In a case unrelated to auto finance, a ruling by a New York federal judge released this week found the Consumer Financial Protection Bureau to be unconstitutionally structured; an action that disagreed with the D.C. Circuit Court of Appeals stating to the contrary from earlier this year.

Hudson Cook partner Lucy Morris looked to explain potential ramifications triggered by U.S. District Judge Loretta Preska in a New York case involving a company allegedly scamming first responders injured during the Sept. 11 attacks. Prior to joining Hudson Cook, Morris served as a deputy enforcement director at the CFPB and served as a founding member of the CFPB implementation team that organized the bureau after passage of the Dodd-Frank Act.

In a 108-page document that can be viewed here, Preska described the CFPB as unconstitutional seven different times. Her assessment disagrees with the en banc review by the D.C. Circuit Court of Appeals that surfaced back in January when the majority opinion declared that the CFPB structure can stand.

So how should the industry react to what came out of a Manhattan federal court this week?

“The court’s opinion is long and dense when it comes to the underlying merits, but short and succinct on the constitutional issue — according to the court, the bureau’s structure is unconstitutional, and there’s no way for a court to fix it,” Morris said in an assessment delivered to SubPrime Auto Finance News.

“If the court is correct, then it calls into question not just this single enforcement action, but everything the bureau has done since its inception, whether by (Richard) Cordray or (Mick) Mulvaney,” she continued. “While this is only one federal district court opinion — and contrary to other courts’ rulings on the bureau’s structure — I expect it will create more litigation against the bureau and add more uncertainty for industry and consumers alike.  

“For this reason, the ruling may be the catalyst for Congress to pass legislation making the bureau a bipartisan commission, fixing any constitutional flaw in its current structure,” Morris went on to say.

Having a commission is a move that’s been suggested many times by both the American Bankers Association as well as the Consumer Bankers Association.

ABA president and chief executive officer Rob Nichols said the organization is still reviewing the ruling from the federal district court in New York.

“Other federal courts have ruled differently, so the implications of this decision remain unclear,” Nichols said.

“ABA has long believed that the bureau should be more accountable to Congress and that a five-member, bipartisan commission — as originally envisioned in drafts of the Dodd-Frank Act — would balance the bureau’s needs for independence and accountability, while broadening perspectives on rulemaking and enforcement. Today’s ruling does not alter that view,” Nichols went on to say.

Earlier this month, CBA president and CEO Richard Hunt testified before the U.S. House Financial Institutions and Consumer Credit Subcommittee on ways to improve transparency and accountability at the CFPB.

“Improving the financial lives of consumers is a goal that unites lawmakers, regulators and industry,” Hunt told lawmakers. There are many changes that can be made to enhance the functioning of the bureau and increase access to credit for consumers, but improving the governance structure at the bureau underpins them all. A bipartisan commission at the bureau will depoliticize it, bring long-term stability, and benefit consumers and small businesses.

“When Congress created the bureau, it was granted jurisdiction over more than 11,000 banks and credit unions as well as countless non-depository institutions. All of that power was given to a single director,” he continued. “It also means the next director has the sole authority to undo every one of those actions — like a political pendulum, swinging with each new administration.”

“As Congress contemplates changes to the bureau, any meaningful discussion should start with the bureau’s leadership structure,” he added.