB’s for-cause removal

provision, we remedy the constitutional violation here by

severing the for-cause removal provision from the statute. As

a result, the CFPB now will operate as an executive agency.

The President of the United States now has the power to

supervise and direct the Director of the CFPB, and may remove

the Director at will at any time. 19

19

We need not here consider the legal ramifications of our

decision for past CFPB rules or for past agency enforcement actions.

70

IV

Because our constitutional ruling will not halt the CFPB’s

ongoing operations or the CFPB’s ability to uphold the $109

million order against PHH, we must also consider PHH’s

statutory objections to the CFPB enforcement action in this

case.

In its enforcement action against PHH, the CFPB alleged

that PHH violated Section 8 of the Real Estate Settlement

Procedures Act. Passed by Congress and signed by President

Ford in 1974, the Act dramatically reformed the real estate

industry. One of the textually stated purposes of the Act was

“the elimination of kickbacks or referral fees that tend to

increase unnecessarily the costs of certain settlement services.”

12 U.S.C. § 2601(b)(2).

We note, however, that this is not an uncommon situation. For

example, in just the last few years, the NLRB, the Public Company

Accounting Oversight Board, and the Copyright Royalty Board have

all been on the receiving end of successful constitutional and

statutory challenges to their structure and legality. See NLRB v.

Noel Canning, 134 S. Ct. 2550 (2014); New Process Steel, L.P. v.

NLRB, 560 U.S. 674 (2010); Free Enterprise Fund, 561 U.S. 477;

Intercollegiate Broadcasting System, Inc., 684 F.3d 1332. Without

major tumult, the agencies and courts have subsequently worked

through the resulting issues regarding the legality of past rules and of

past or current enforcement actions. See, e.g., Noel Canning v.

NLRB, 823 F.3d 76, 78-80 (D.C. Cir. 2016); Intercollegiate

Broadcasting System, Inc. v. Copyright Royalty Board, 796 F.3d

111, 118-19 (D.C. Cir. 2015). Because, as we will explain in the

next section, the CFPB’s enforcement action against PHH in this

case must be vacated in any event, we need not consider any such

issues at this time.

71

To further that purpose, Section 8(a) of the Act bans

payments for referrals in the real estate settlement process.

Section 8(a) provides: “No person shall give and no person

shall accept any fee, kickback, or thing of value pursuant to any

agreement or understanding, oral or otherwise, that business

incident to or a part of a real estate settlement service involving

a federally related mortgage loan shall be referred to any

person.” Id. § 2607(a). 20

Importantly for this case, however, Section 8(c) contains a

series of qualifications, exceptions, and safe harbors. Of

relevance here, Section 8(c) carves out a safe harbor against

overly broad interpretations of Section 8(a): “Nothing in this

section shall be construed as prohibiting . . . (2) the payment to

any person of a bona fide salary or compensation or other

payment for goods or facilities actually furnished or for

services actually performed.” Id. § 2607(c)(2).

In 1995, PHH, a mortgage lender, began participating in

so-called captive reinsurance agreements. PHH would refer

borrowers to certain mortgage insurers. Those mortgage

insurers, in turn, would purchase mortgage reinsurance from

Atrium, a wholly owned subsidiary of PHH. According to

PHH, this was not a problem under Section 8 because the

mortgage insurers would pay no more than reasonable market

value to Atrium for the reinsurance they purchased. PHH

argues that the mortgage insurers were thus paying reasonable

market value for reinsurance from Atrium, as allowed by the

statute’s safe harbor, and were not paying anything for the

referrals made by PHH, which would have been unlawful. 21

20

Section 8 of the Act is codified at 12 U.S.C. § 2607. For

consistency, we refer to Section 8 rather than Section 2607.

21

It is worth noting that Sections 8(a) and 8(c), as relevant here,

do not speak directly to transactions between mortgage lenders and

homebuyers. Instead, those two provisions speak to the

72

Many other mortgage lenders did the same thing as PHH.

They did so in part because the U.S. Department of Housing

and Urban Development, known as HUD, the federal

government agency responsible for enforcing this real estate

law, repeatedly said (beginning in 1997) that captive

reinsurance arrangements were permissible under Section 8 so

long as the mortgage insurer paid no more than reasonable

market value for the reinsurance.

