Summary of SDNY order holding that CFPB is unconstitutional

CFPB v. RD Legal Funding, LLC, 17-cv-890 (June 21, 2018, S.D.N.Y.)

Last week, a federal court in New York ruled that the entire Consumer Financial Protection Bureau (“CFPB”) is unconstitutional. The CFPB was established by Congress in response to the 2007-2008 financial crisis to regulate financial institutions and protect consumers, especially with respect to mortgages, credit cards, and student loans. Although the CFPB has refrained from regulating virtual currencies and other distributed ledger technologies, that could change as these technologies are applied to mortgages, loans, and other areas of consumer finance.

The court’s ruling is notable for its lack of analysis. Although it exceeds 100 pages, the court devotes fewer than 2 pages to the constitutionality of the CFPB. The analysis begins by rejecting, without explanation, a recent federal court of appeals decision in PHH Corp. v. CFPB, which held that the CFPB is, in fact, constitutional.

Instead, the ruling combines different parts of two dissenting opinions in PHH Corp. It adopts the legal reasoning of the first dissent but rejects its remedy. Its preferred remedy—striking down the entire CFPB—comes from the second dissent, which was supported by only 1 of 10 judges who decided PHH Corp. In other words, the analysis consists of opinions already rejected by the court of appeals.

Typically, this ruling would have few practical consequences. It is not precedent for other courts and, given its contradiction of the court of appeals, will likely be overturned. The Trump administration, however, is critical of the CFPB and may choose to accept the ruling. Doing so might encourage more lawsuits against the CFPB, embolden the agency’s critics, and make it easier for other courts to find the CFPB unconstitutional.

These outcomes, if they occur, could affect how companies offer consumer financial services in the future, including those based on distributed ledger technology. We will report on these developments as they occur. For now, though, the CFPB will continue to operate as it has.

Continue to check our blog for updates on this issue.