Federal court rules CFPB structure unconstitutional

The three judge panel of the U.S. Court of Appeals for the D.C. Circuit called the Bureau’s governance model a “gross departure” from the checks and balances normally imposed on regulatory agencies.

A federal appeals court this week delivered a strong rebuke to the Consumer Financial Protection Bureau, declaring the agency’s unusual independence to be unconstitutional. The three judge panel of the U.S. Court of Appeals for the D.C. Circuit called the bureau’s governance model a “gross departure” from the checks and balances normally imposed on regulatory agencies. The full opinion can be found here.

The Dodd-Frank Act which created the CFPB set up a single director appointed by the President and confirmed by the Senate. The law specified that the director could only be removed by the President “for cause,” defined as “inefficiency, neglect of duty, or malfeasance in office,” rather than at the President’s prerogative.

The court felt that this independence was a liability, holding that Congress gave the CFPB director unprecedented authority. The ruling found that the problem of checks and balances was particularly acute because the CFPB “possesses enormous power” over Americans. “When measured in terms of unilateral power, the director of the CFPB is the single most powerful official in the entire U.S. government, other than the president. Indeed, within his jurisdiction, the director of the CFPB can be considered even more powerful than the president,” the opinion said. The appeals court allowed the CFPB to continue operating as an agency but ordered a restructuring of how it operates in the executive branch.

If it stands, the decision would reduce the agency’s independence, empowering the White House to supervise the agency and remove its director, in contrast to the current arrangement where the director’s five-year term is intended to outlast a president’s term. Massachusetts Democratic Sen. Elizabeth Warren, the principal architect of the agency, said the ruling “will likely be appealed and overturned.”

“The bureau is considering options for seeking further review of the court’s decision,” a CFPB spokeswoman said, adding the ruling “will not dampen our efforts or affect our focus on the mission of the agency.”

The opinion is inflaming the fractious political debate over the CFPB and the sweeping 2010 law that created it, emboldening Republican critics who have long pushed legislation that would go further in limiting the agency’s authority. “This is a good day for democracy, economic freedom, due process and the Constitution,” Texas Republican Rep. Jeb Hensarling, who is spearheading the drive to curb the agency’s powers, said in response to the ruling.