PA District Court Rejects Challenge to CFPB Constitutionality, Allowing UDAAP Claims to Continue

The U.S. District Court for the Middle District of Pennsylvania recently rejected a student loan servicer’s arguments that the CFPB’s structure is unconstitutional, denying the servicer’s motion to dismiss in a CFPB lawsuit alleging various unfair, deceptive, or abusive acts or practices (UDAAP) violations.

In the lawsuit, which was filed in January 2017, the CFPB alleged that certain aspects of the company’s servicing and debt collection practices, primarily related to the servicer’s communications with borrowers at risk of default, constituted UDAAP violations. The servicer moved to dismiss, arguing that, among other things, the CFPB lacked authority to bring the claims because its structure is unconstitutional.

Regarding the constitutional claims, the servicer argued that the CFPB’s structure improperly interferes with the President’s powers under Article II of the Constitution because it combines the following three characteristics: (1) the agency is headed by a single director who wields executive power; (2) the director is only removable for cause; and (3) the agency is funded outside the normal budgetary process.

The Court rejected the servicer’s arguments, finding that the CFPB’s structure “does not violate Article II or the principle of separation of powers” because it “does not impede the President’s ability to ‘take Care that the Laws be faithfully executed.’”  The Court based its holding on a lengthy review of Supreme Court precedent regarding such constitutional issues, noting that each of the three characteristics at issue could be found in isolation in other, constitutional agencies at the federal level.

In response to the servicer’s argument that the combination of all three characteristics into a single agency runs afoul of Article II, the Court contended that the servicer had “failed to put forth any persuasive arguments” as to why the combined attributes “unconstitutionally prevent the President from ensuring that the Bureau is performing its functions” under its enacting statute.  To the contrary, the Court found “good reason to believe that these characteristics function to increase the President’s ability to supervise the Bureau over other independent agencies.”  In reaching that conclusion, the Court agreed with the CFPB’s argument that because the agency is headed by a single director instead of a multi-member body, it may in fact be easier for the President to hold the director accountable for the actions of the agency.

In addition, the Court stated that, if any of the challenged aspects of the CFPB’s structure were found to be unconstitutional and severed from the Consumer Financial Protection Act, the severance would not affect the CFPB’s ability to maintain the present lawsuit.

The case is CFPB v. Navient Corporation, et al., No. 3:17-CV-00101.