Structure of CFPB Ruled Unconstitutional

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The U.S. Court of Appeals for the District of Columbia on Tuesday ordered a restructuring of how the Consumer Financial Protection Bureau (CFPB) operates within the executive branch, calling the Bureau’s structure “unconstitutional.”

New Jersey-based mortgage lender PHH Corp. had challenged a $109 million fine handed down by CFPB Director Richard Cordray, becoming the first organization to challenge an enforcement action handed down by the CFPB.

Judge Brett Kavanaugh in the D.C. Circuit Court of Appeals ruled that the CFPB will be allowed to continue operating as an agency and perform its duties as it has been, but that it will be an executive agency similar to other executive agencies such as the Department of Justice and Department of Treasury that are headed by a single person.

“This new agency, the CFPB, lacks that critical check and structural constitutional protection, yet wields vast power over the U.S. economy,” the ruling stated. “In light of the consistent historical practice under which independent agencies have been headed by multiple commissioners or board members, and in light of the threat to individual liberty posed by a single-Director independent agency…We therefore hold that the CFPB is unconstitutionally structured.”

The court’s ruling gives the president the power to supervise the CFPB’s director and remove him from that position at will; the court also asked the CFPB to review the decision in the PHH Corp. case.

“In essence, the Director is the President of Consumer Finance. The concentration of massive, unchecked power in a single Director marks a departure from settled historical practice and makes the CFPB unique among traditional independent agencies.”

The Bureau was created in July 2011 out of the Dodd-Frank Act. While Democrats have defended the Bureau’s structure and pointed to the more than $11 billion returned to consumers that the Bureau has deemed financially harmed, the CFPB has been harshly criticized by Republicans who believe it to be an overreaching agency whose power is unchecked.

The court’s ruling noted the power of the Bureau’s director, stating that, “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. It is the Director’s view of consumer protection law that prevails over all others. In essence, the Director is the President of Consumer Finance. The concentration of massive, unchecked power in a single Director marks a departure from settled historical practice and makes the CFPB unique among traditional independent agencies.”

The court further stated that the Bureau’s determining when, how, and against whom to bring enforcement actions “occurs in the twilight of judicially unreviewable discretion. Those discretionary actions have a critical impact on individual liberty.”

CFPB spokesperson Moira Vahey said in reaction to Tuesday’s D.C. Circuit Court decision: “The Bureau respectfully disagrees with the Court’s decision. The Bureau believes that Congress’s 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. In the meantime, as the court expressly recognized, the Bureau will continue its important work. Congress has charged the Bureau with ensuring that the markets for consumer financial products and services are fair, transparent, and competitive and with protecting consumers in these markets from unlawful practices. Today’s decision will not dampen our efforts or affect our focus on the mission of the agency.”

House Financial Services Committee Republicans praised the court’s decision, while the Democrats on the Committee derided it:

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