Court: Consumer bureau’s structure is unconstitutional

The nation’s second most powerful court ruled Tuesday that the structure of the Consumer Financial Protection Bureau (CFPB) is unconstitutional, delivering a huge victory to business groups and Republicans in Congress.

Tuesday’s ruling, handed down by the U.S. Court of Appeals for the D.C. Circuit, does not halt the agency’s operations but states that Congress erred in creating a far-reaching agency that is led by a single director.

{mosads}The decision, the first major legal challenge to the CFPB’s powers, strikes a blow to the agency, which was created five years ago as part of the Dodd-Frank financial reform law. The agency was the brainchild of Sen. Elizabeth Warren (D-Mass.).

Republicans have fought for years to overhaul the agency, making a nearly identical argument to the one used in the D.C. Circuit ruling.

“This is a good day for democracy, economic freedom, due process and the Constitution. The second highest court in the land has vindicated what House Republicans have said all along, that the CFPB’s structure is unconstitutional,” said House Financial Services Committee Chairman Jeb Hensarling (R-Texas) in a statement.

In its 2-1 decision, the court said the independent agency’s structure is unconstitutional because the director has wide-ranging power with little oversight. The court found that the arrangement “represents a gross departure from settled historical practice” of having multi-member commissions at independent agencies to keep them in check.

“The CFPB is the first of its kind and a historical anomaly,” wrote Judge Brett Kavanaugh in the court’s 110-page opinion. “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.” 

The court also ruled that the CFPB had to re-review an enforcement action it took against PHH Corporation, a New Jersey mortgage lender that took the agency to court after it was fined $109 million for allegedly accepting kickbacks from mortgage insurers.

Beyond that particular enforcement action, the immediate fallout from the ruling is still coming into focus. 

White House press secretary Josh Earnest said an initial reading of the ruling indicated that it doesn’t “undermine the current activities of the CFPB.” 

“Obviously we’re disappointed by this decision, but we continue to have confidence that was expressed by the judges in the ability of the CFPB to do the important work of protecting consumers,” Earnest said.

Warren, who helped set up the agency and is perhaps its fiercest defender, argued that the court’s ruling was a “technical tweak” and did not change anything substantial about how the agency operates.

“This split decision — which bizarrely relies on a mischaracterization of my original proposal for a new consumer agency — will likely be appealed and overturned.  But even if it stands, the ruling makes a small, technical tweak to Dodd-Frank and does not question the legality of any other past, present, or future actions of the CFPB,” she said in a statement.  

“Continued Republican efforts to transform the agency’s structure or funding should be seen for what they are: attempts fostered by big banks to cripple an agency that has already forced them to return over $11 billion to customers who have been cheated.”

The court rejected PHH’s call for the CFPB to halt its operations until Congress passes legislation reforming its structure. Instead, the court ordered that the CFPB continue operating but said it should no longer be considered an independent agency. Instead, the court said, it should be more closely affiliated with the administration, much like the Treasury Department.

The effective takeaway from that is that the president now has the power to remove the CFPB director at any time, for any reason. Previously, the CFPB’s independent status ensured the director could only be removed for cause.

The CFPB’s current director, Richard Cordray, was placed in his position by President Obama and is not in danger of removal. However, the court-ordered change would give the next president the ability to establish a new director even if Cordray wished to finish out his five-year term through 2018.

“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,” Kavanaugh wrote.

In its ruling, the court argued that the federal government had never before seen an agency like the CFPB, which has broad powers over all of consumer finance but is run by a single director who does not answer to the president. The court argued that such an arrangement flouts the Constitution’s separations of powers and poses a risk to individual liberty.

The ruling marks a big win for the financial services industry and is certain to fuel new calls for replacing the director with a bipartisan commission. 

“We still assert a five-person, bipartisan board would preserve the Bureau as a strong, stable and effective regulator that would give the banking system certainty and consistency, regardless of a President Trump or Clinton,” said Richard Hunt, president and CEO of the Consumer Bankers Association.

Others used the legal ruling to push the CFPB to significantly rein in its operations. The National Association of Federal Credit Unions argued that with the CFPB’s structure in question, it should not be doing much of anything. 

“NAFCU urges an immediate moratorium at the CFPB on any rulemaking not already implemented,” said Dan Berger, the group’s president and CEO. “The bureau should also consider ceasing and desisting all rulemakings until the legality is resolved.”

Republicans also want to see additional checks placed on the CFPB, such as giving other regulators greater veto power over the agency’s actions and bringing its budget under the control of congressional appropriators. 

“Congress must pass comprehensive Dodd-Frank reform that includes an overhaul of the CFPB, including a change in the leadership structure, bringing the agency under the traditional congressional appropriations process, and subjecting it to the same anti-discrimination standards as other federal agencies and private corporations,” said Brian Wise, president of the U.S. Consumer Coalition, a group opposed to the agency.

But legislative efforts to change the agency have consistently run into opposition from Democrats. They argue that Republicans opposed the CFPB from its inception and say the changes they are proposing would only weaken its ability to police financial markets on behalf of consumers.

CFPB allies called Tuesday’s ruling a blow to consumers, pointing out that the CFPB was the agency that led enforcement actions against Wells Fargo after that bank was found to have potentially created millions of fake accounts for customers. 

“Compromising the CFPB’s independence would be a huge gift to Wall Street greed and a loss for consumers. We are hopeful that this erroneous decision will be overturned,” said Lisa Donner, executive director of Americans for Financial Reform.

Jordan Fabian contributed. This story was updated at 3:20 p.m.