In this action against PHH, however, the CFPB changed

course and, for the first time, interpreted Section 8 to prohibit

captive reinsurance agreements even if the mortgage insurers

pay no more than reasonable market value to the reinsurers.

The CFPB then retroactively applied that new interpretation

against PHH based on conduct that PHH engaged in before the

CFPB issued its new interpretation.

PHH advances two alternative and independent arguments

on the statutory issue. First, PHH argues that the CFPB

misinterpreted Section 8(c). Second, in the alternative, PHH

argues that the CFPB violated bedrock due process principles

by retroactively applying its new interpretation of the statute

against PHH. We agree with PHH on both points.

transactions between the mortgage lender and mortgage insurer.

The sections prohibit one specific kind of activity in that market:

payment to the lender by the mortgage insurer for the lender’s

referral of a customer to the mortgage insurer.

Although not required by Section 8(c)(2), PHH nonetheless

typically provided its borrowers with a disclosure. The disclosure

said that if a borrower selected a mortgage insurer with which PHH

had a referral arrangement, the insurer would pay a reinsurance fee

to Atrium, which was affiliated with PHH. See J.A. 332.

73

A

The basic statutory question in this case is not a close call.

The text of Section 8(c) permits captive reinsurance

arrangements where mortgage insurers pay no more than

reasonable market value for the reinsurance. Section 8(c)

contains a broad range of exceptions, qualifications, and safe

harbors to Section 8(a). As relevant here, Section 8(c) creates

a safe harbor, stating: “Nothing” in Section 8 “shall be

construed as prohibiting” the “payment to any person of a bona

fide salary or compensation or other payment for goods or

facilities actually furnished or for services actually

performed.” See 12 U.S.C. § 2607(c)(2). Nothing means

nothing.

Section 8(a) prohibits, in this context, payment by a

mortgage insurer to a lender for the lender’s referral of a

customer to the mortgage insurer. But Section 8(a) and 8(c)

do not prohibit bona fide payments by the mortgage insurer to

the lender for other services that the lender (or the lender’s

subsidiary or affiliate) actually provides to the mortgage

insurer.

How do we determine whether the mortgage insurer’s

payment to the lender was a bona fide payment for the

reinsurance rather than a disguised payment for the lender’s

referral of a customer to the insurer? As HUD had long

explained, the answer is commonsensical: If the payment to

the lender-affiliated reinsurer is more than the reasonable

market value of the reinsurance, then we may presume that the

excess payment above reasonable market value was not a bona

fide payment for the reinsurance but was a disguised payment

for a referral. Otherwise, there is no basis to treat payment of

reasonable market value for the reinsurance as a prohibited

payment for the referral – assuming, of course, that the

74

reinsurance was actually provided. In other words, in the text

and context of this statute, a bona fide payment means a

payment of reasonable market value. 22

To be sure, one might say that the mortgage insurer –

although paying reasonable market value for the reinsurance –

would have preferred not to purchase reinsurance at all or to

purchase it from a different reinsurer. In that sense, the

lender’s actions create a kind of tying arrangement in which the

lender says to the mortgage insurer: We will refer customers

to you, but only if you purchase another service from our

affiliated reinsurer, albeit at reasonable market value. But the

statute does not proscribe that kind of arrangement. As

relevant here, Section 8(a) proscribes payments for referrals.

Period. It does not proscribe other transactions between the

lender and mortgage insurer. Nor does it proscribe a tying

arrangement, so long as the only payments exchanged are bona

fide payments for services and not payments for referrals.

The CFPB says, however, that the mortgage insurer’s

payment for the reinsurance is not “bona fide” if it was part of a

tying arrangement. That makes little sense. Tying

arrangements are ubiquitous in the U.S. economy. To be sure,

tying arrangements are outlawed in certain circumstances, but

they were not outlawed by Section 8 in the circumstances at

issue here. 23 A payment for a service pursuant to a tying

22

When we use the phrase “reasonable market value” in this

opinion, we use that phrase as shorthand for a payment that bears a

reasonable relationship to the market value of the services performed

or products provided, as HUD has long explained it. We do not

opine on what constituted reasonable market value for the

reinsurance at issue in this case. That factual question is not before

us.

