Federal court rules consumer bureau structure unconstitutional

A federal district judge ruled Thursday that the structure of the Consumer Financial Protection Bureau (CFPB) violates the Constitution, countering a January ruling from a federal appeals court.

Judge Loretta Preska of the Southern District of New York ruled that the CFPB’s creation as an independent agency with a director that could only be dismissed for wrongdoing was unconstitutional.

{mosads}In January, the Court of Appeals for the District of Columbia Circuit ruled that the CFPB’s structure was constitutional, reversing a 2016 verdict issued by a panel of the court’s judges. The appeals court’s initial opinion, written by Judge Brett Kavanaugh, sought to fix the issue by ruling that the CFPB director could be fired at will.

Preska, an appointee of former President George H.W. Bush, concurred with part of the D.C. appellate court’s initial ruling against the CFPB, which held that the agency “is unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single Director.”

She ruled that the entire section of the 2010 Dodd-Frank Act that established the CFPB should be stricken, and she dismissed the CFPB from the case, which was filed in May 2017 by then-New York Attorney General Eric Schneiderman (D). Preska did not issue an order to shut down the bureau.

Acting CFPB Director Mick Mulvaney last month sought to protect the agency’s involvement in its case against RD Legal Funding, which was initiated by his predecessor, Richard Cordray. The suit claims that RD Legal scammed both survivors of the 9/11 terrorist attacks and former NFL players battling the effects of severe concussions out of monetary compensation for their injuries.

While the CFPB is now dismissed from the lawsuit, Preska ruled that New York Attorney General Barbara Underwood (D), who replaced Schneiderman in May, could pursue the case against RD Legal under Dodd-Frank.

David Willingham, an attorney at Boies Schiller Flexner leading RD Legal’s challenge, said “We are pleased that the Court correctly found that the CFPB is unconstitutional as structured, and this underscores that the CFPB never should have brought this action in the first place.”

Thursday’s ruling raises the likelihood that the Supreme Court will take up the issue of the CFPB’s constitutionality in an upcoming term. The appeals courts for the 5th and 9th Circuits will also hear challenges to the CFPB’s constitutionality, and a ruling against the bureau could force the high court to reconcile the conflicting opinions.

The CFPB was created by Dodd-Frank to crack down on predatory lending, enforce consumer protection laws and police the financial services industry against unfair, deceptive and abusive practices.

The bureau was designed and staffed primarily by Sen. Elizabeth Warren (D-Mass.) when she served as a special adviser to former President Obama before her 2012 election to the Senate.

While Democrats have praised the CFPB’s aggressive oversight and regulation, Republicans and industry advocates accuse the bureau and Cordray, its first director, of abusing its power and independence.

President Trump appointed Mulvaney to lead the CFPB after Cordray’s resignation in November. Mulvaney has since delayed several Cordray-era rules and loosened the CFPB’s oversight of financial firms.

Trump on Monday nominated Kathy Kraninger, associate director at the Office of Management and Budget (OMB), to serve as the CFPB’s full-time director. Mulvaney, who is also the head of the OMB, will lead the CFPB until the confirmation of his successor.

CFPB critics have long called on Congress to replace the bureau’s director with a bipartisan commission, which they say would make the agency more stable and less political.

“The court’s ruling further proves one person should not have the sole authority over the financial lives of every American consumer,” said Richard Hunt, president and CEO of the Consumer Bankers of America.

“It creates uncertainty, limits opinions and turns the Bureau into a political pendulum, swinging with each new Administration.”

Rob Nichols, president and CEO of the American Bankers Association, said “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.”

Advocates for an aggressive CFPB that were aligned with Cordray insisted that the bureau’s structure should remain untouched.

“The 2008 financial crisis proved the need for the CFPB, a successful independent consumer watchdog,” said Will Corbett, litigation counsel at the Center for Responsible Lending, which supports strict loan protections for consumers.

“This decision is a clear and completely inappropriate example of legislating from the bench.”

Updated at 6:17 p.m.