The Consumer Financial Protection Bureau survived a constitutional challenge and will remain in business, though a federal appeals court took away power from its director and tossed out a $109 million penalty against a mortgage company.
The long-awaited decision was a blow to the agency, which was created in the wake of the financial crisis to regulate auto lending, mortgages, credit cards and other products directed at consumers. Ever since, it’s been the subject of almost constant criticism from Republicans and the industry, even as it scored its highest-profile victory to date, penalizing Wells Fargo & Co. for opening accounts without clients’ knowledge.
The appellate court found the CFPB to be “unconstitutionally structured” because the autonomy vested in Director Richard Cordray -- who could only be fired by the president and for cause -- was a “gross departure from settled historical practice.”
But the three-judge panel rejected calls to dismantle the agency, instead voiding the for-cause provision and making the director removable by the president at any time and for any reason. “The CFPB 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 or the Department of the Treasury,” the court ruled.
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.
Since it was created, the agency has battled with new-vehicle dealers over interest rates charged buyers and with auto lenders over discrimination.
"We applaud the court for recognizing the overreach created when too much power is vested in an agency virtually unaccountable to anyone," said Steve Jordan, CEO of the National Independent Automobile Dealers Association. "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 hopes to win support for the Financial CHOICE Act, which would restructure the CFPB to be led by a bipartisan, five-member commission like most independent federal agencies. The bill would also subject the CFPB's budget to Congressional oversight through the appropriations process.
Moira Vahey, a CFPB spokeswoman, said the agency was considering its options for further review of the ruling, while remaining focused on its mission.
“The Bureau respectfully disagrees with the Court’s decision,” Vahey said in an e-mailed statement. “The Bureau believes that Congress’s decision to make the director removable only for cause is consistent with Supreme Court precedent.”
The bureau’s options include seeking reconsideration by the full complement of judges on the Washington-based court and petitioning for U.S. Supreme Court review.
Other business and trade groups also welcomed the ruling, while consumer advocacy groups condemned it.
“The D.C. Circuit’s decision eliminating the CFPB director’s independence threatens the ability of the agency to be a tough protector of consumer interests,” said Public Citizen President Robert Weissman.
Sam Kazman, general counsel of the Competitive Enterprise institute, said, “This is a great day for limited government and the constitutional separation of powers.” The ruling, he added, would “play a major role in providing proper accountability for this rogue agency.”
The court action comes only a month after the CFPB drew praise from Democrats, including presidential candidate Hillary Clinton, for its role in fining Well Fargo $185 million to resolve allegations that bank employees opened deposit and credit-card accounts without customer approval to satisfy sales goals and earn financial rewards. The bank agreed to pay $100 million of that to the CFPB.
Democrats had hailed the enforcement action as a victory for the CFPB and used it to emphasize the need for the agency. They attacked Republican lawmakers who support legislation that would undo the 2010 Dodd-Frank Act and with it, the bureau.
In addition to reducing Cordray’s powers, the appellate court threw out a CFPB decision imposing a $109 million penalty on a New Jersey mortgage-servicing company, PHH Corp.
The agency had punished the company for referring customers to insurers who then purchased reinsurance from a PHH subsidiary. CFPB determined those payments were part of an illegal kickback scheme. PHH said the law creating the CFPB gave an unaccountable director too much authority.
PHH’s lawyer, former U.S. Solicitor General Ted Olson, told appellate judges during arguments in April that Cordray “ran roughshod over clear provisions of federal law.” He called the bureau’s punishment of PHH “draconian,” remedial and unauthorized.
Dico Akseraylian, a spokesman for Mount Laurel, New Jersey-based PHH, said in an e-mail that company officials were "extremely gratified" by the appellate court’s decision.
PHH was accused of violating provisions of the Real Estate Settlement Procedures Act, or RESPA, a consumer-protection statute first passed in 1974. RESPA’s purpose, according to the government, was to eliminate kickback and referral fees that increased costs for consumers.
The CFPB also overrode an earlier determination that only conduct committed within the last three years could be subject to punishment, stretching the look-back time to 2008, according to the mortgage company.
PHH said the premiums paid to its reinsurer, Atrium, were for a legitimate purpose. The government, it said, reversed long-standing industry expectations when it declared PHH in violation. The CFPB calculated liability based on each reinsurance premium payment made, rather than each real-estate closing where mortgage insurance was required, boosting the original $6.4 million penalty to more than $109 million.
“We are hopeful that the court’s opinion will provide greater certainty to the entire mortgage industry regarding the industry’s reliance on long-standing regulation as to how to conduct business consistent with RESPA,” Akseraylian said.
U.S. Circuit Judge Brett Kavanaugh, who wrote the appeals court’s primary opinion, referred to the CFPB’s directorship as “the single most powerful official in the entire U.S. government other than the president.”
“This court looks askance now at the idea that the CFPB is free to pursue an administrative enforcement action for an indefinite period of time after the relevant conduct took place,” the judge said, deriding the bureau’s contrary legal position as “an absurdity.”
Texas congressman Jeb Hensarling, the Republican chairman of the House Financial Services Committee, called the ruling “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,” he said, in an e-mailed statement.
California Congresswoman Maxine Waters, a Democrat and a member of the Financial Services Committee, said it was "no surprise that a small panel of the country’s most conservative judges made such an anti-consumer ruling." All three judges were named to the court by Republican presidents.
But she added, "The ruling does affirm the CFPB’s right to continue to pass new regulations and enforce consumer protection laws under a single director.”
Allied Progress, a Washington-based group that supports the CFPB’s mission, criticized the ruling as a victory for the same interests that “instigated and profited from” the 2008 financial crisis.
“It’s no wonder Wall Street wants to kill this successful agency -- their ability to rip off consumers has been greatly diminished,” its executive director, Karl Frisch, said in a statement.