23

Tying arrangements are rarely prohibited in the American

economy, unless the party doing the tying has market power.

75

arrangement does not make the payment any less bona fide, so

long as the payment for the service reflects reasonable market

value. A bona fide payment means a payment of reasonable

market value.

Recognizing, however, that an aggressive government

enforcement agency or court might interpret other transactions

between businesses in the real estate market as connected to,

conditioned on, or tied to referrals, and might try to sweep such

transactions within the scope of Section 8(a)’s prohibition,

Congress explicitly made clear in Section 8(c) that those other

transactions were lawful so long as reasonable market value

was paid and the services were actually performed. In other

words, Section 8(c) specifically bars the aggressive

interpretation of Section 8(a) advanced by the CFPB in this

case. Section 8(c) was designed to provide certainty to

businesses in the mortgage lending process. The CFPB’s

interpretation flouts that statutory goal and upends the entire

system of unpaid referrals that has been part of the market for

real estate settlement services.

Our interpretation of the text accords with the

longstanding interpretation of the Department of Housing and

Otherwise, tying arrangements can be beneficial to consumers and

the economy by enhancing efficiencies and lowering costs. As the

Supreme Court has stated, “Many tying arrangements . . . are fully

consistent with a free, competitive market.” Illinois Tool Works,

Inc. v. Independent Ink, Inc., 547 U.S. 28, 45 (2006); see also

National Fuel Gas Supply Corp. v. FERC, 468 F.3d 831, 840 (D.C.

Cir. 2006). In this context, moreover, the Real Estate Settlement

Procedures Act allows vertical integration of lenders and other

settlement service providers under its affiliated business provisions.

If such vertical integration is allowed, it would not make much sense

to conclude that similar vertical contractual relationships are

proscribed.

76

Urban Development. For decades, HUD explained to

mortgage lenders that captive reinsurance arrangements where

reasonable market value was paid were entirely permissible

under Section 8. Indeed, HUD adopted a rule, Regulation X,

under which captive reinsurance arrangements were permitted

so long as the insurer paid reasonable market value for the

reinsurance. See 24 C.F.R. § 3500.14(g) (2011); see also 24

C.F.R. § 3500.14(e)-(f) (1992). That regulation remains in

place as a CFPB regulation. See 12 C.F.R. § 1024.14 (2016).

Yet in its decision here and its argument to this Court, the

CFPB has not adhered to the regulation. On the contrary, the

CFPB now says the opposite of what HUD’s prior

interpretations and Regulation X all say. In the next section,

we will consider the due process implications of the CFPB’s

retroactive application of its about-face. For now, we simply

note that the CFPB’s interpretation flouts not only the text of

the statute but also decades of carefully and repeatedly

considered official government interpretations.

Our interpretation of the text also accords with the

statute’s multiple purposes, as revealed by the text. One goal

of the statute was to eliminate payments for referrals because

“referral fees . . . tend to increase unnecessarily the costs of

certain settlement services.” 12 U.S.C. § 2601(b)(2).

Another purpose of the statute, as the text shows, was to allow

market participants to refer customers to other service

providers, albeit without demanding or receiving payment for

the referral. Id. § 2607(a). After all, such referrals often

enhance the efficiency of the homebuying process. Another

purpose was to assure market participants that they could

engage in transactions – other than payments for referrals – so

long as reasonable payments were made for services actually

performed. Id. § 2607(c); see also Glover v. Standard

Federal Bank, 283 F.3d 953, 964 (8th Cir. 2002); Geraci v.

Homestreet Bank, 347 F.3d 749, 751 (9th Cir. 2003). If

77

payments for services actually performed reflect the

reasonable market value of the services, as they must to fall

within Section 8(c), then they square with the Act’s various

purposes.

Our interpretation of the text also aligns with how key

Members of Congress intended Sections 8(a) and 8(c) to work

together. When the Real Estate Settlement Procedures Act

was reported out of the Senate Committee on Banking,

Housing and Urban Affairs in 1974, the accompanying

committee report stated: “Reasonable payments in return for

services actually performed or goods actually furnished are not

intended to be prohibited.” S. Rep. No. 93-866, at 6 (1974).

Note the Senate Committee’s use of the word “reasonable.”

