Until October 10, none of the constitutional or scope of enforcement authority challenges to the Consumer Financial Protection Bureau’s (“CFPB” or Bureau”) power have been successful. That changed on October 11 when the U.S. Court of Appeals for the District of Columbia held the Director of the Bureau has too much unilateral, unchecked power and the law that the Director can only be removed by the President “for cause” is unconstitutional. The Court limited the remedy to the problem, however, by striking the “for cause” portion of the law and held that the President supervises the Director, and the President may remove the Director without cause.

In the long-anticipated decision in PHH Corp. v. Consumer Financial Protection Bureau, Circuit Judge Kavanaugh found that “the CFPB, lacks that critical check and structural constitutional protection, yet wields vast power over the U.S. economy.” Notably, however, the Court declined to shut down the entire CFPB even after finding the Bureau constitutionally flawed. The CFPB’s operations can go on as usual and can continue to take enforcement actions against companies.

The Court also held that the Bureau’s $109 million penalty against the defendant mortgage company, PHH Corp., was inappropriate for two reasons. First, the Court held that the Bureau had improperly applied a retroactive penalty against PHH in an instance where it had reinterpreted a rule it inherited from the U.S. Department of Housing and Urban Development in a way that invalidated HUD’s interpretation. “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,” Judge Kavanaugh wrote.

Second, the Court held that the CFPB’s three year statute of limitations applied to the CFPB’s enforcement effort. The CFPB has taken the position that it could bring an administrative case beyond the three-year statute of limitations provided under RESPA. The Court disagreed, writing, “We need not wait for an enforcement action 100 years after the fact. This court looks askance now at the idea that the CFPB is free to pursue an administrative enforcement action for an indefinite period of time after the relevant conduct took place.”

Ultimately, the Court’s decision on the constitutionality of the Bureau is unlikely to have a major effect on the bureau’s day-to-day operations. In severing the offending provision, the Court changed the structure of the Bureau to allow the President to remove the Director of the CFPB at will. This means that the Director of the CFPB may be subject to turnover every four years on the election cycle, rather than the five year term provided under Dodd Frank.

Other parts of the Court’s decision should not be overlooked. The CFPB has been a frequent target of criticism that it employs its interpretative power over consumer protection statutes in a more aggressive manner. The Court has imposed an important check on the CFPB’s interpretative power, holding that the CFPB cannot change the law through interpretation and then seek to impose the new standard of conduct retroactively. In addition, the Court’s rejection of the CFPB’s broad claim that statutes of limitations do not apply to its enforcement actions is a further significant limitation on the CFPB’s powers.

Regardless, the opinion may not be the final word. The decision may be appealed by the CFPB, which could either petition for en banc review of the entire D.C. Circuit or a writ of certiorari from the Supreme Court. The entire D.C. Circuit or the Supreme Court could overturn or expand upon the Court’s decision on the constitutionality of the Bureau.

The case is PHH Corp. v. Consumer Financial Protection Bureau, 15-1177 (D.C. Cir. October 11, 2016), and can be found here.