Court Upholds Constitutionality of Consumer Financial Protection Bureau

By Colin Wilhelm and Josh Gerstein, Politico

01 February 18

 

federal appeals court has upheld the constitutionality of the Consumer Financial Protection Bureau's structure, a decision that preserves the agency's independence in the face of challenges from business interests and conservatives.

The D.C. Circuit Court of Appeals ruled 7-3 on Wednesday that a provision in the 2010 Dodd-Frank law that limits the president’s ability to remove the CFPB director during his or her five-year term does not violate the president’s authority to appoint and remove executive branch officers.

The ruling was largely along ideological lines, with one George W. Bush appointee joining all the Democratic-appointed judges in upholding the consumer bureau's structure. The three dissenting judges were all Republican appointees.

The CFPB, the brainchild of Elizabeth Warren (D-Mass.) before she entered the Senate and a product of the landmark Dodd-Frank law, has been a lightning rod for criticism by Republicans and industry, who view it as overly aggressive in its enforcement.

They argue that its single-director structure and funding outside the congressional appropriations process — it is financed by the Federal Reserve — make it unaccountable, a core issue at the heart of the court case.

The case is separate from another legal battle that's raging over the leadership of the agency.

In November, Richard Cordray, who was appointed CFPB director by then-President Barack Obama, resigned and designated his deputy, Leandra English, as acting head of the agency. The same day, President Donald Trump named his budget chief, Mick Mulvaney, as the CFPB’s acting head. English and others have filed lawsuits challenging Mulvaney's appointment, but no court has stepped in to block Trump’s move.

The same court that ruled in Wednesday’s decision will hear English’s appeal to halt any further action by Mulvaney as acting director.

Mulvaney has taken a number of steps to rein in the bureau since he took over, including reconsidering the CFPB's rule curbing payday lending and requesting no additional funding from the Fed for the bureau for the second quarter of fiscal year 2018.

Wednesday's decision involved a case brought by PHH Corp., a New Jersey mortgage service provider that the CFPB targeted for an enforcement action in 2015. PHH challenged the bureau’s leadership structure in court and initially won a ruling in its favor.

But the bureau’s appeal preserved its single-director leadership — as opposed to a bipartisan commission that some critics would prefer — before Cordray left to run for governor in Ohio.

Though the court ruled the CFPB structure is constitutional, it handed the industry a partial victory by rejecting the penalty that Cordray imposed on PHH. Cordray added more than $100 million to a fine recommended by an administrative law judge, and Wednesday’s ruling stayed his order for the company to pay a fine, pending review.

An appeal to the Supreme Court remains possible, though the decision to order CFPB to review the fine against PHH may prevent the company and the Trump administration from challenging the result.

While decrying the court’s ruling, House Financial Services Chairman Jeb Hensarling (R-Texas), one of the CFPB's biggest critics, poked at progressives who hailed the preservation of the bureau’s single-director structure. Hensarling said Mulvaney could use the singular power of the CFPB directorship to overhaul the agency.

“I am deeply disappointed with the court’s decision and hope the Supreme Court will review the ruling,” Hensarling said in a statement. “In the meantime, I take great solace in the fact that Mick Mulvaney can use his unchecked, unilateral powers to continue the agency’s transformation into one that will, as he said, 'exercise [its] statutory authority to enforce the laws of this nation.'"

The ruling also means that Trump’s permanent successor to Mulvaney will hold a five-year term, meaning that even if the president does not win reelection, his pick will continue on into a new administration.

One of the lawyers who argued in favor of the CFPB’s structure, Deepak Gupta, praised the court’s decision.

“This is a resounding victory for the Consumer Financial Protection Bureau and for independent agencies generally,” Gupta said. “It would’ve been a devastating loss to the very concept of independent agencies that have existed since the New Deal” had the bureau lost the case, he said.

Gupta, who also represents English in her challenge to Mulvaney, said the court’s decision to send PHH’s fine back to the CFPB for review cast doubt on whether the case would be appealed again to the Supreme Court.

“I could see an argument that they got what they asked for and so they don’t have the ability to take this to Supreme Court,” he said.

The CFPB did not respond to a request for comment on the ruling.

In a statement, PHH said it would continue to argue its case with the bureau against the penalty Cordray escalated, but did not mention an appeal to today’s decision. When reached by phone for comment on a potential appeal to the high court, a spokesperson for the company said it was “evaluating next steps.”

Eric Mogilnicki, a partner at the law firm Covington & Burling who specializes in CFPB-related cases, said it's “quite likely” PHH would prevail in its argument against the penalty following today’s decision, and that an appeal from the administration would be unlikely due to political considerations.

“It’s hard to see why the administration would want this appealed except for under the principle” of preserving executive branch power, Mogilnicki said.

The case could have broader implications over arguments of agencies and individuals that Congress grants a degree of independence from the executive branch as well.

“The important thing to keep in mind here is it’s about preserving the institution, the long-term independence of the bureau,” said Melissa Stegman, senior policy counsel for the Center for Responsible Lending, during a press call Wednesday afternoon.

For now, the fight over who should act as CFPB director remains.

Gupta argued that Wednesday’s ruling could hold implications for English’s case.

“It does have implications for the case, no question, because this is a resounding affirmation of the independence that Congress wanted for this agency,” he said. “The White House OMB director is effectively running the agency."

Meanwhile, Mulvaney took his latest step toward imprinting his vision for the bureau as acting director: The bureau released a request for information about its administrative adjudication procedure on Wednesday, the process in which the original decision to fine PHH was made.