Here, the CFPB has argued that the phrase “bona fide

payment” in the statute somehow means something different

from “reasonable payment.” CFPB Br. 29 & n.18. But the

Senate Committee, following the commonsense meaning,

expressly equated the two terms. Contrary to the CFPB’s

strained interpretation, the committee report indicates that

those Members of Congress intended Sections 8(a) and 8(c) to

mean what they say and to say what they mean: Payments for

referrals are proscribed, but payments for other services

actually performed are permitted, so long as the payments

reflect reasonable market value.

In seeking to defend its interpretation, the CFPB argues

that its interpretation of the Real Estate Settlement Procedures

Act is entitled to Chevron deference. But Chevron instructs

us at step one to first employ all of the traditional tools of

statutory interpretation, as we have done. See Chevron U.S.A.

Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837,

843 n.9 (1984). After we employ those tools, only if an

ambiguity remains do we defer to the agency, if its

interpretation is at least reasonable. Here, we conclude at

78

Chevron step one that the statute permits captive reinsurance

arrangements. Indeed, Section 8(c) eliminates any potential

ambiguity that might have existed if all we had were Section

8(a) alone. Section 8(c) clearly permits captive reinsurance

arrangements so long as the mortgage insurer pays reasonable

market value for reinsurance actually provided. So the

CFPB’s interpretation fails at Chevron step one. Cf.

Kingdomware Technologies, Inc. v. United States, 136 S. Ct.

1969, 1979, slip op. at 12 (2016); FERC v. Electric Power

Supply Association, 136 S. Ct. 760, 773 n.5, slip op. at 14 n.5

(2016); Adams Fruit Co. v. Barrett, 494 U.S. 638, 642 (1990);

Loving v. IRS, 742 F.3d 1013, 1021-22 (D.C. Cir. 2014). For

those same reasons, if we reached Chevron step two, we would

conclude that the CFPB’s interpretation is not a reasonable

interpretation of the statute in light of the statute’s text, history,

context, and purposes.

The policy and ethics of captive reinsurance arrangements

no doubt can be debated, as can the policy and ethics of the

wide variety of similar tying and referral arrangements that are

ubiquitous in the American economy. But the initial question

before us (and that was before the CFPB) is not one of policy or

ethics. The question is one of law. Under Section 8(a) and

Section 8(c), the relevant questions are whether the payment

from the mortgage insurer to the lender-affiliated reinsurer is

bona fide – that is, commensurate with the reasonable market

value of the reinsurance – and whether the services were

actually performed. If so, then the payment is permissible, as

HUD had long stated.

The CFPB obviously believes that captive reinsurance

arrangements are harmful and should be illegal. But the

decision whether to adopt a new prohibition on captive

reinsurance arrangements is for Congress and the President

when exercising the legislative authority. It is not a decision

79

for the CFPB to make unilaterally. See King v. Burwell, 135

S. Ct. 2480, 2496, slip op. at 21 (2015) (“In a democracy, the

power to make the law rests with those chosen by the people.”).

We hold that Sections 8(a) and 8(c) of the Real Estate

Settlement Procedures Act allow captive reinsurance

arrangements so long as the mortgage insurance companies

pay no more than reasonable market value to the reinsurers for

services actually provided. On remand, the CFPB may

determine whether the relevant mortgage insurers in fact paid

more than reasonable market value to the reinsurer Atrium for

the reinsurance. 24

B

Even if the CFPB’s interpretation of Section 8 were

permissible, it nonetheless represented a complete about-face

from the Federal Government’s longstanding prior

interpretation of Section 8. Agency change is not a fatal flaw

in and of itself, so long as the change is reasonably explained

and so long as the new interpretation is consistent with the

statute. See FCC v. Fox Television Stations, Inc., 556 U.S.

502, 514-16 (2009). But change becomes a problem – a fatal

one – when the Government decides to turn around and

retroactively apply that new interpretation to proscribe conduct

that occurred before the new interpretation was issued.

Therefore, even if the CFPB’s new interpretation were

consistent with the statute (which it is not), the CFPB violated

due process by retroactively applying that new interpretation to

PHH’s conduct that occurred before the date of the CFPB’s

new interpretation.

