Court calls CFPB ‘unconstitutionally structured’


What some legal watchers consider to be the second-highest court in the nation called the Consumer Financial Protection Bureau “unconstitutionally structured” on Tuesday.

The U.S. Court of Appeals for the District of Columbia Circuit ruled in favor of a finance company that operates in the mortgage space, rescinding a $109 million enforcement action the bureau handed out nearly two years ago. In the process, that court also gave firepower for lawmakers and associations who have been asking for the CFPB to be restructured — perhaps even completely torn apart.

In writing for the 2-1 majority, U.S. Circuit Judge Brett Kavanaugh said, “In this case, the single-director structure of the CFPB represents a gross departure from settled historical practice. Never before has an independent agency exercising substantial executive authority been headed by just one person.

“The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency,” Kavanaugh continued in the 110-page court document available here.

The case involved PHH Corp., a Mount Laurel, N.J.-based finance company that closed on more than $10 billion in mortgages during the second quarter. Word about Tuesday's decision spread quickly through Capitol Hill, associations that represent banking and other industries, as well as to the National Independent Automobile Dealers Association, which just conducted its annual event in Washington, D.C.

“We applaud the court for recognizing the overreach created when too much power is vested in an agency virtually unaccountable to anyone,” NIADA chief executive officer Steve Jordan said. “NIADA supports a common-sense approach to consumer protection and fair dealing in the financial marketplace, but the current structure of the CFPB accomplishes neither."

NIADA explained the court development noted the CFPB’s structure violates the Constitution’s separation of powers because the bureau’s lone director is not sufficiently answerable to the president.

The court’s decision allows the CFPB to continue operating as an agency, but orders it to operate as an executive agency like the other executive agencies that are headed by a single individual.

“We agree with the DC Circuit Court of Appeals when it said in the decision ‘the deliberative process and multiple viewpoints in a multi-member independent agency can help ensure that an agency does not wrongly bring an enforcement action or adopt rules that unduly infringe individual liberty,’” said Richard Hunt, president and CEO of the Consumer Bankers Association

“For this reason, 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,” Hunt continued.

“We applaud the court’s decision to repeal the amplified penalty on PHH. At the same time, the decision puts the CFPB under the direct control of the administration to resolve the constitutional question,” Hunt went on to say. “This means the CFPB would no longer be an independent agency, as originally intended. Congress could resolve both problems by creating a commission to run the agency, in place of a sole director.”

Meanwhile, one of the CFPB’s most devout critics took an even harsher stance. Rep. Jeb Hensarling, who is chairman of the U.S. House Financial Services Committee, previously released a plan in an effort to turn back the Dodd-Frank Act, which created the CFPB.

“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 Hensarling, a Texas Republican.

“By design the CFPB is arguably the most powerful and least accountable Washington bureaucracy in American history, and it shows,” he continued on Tuesday. “The bureau has infringed on the economic freedoms of consumers, limited their financial choices, increased their costs, and failed to hold managers accountable for widespread discrimination and abuse of its own employees. This must change. 

“The CFPB has an important mission. Properly designed and led, it is capable of great good,” Hensarling went on to say. “But the bureau’s bizarre and defective structure allows it to evade the time-tested checks and balances that are necessary to hold it or any other government bureaucracy accountable.”