October 11, 2016
WASHINGTON — The U.S. consumer watchdog agency, enmeshed in partisan politics since its creation after the financial crisis, now has had its structure ruled unconstitutional because it gives too much power to a single agency director.
A federal appeals court ruled Tuesday that the way the Consumer Financial Protection Bureau is organized violates the Constitution's separation of powers by limiting the president's ability to remove the director who heads the agency.
The law creating the independent agency after the 2008-09 crisis says its director can only be removed "for cause," such as neglect of duty, and not over political differences. The court said that conflicts with the Constitution, which allows the president to remove executives for any reason.
That problem can be solved, the court said, by taking out the "for cause" provision — giving the president the power to remove the director at will, and to supervise him or her. The CFPB's operations will not be affected.
The ruling came from a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit.
A few actions taken by the agency might have to be reviewed because they didn't conform with the law in the appeals judges' view. Maria Earley, an attorney at law firm Reed Smith who was a CFPB enforcement attorney, said a handful of cases could be affected.
While the constitutional questions raised by the court are significant, "It's important to recognize the remedy the court outlines still allows the CFPB to continue to operate," Earley said.
The ruling handed a victory to the banking industry, which has viewed the agency as a thorn in its side and accused it of overreaching in its regulation of consumer financial activities. The agency has taken legal action against banks, mortgage companies, credit card issuers, payday lenders, debt collectors and others. The CFPB says that over five years it has recovered $11.7 billion that it returned to more than 27 million harmed consumers.
Consumer groups said the court's decision undermines financial protections.
The agency has been a political lightning rod since it was created by Congress in a major financial overhaul law in 2010 to protect consumers from harmful banking and lending practices. Wall Street interests, the banking and consumer finance industries and Republicans in Congress have fiercely opposed and criticized the agency.
Richard Cordray, a Democrat and former Ohio attorney general, has run the agency since it began operating in July 2011. His term doesn't expire until 2018, so his tenure likely won't be affected unless Republican Donald Trump were to win the presidency.
As the agency's director, Cordray exercises more power than would be the case with a five-member commission, which is often the structure atop independent federal agencies. The members of such commissions normally are split between the political parties.
"The director of the CFPB possesses enormous power over American business, American consumers and the overall U.S. economy," the appeals court ruling said. "That combination of power that is massive in scope, concentrated in a single person and unaccountable to the president triggers the important constitutional question at issue in this case."
One of the judges, Karen Henderson, dissented partially from the ruling. She said she doesn't believe it's necessary to reach a conclusion on whether the agency's structure is constitutional in order to resolve the case.
The government had argued that the agency's structure and powers are constitutional.
The case involves allegations that New Jersey mortgage lender PHH Corp. was involved in a scheme to refer customers to certain mortgage insurance companies in exchange for illegal kickbacks. The CFPB ordered PHH to pay $109 million in illegal payments it had received. PHH claims its conduct was legal and challenged the bureau's structure as unconstitutional.
The Obama administration could seek a rehearing of the decision before the full appeals court, which would be the next step in the legal process. The full court has a majority of judges appointed by Democratic presidents, while all three judges on the panel that issued the ruling were named by Republican presidents.
"The bureau respectfully disagrees with the court's decision," CFPB spokeswoman Moira Vahey said. "The bureau believes that Congress' decision to make the director removable only for cause is consistent with Supreme Court precedent, and the bureau is considering options for seeking further review of the court's decision."