24

If a mortgage insurer did pay more than reasonable market

value for reinsurance, the disgorgement remedy is the amount that

was paid above reasonable market value.

80

Before the creation of the CFPB in 2010, the Department

of Housing and Urban Development administered the Real

Estate Settlement Procedures Act. In 1997, HUD sent a letter

to a mortgage company. The mortgage company had

requested that HUD clarify the application of Section 8 of the

Real Estate Settlement Procedures Act to captive reinsurance

arrangements.

In the letter, HUD analyzed the relationship between

Sections 8(a) and 8(c). HUD said that “Subsection 8(c) of

RESPA sets forth various exemptions from these

prohibitions.” Letter from Nicolas P. Retsinas, Assistant

Secretary for Housing, Department of Housing and Urban

Development, to Countrywide Funding Corporation 3 (Aug. 6,

1997) (J.A. 251-58). HUD further stated that its “view of

captive reinsurance” was that “the arrangements are

permissible” if “the payments to the reinsurer: (1) are for

reinsurance services ‘actually furnished or for services

performed’ and (2) are bona fide compensation that does not

exceed the value of such services.” Id. (J.A. 253).

The 1997 HUD letter was widely disseminated and relied

on in the industry. In 2004, a title association again asked

HUD about the legality of captive reinsurance programs under

the Real Estate Settlement Procedures Act. HUD restated the

position it had taken in 1997 with respect to captive mortgage

reinsurance. As it had in 1997, HUD wrote that captive

reinsurance agreements are permissible if the payments made

to the reinsurer (1) are “for reinsurance services actually

furnished or for services performed” and (2) are “bona fide

compensation that does not exceed the value of such services.”

Letter from John P. Kennedy, Associate General Counsel for

Finance and Regulatory Compliance, Department of Housing

81

and Urban Development, to American Land Title Association

1 (Aug. 12, 2004) (J.A. 259).

In accord with those letters, HUD’s Real Estate Settlement

Procedures Act regulations were set forth in Regulation X,

which was first issued in 1976 and updated, as relevant here, in

1992. See 24 C.F.R. §§ 3500.01-3500.14 (1977); see also 24

C.F.R. § 3500.14 (1993). As it initially read, Regulation X

stated: “The payment and receipt of a thing of value that bears

a reasonable relationship to the value of the goods or services

received by the person or company making the payment is not

prohibited by RESPA section 8. To the extent the thing of

value is in excess of the reasonable value of the goods provided

or services performed, the excess is not for services actually

rendered and may be considered a kickback or referral fee

proscribed by RESPA section 8.” 24 C.F.R. § 3500.14(e)

(1977). Regulation X was slightly reworded in 1992: “If the

payment of a thing of value bears no reasonable relationship to

the market value of the goods or services provided, then the

excess is not for services or goods actually performed or

provided.” 24 C.F.R. § 3500.14(g)(3) (1993). Regulation X

described “bona fide” payments for services actually

performed as payments that “Section 8 of RESPA permits.”

Id. § 3500.14(g)(1). After the CFPB inherited HUD’s

enforcement and rulemaking authority under the Act, the

CFPB itself codified HUD’s Regulation X provisions

governing Section 8. See 12 C.F.R. § 1024.14(g) (2012).

In our Court, the CFPB acknowledges that, at the time of

PHH’s conduct, Regulation X stated “that, if a payment bears

no reasonable relationship to the value of the services

provided, then the excess may be a payment for a referral.”

CFPB Br. 31 n.23. But the CFPB argues that “this does not

mean that, if the payment does bear a reasonable relationship to

the value of the services provided, then those payments are

82

never for referrals.” Id. The CFPB’s interpretation is a

facially nonsensical reading of Regulation X. As Regulation

X made clear, if an insurer makes a payment at reasonable

market value for services actually provided, that payment is not

a payment for a referral.

HUD’s consistent and repeated interpretation of Section 8

was widely known and relied on in the mortgage lending

industry. It was reflected in the leading treatise on the Act.

See JAMES H. PANNABECKER & DAVID STEMLER, THE RESPA

MANUAL: A COMPLETE GUIDE TO THE REAL ESTATE

SETTLEMENT PROCEDURES ACT § 8.04[6][a] (2013). And

courts had acknowledged and approved HUD’s interpretation.

