In a significant blow to the authority of the Consumer Financial Protection Bureau, a federal appeals court ruled on Tuesday that the agency’s structure was unconstitutional but also offered a fairly simple remedy: Give the president the power to fire the agency’s director at will.
The highly anticipated ruling from a three-judge panel of the United States Court of Appeals for the District of Columbia Circuit directly addressed a longstanding criticism of the consumer watchdog agency: that its structure improperly gives too much power and autonomy to a sole director.
Other independent federal agencies are typically headed by a commission, the court noted in its ruling. But the 2010 legislation that created the consumer bureau, the Dodd-Frank Act, gave the bureau’s director — who is now Richard Cordray, President Obama’s pick — an unusual degree of independence. Once nominated by the president and confirmed by the Senate, the director, who serves a five-year term, can be removed only for cause, defined as “inefficiency, neglect of duty or malfeasance.”
The appeals court panel, citing “the threat to individual liberty” posed by an independent agency with a leader with such unchecked power, struck down that structure.
But the court stopped well short of the remedy sought by the plaintiffs and other critics of the watchdog agency, who have argued that the bureau should be shut down if its structure was found to be unconstitutional.
Instead, the court simply chose to sever the provision saying that the director could only be fired for cause and left the rest of the law that created the bureau intact.
“The president now will have the power to remove the director at will, and to supervise and direct the director,” the court wrote in its ruling, written by Judge Brett M. Kavanaugh. “The C.F.P.B. 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.”
The Consumer Financial Protection Bureau is expected to appeal to the full circuit court, which tilts Democratic. Or, alternatively, the agency could directly ask the Supreme Court to review the case.
“The bureau respectfully disagrees with the court’s decision,” said a spokeswoman for the agency, Moira Vahey. “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.”
As the case wends through the courts, the agency will continue its work, Ms. Vahey said. “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,” she added. “Today’s decision will not dampen our efforts or affect our focus on the mission of the agency.”
Judge Kavanaugh and the other two judges on the panel, A. Raymond Randolph and Karen L. Henderson, were all appointed by Republican presidents. Judge Randolph concurred with the decision and Judge Henderson concurred in part and dissented in part.
Republicans in Congress have consistently wanted to abolish the Consumer Financial Protection Bureau, arguing that it represents regulatory overreach. In its five years of existence, the agency counts among its major accomplishments stricter rules on mortgage lending and a number of enforcement actions against consumer abuses. The agency recently levied a record fine against Wells Fargo for setting up unauthorized accounts on behalf of its customers.
As part of its ruling, the court sided with the case’s plaintiff, the PHH Corporation, a mortgage lender, and threw out a $109 million fine that the consumer bureau levied against PHH for accepting what it said were illegal kickbacks. PHH responded with a lawsuit challenging the bureau’s statutory authority to impose the penalty.
The court agreed with PHH’s claim that the bureau had overstepped its bounds, and threw out the penalty.