SDNY Judge Declares CFPB to be Unconstitutional

3 min

Last week, U.S. District Judge Loretta Preska of the Southern District of New York ruled in CFPB et al. v. RD Legal Funding, LLC (the Company) that the Consumer Financial Protection Bureau (CFPB) is unconstitutionally structured and, thus, lacks the authority to bring claims under the Consumer Financial Protection Act (CFPA). Judge Preska's decision has broad implications.

As way of background, the CFPB and the New York Attorney General brought claims against the Company and its founder and owner (the "Company"), under the CFPA and New York law. The Company provides money advances to consumers who are expecting to receive compensation under a settlement or judgment. Once the consumers receive their settlement or judgment, they then repay the Company an amount that is substantially larger than the funds advanced to them by the Company. The Company is alleged to have, among several things, (1) mischaracterized these transactions as "assignments," which prevents consumers from comparing the costs of the Company's products to those of competitors, (2) misrepresented when consumers receive the advanced funds, and (3) collected on contracts that are void under New York state law.1

In ruling on the Company's motion to dismiss, Judge Preska disagreed with the D.C. Circuit's recent ruling in PHH that the CFPB is constitutional,2 and stated that the D.C. Circuit holding has no binding on her court.3 Instead, Judge Preska held that the CFPB "is unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single Director."4 Even further, Judge Preska declared that Title X of Dodd-Frank—the CFPA, which is the CFPB's enabling act—should be stricken in its entirety.5 The CFPB's argument that it has standing to bring the action because Acting Director Mick Mulvaney ratified the CFPB's decision to bring the action and that he is removable at will by the president proved to be fruitless. And while Judge Preska dismissed the CFPB's claim and terminated the CFPB as a party to the action, she upheld the New York Attorney General's claim and denied the Company's motion to dismiss.

The CFPB has declined to comment, but we are watching developments to see whether the CFPB appeals this decision to the Second Circuit.

[1] Consumer Financial Protection Bureau v. RD Legal Funding, LLC, No. 17-CV-890 (LAP), 2018 WL 3094916, at *4 (S.D.N.Y. June 21, 2018).

[2] See PHH Corp. v. Consumer Financial Protection Bureau, 881 F.3d 75, 110 (D.C. Cir. 2018); see also 12 U.S.C. § 5491(a).

[3] RD Legal Funding, LLC, 2018 WL 3094916, at *35.

[4] Id. (quoting PHH Corp. v. Consumer Financial Protection Bureau, 881 F.3d 75, 198 (D.C. Cir. 2018)).

[5] Id.