Court: structure of consumer watchdog agency unconstitutional

The structure of the Consumer Financial Protection Bureau (CFPB) is not constitutional, according to a ruling by a federal appeals court, which also sent back an enforcement action by the five-year-old agency against mortgage lender PHH Corp. (PHH) for review.

The five-year-old agency violates the Constitution’s separation of powers because too much power is in the hands of its director, found the U.S. Court of Appeals for the District of Columbia Circuit. Giving the president the power to get rid of the CFPB’s director and to oversee the agency would fix the situation, the court said.

The court ruled that the CFPB could continue functioning, but must restructure how it runs within the executive branch. “The CFPB therefore will continue to operate and to perform its many duties, but will do so as an executive agency akin to other executive agencies headed by a single person, such as the Department of Justice and the Department of the Treasury,” according to the ruling.

Richard Cordray, a Democrat and former Ohio attorney general, has run the CFPB since it started in July 2011. His term expires in 2018.

The CFPB said it “respectfully disagrees with the court’s decision” and was reviewing its options.

The decision comes a month after the CFPB drew accolades from Democrats for its part in penalizing Wells Fargo (WFC) for opening up to 2 million accounts without customer approval. 

Reaction to the court ruling was largely as expected, with industry groups lauding it as an answer to what they view as the agency’s overreach and consumer groups unhappy, but also pleased the bureau could continue operating. 

“We are disappointed with the ruling, but we are glad that the decision left the CFPB’s house intact,” emailed Laura MacCleery, vice president of policy and mobilization for Consumer Reports. “The recent scandal with Wells Fargo shows that a watchdog for the integrity of economic products is needed today and every day. We hope that future administrations value the independence of the agency and act to preserve its strength, powers and abilities as Congress intended.” 

A trade group representing the nation’s credit unions called for a moratorium on the CFPB coming up with new regulations. “The bureau should also consider ceasing and desisting all rulemakings until the legality is resolved,” Dan Berger, president and CEO of the National Association of Federal Credit Unions, emailed. 

But the CFPB said its work will continue. “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,” the bureau emailed. “Today’s decision will not dampen our efforts or affect our focus on the mission of the agency.”

The brainchild of Sen. Elizabeth Warren, D-Massachusetts, the CFPB was formed in the aftermath of the 2008 financial crisis by the Dodd-Frank Act, a law intended to reform the financial industry and safeguard consumers from predatory practices.

The section of the act that outlines how the bureau was to be formed stipulates the agency’s director should be appointed by the president and confirmed by the Senate. It then has the means to ““administer, enforce, and otherwise implement federal consumer financial laws, which includes the power to make rules, issue orders, and issue guidance.” 

The bureau is funded through the Federal Reserve, a process intended to allow it to operation without concern about politics. That independence has been an area of contention, most particularly for Republicans. The House Financial Services Committee in 2013 took issue with the lack of congressional oversight on the CFPB’s budget. The panel in April approved proposals to give Congress authority over the bureau’s budget.

Tuesday’s court ruling also threw out a $109 million penalty imposed on PHH, a New Jersey mortgage servicing company penalized for referring customers to insurers who then bought reinsurance from one of its subsidiaries. The CFPB described the reinsurance payments as improper kickbacks and imposed its penalty in June.

“We are extremely gratified that the D.C. Circuit Court of Appeals overturned the director’s decision related to our former mortgage reinsurance activities,” stated PHH in an email. “We are hopeful that the Court’s opinion will provide greater certainty to the entire mortgage industry regarding the industry’s reliance on long-standing regulation as to how to conduct business.”