Court Rules Consumer Protection Agency's Structure Is Unconstitutional

A Washington D.C. appeals court ruled Tuesday that the structure of the Consumer Financial Protection Bureau -- which was created five years ago to protect consumers from abuses by the financial services industry -- is unconstitutional, but that it can still continue to operate.

In a 2 to 1 ruling, the U.S. Court of Appeals for the D.C. Circuit took issue specifically with the CFPB’s single director, Richard Cordray, who can only be removed by the president for cause. “That combination of power that is massive in scope, concentrated in a single person, and unaccountable to the President triggers the important constitutional question at issue in this case,” wrote Judge Brett Kavanaugh in the appellate court's majority opinion.

President Can Remove Director at Will

In its 110-page opinion, the court ruled that the president will now have the authority to remove the director of the CFPB at will, rather than having to wait “for cause.”

The court stopped short of closing down the agency.

“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 and the Department of the Treasury,” the court said. “Those executive agencies have traditionally been headed by a single person precisely because the agency head operates within the Executive Branch chain of command under the supervision and direction of the President. The President is a check on and accountable for the actions of those executive agencies, and the President now will be a check on and accountable for the actions of the CFPB as well.”

The case came about after the CFPB fined mortgage lender PHH for allegedly accepting kickbacks from mortgage insurers. PHH appealed the fine, which led to Tuesday’s decision.

Billions Returned to Consumers

The CFPB, which was originally championed by Massachusetts Senator Elizabeth Warren, has returned $11.7 billion to more than 27 million American consumers on a number of issues including payday lending, forced arbitration and prepaid accounts.

The agency is also responsible for prominent enforcement actions against major financial institutions, such as the recent fine against Wells Fargo for allowing employees to open fake accounts without customers’ knowledge.

But despite its success, the CFPB has been long-criticized by Republicans and the financial services industry, both of which claim the agency does not have enough oversight. In fact, Republicans have proposed multiple pieces of regulation that would rein in the agency.

A spokesperson for the CFPB said the agency respectfully disagrees with the Court’s decision. "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," she said.

In the meantime, the CFPB will continue its work. "Today’s decision will not dampen our efforts or affect our focus on the mission of the agency,” the spokesperson said.