See, e.g., Glover v. Standard Federal Bank, 283 F.3d 953, 964

(8th Cir. 2002) (the “permissive language of Section 8(c) . . .

clearly states that reasonable payments for goods, facilities or

services actually furnished are not prohibited by RESPA, even

when done in connection with the referral of a particular loan

to a particular lender”); cf. Carter v. Welles-Bowen Realty,

Inc., 736 F.3d 722, 728 (6th Cir. 2013) (Section 8(c)(2) is a

“safe harbor[]” from Section 8(a)’s “ban on referral fees”);

Geraci v. Homestreet Bank, 347 F.3d 749, 751 (9th Cir. 2003)

(describing Section 8(c)(2) as a “safe harbor” and noting that

HUD, when evaluating whether payments from mortgage

lenders to mortgage brokers fall within Section 8(c), considers

whether the payments for services “are reasonably related to

the value of the . . . services that were actually performed”).

At the time PHH engaged in its captive reinsurance

arrangements, everyone knew the deal: Captive reinsurance

arrangements were lawful under Section 8 so long as the

mortgage insurer paid no more than reasonable market value to

the reinsurer for reinsurance actually furnished.

83

In 2015, however, the CFPB decided that captive

reinsurance agreements were prohibited by Section 8. The

CFPB then applied its new interpretation of Section 8

retroactively against PHH, ruling against PHH based on

conduct that had occurred as far back as 2008. The

retroactive application of the CFPB’s new interpretation

violated the Due Process Clause.

The Due Process Clause limits the extent to which the

Government may retroactively alter the legal consequences of

an entity’s or person’s past conduct. That anti-retroactivity

principle “is deeply rooted in our jurisprudence, and embodies

a legal doctrine centuries older than our Republic.” Landgraf

v. USI Film Products, 511 U.S. 244, 265 (1994); see also

Eastern Enterprises v. Apfel, 524 U.S. 498, 547 (1998)

(Kennedy, J., concurring in the judgment and dissenting in

part) (“[F]or centuries our law has harbored a singular distrust

of retroactive statutes.”).

Retroactivity – in particular, a new agency interpretation

that is retroactively applied to proscribe past conduct –

contravenes the bedrock due process principle that the people

should have fair notice of what conduct is prohibited. As the

Supreme Court has emphasized, “individuals should have an

opportunity to know what the law is and to conform their

conduct accordingly.” Landgraf, 511 U.S. at 265. Due

process therefore requires agencies to “provide regulated

parties fair warning of the conduct a regulation prohibits or

requires.” Christopher v. SmithKline Beecham Corp., 132 S.

Ct. 2156, 2167, slip op. at 10-11 (2012) (internal quotation

marks and alteration omitted); see also FCC v. Fox Television

Stations, Inc., 132 S. Ct. 2307, 2317, slip op. at 11 (2012) (“A

fundamental principle in our legal system is that laws which

regulate persons or entities must give fair notice of conduct that

is forbidden or required.”); cf. United States v. Pennsylvania

84

Industrial Chemical Corp., 411 U.S. 655, 674 (1973) (“Thus,

to the extent that the regulations deprived PICCO of fair

warning as to what conduct the Government intended to make

criminal, we think there can be no doubt that traditional notions

of fairness inherent in our system of criminal justice prevent

the Government from proceeding with the prosecution.”); Cox

v. Louisiana, 379 U.S. 559, 571 (1965) (“[U]nder all the

circumstances of this case, after the public officials acted as

they did, to sustain appellant’s later conviction for

demonstrating where they told him he could would be to

sanction an indefensible sort of entrapment by the State –

convicting a citizen for exercising a privilege which the State

had clearly told him was available to him. The Due Process

Clause does not permit convictions to be obtained under such

circumstances.”) (internal quotation marks and citation

omitted); Bouie v. City of Columbia, 378 U.S. 347, 350-51

(1964) (Due Process Clause violated when state punished

defendants “for conduct that was not criminal at the time they

committed it” because the “underlying principle” of fair

warning dictates that “no man shall be held criminally

responsible for conduct which he could not reasonably

understand to be proscribed”) (internal quotation marks

omitted); Raley v. Ohio, 360 U.S. 423, 438-39 (1959) (“Ther

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