Research and Statistics

Court hears arguments on CFPB constitutionality


The D.C. Circuit Court of Appeals hearing Wednesday sets the stage for a decision that could reduce the independence and power of the federal consumer watchdog agency

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Can President Trump fire the Obama-appointed head of the Consumer Financial Protection Bureau?

A federal appeals court in Washington, D.C., heard arguments on that constitutional question Wednesday. “This agency goes further than anything Congress has attempted to do in history,” said Theodore B. Olson, attorney for a mortgage company that is challenging the bureau’s constitutionality.

Judges on the 11-person panel seemed divided over the idea that the consumer watchdog agency director, Democrat Richard Cordray, should be able to keep his job through his five-year term, which expires in mid-2018.

Giving the director a shield from the White House prevents the president from implementing policies he promised to voters, said Judge Brett Kavanaugh. For example, he said, after the next election, a consumer-protection oriented president would be unable to replace the director chosen by President Trump for years. “That seems crazy,” Kavanaugh said.

Other judges on the panel questioned how different the CFPB was from other independent agencies created by Congress, such as the Federal Trade Commission, whose five commissioners serve set, seven-year terms.

The case will decide if the agency keeps its independence – key to its ability to crack down on industry.

CFPB should answer to the president, DOJ argues
The U.S. Justice Department argued against the consumer protection agency. It said that Article II of the U.S. Constitution gives the president authority over executive agency heads – and Cordray shouldn’t be exempt. Department lawyers argued the CFPB director is no different from the Secretary of the Treasury or the Secretary of Labor, and making officials answerable to the president means they are accountable to voters.

Lawrence DeMille-Wagman, attorney for the CFPB, argued that Supreme Court precedent has established Congress’ right to protect independent agency leaders from removal for reasons other than poor performance, insulating them from politics.

At stake for consumers is whether the 6-year-old bureau can remain a watchdog, or be turned into a lapdog by the deregulation-minded administration, consumer advocates say. The agency has won $11.7 billion for consumers in refunds and forgiven debt through crackdowns on industry practices – including $2.8 billion in refunds for credit card holders.

In addition to enforcement actions on consumers’ behalf, the CFPB writes rules governing financial services and supervises large banks, debt collectors and other industry players. “The CFPB stands up for consumers by going after the wrongdoers who threaten our financial security,” said Michael Landis, litigation director at the U.S. Public Interest Research Group, in a blog post. “But that’s exactly why the agency is under attack from special interests.”

Industry takes on consumer regulator
The case stems from a 2015 CFPB crackdown on mortgage giant PHH Corp. for taking alleged kickbacks from mortgage insurers. The CFPB said PHH referred borrowers to mortgage insurers who did business with Antrim Reinsurance, a company related to PHH.

The process amounted to a complicated kickback scheme that violated the Real Estate Settlement Procedures Act (RESPA), CFPB said in a decision signed by Cordray. PHH, based in New Jersey, denied breaking the law – and, moreover, said that the CFPB should be abolished as unconstitutionally powerful.

In October 2016, a three-judge panel of the D.C. Circuit Court of Appeals partially agreed. In a 2-1 decision, the panel said the agency’s structure – set by Congress in the Dodd-Frank Act – gives its appointed director an unconstitutional degree of independence from the elected president. It said the remedy was not to abolish the agency, but give the White House authority to fire the CFPB director at will – not just “for cause” as allowed under Dodd-Frank.

“No independent agency exercising substantial executive authority has ever been headed by a single person. Until now,” Circuit Judge Brett Kavanaugh wrote in the panel’s decision.

The case turns on an obscure interpretation of law. Some agencies such as the Federal Trade Commission have leaders who can be fired by the president only for cause. But the appellate panel said that exception to the president’s powers shouldn’t extend to agencies with a single director – only to those with several leaders.

The D.C. Circuit Court of Appeals granted the CFPB’s appeal to be reheard and set aside the ruling of the three-judge panel, which set the stage for Wednesday’s hearing.

Fight expands to consumer protection vs deregulation
The PHH case has expanded from a fight over a $109 million fine to a battle between consumer protection advocates on one side and supporters of deregulation on the other.

Sixteen state attorneys general filed a brief siding with the CFPB, as did senior lawmakers on the House and Senate Finance Committees, and an array of consumer advocate groups.

“Congress deliberately designed this new agency to withstand partisan politics and the powerful influence of the financial industry,” Americans for Financial Reform and nine other consumer groups wrote in a friend-of-the-court brief.

On the other side are business-oriented groups that say Dodd-Frank went overboard.

“[T]he CFPB was designed to be – and operates as – a government unto itself,” the Competitive Enterprise Institute wrote in a friend-of-the-court brief. It “is vested with sweeping executive authority to make and enforce rules that affect virtually every sector of the U.S. economy and its director does not answer to the U.S. President.”

Banking and mortgage groups also weighed in, disputing what they see as an attack on long-established practices under RESPA. The decision against PHH would throw the real estate lending industry into disarray by overthrowing previous federal guidelines, the Financial Services Association and six other industry groups wrote in a brief.

Possible outcomes could lead to Supreme Court
If the appeals court rules in favor of the CFPB, the case is likely to go to the Supreme Court, legal experts say. But if the CFPB’s structure is found unconstitutional, the Justice Department could block it from appealing to the high court, allowing Trump to replace Cordray with a deregulation-minded director.

However, the appeals court might set aside the question of the CFPB’s legitimacy under a single director and focus on its RESPA enforcement decision. That would kick the fight over the agency back into the political realm, where it is already hotly underway. A GOP-backed bill in Congress would make the director answerable to the president and reduce its legal authority to bring companies to court.

During the hearing, Judge Robert Wilkins raised the question of what would happen should the president remove Cordray from the agency. Under court precedent, the previous penalty established was back pay for the prematurely terminated director.

“So long as the president is willing to cut a check for the rest of the term, he can still get rid of the person,” Wilkins said, referring to the precedent. Legal experts said that such a move could result in a court challenge that would take both the CFPB and the White House into uncharted territory.

“I think it’s an open question,” said Deepak Gupta, former senior counsel at the CFPB.

See related:Poll: Few aware of embattled consumer watchdog, CFPB reports credit reporting industry doing better

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