The financial services industry was quick to express support for an Oct. 11 decision by the U.S. Court of Appeals for the District of Columbia Circuit saying the structure of the Consumer Financial Protection Bureau violates the Constitution of the United States.
However it's not likely that the remedy settled upon by the court will settle the industry's issues with the independent government watchdog agency created in 2010 by the Dodd-Frank Wall Street Reform Act.
The challenge to the CFPB's constitutionality began with a charge that nonbank lender PHH Mortgage received illegal kickbacks from its captive mortgage insurance provider (which HUD itself had deemed legal for years, but that's another long and detailed story).
For its infractions, PHH was fined $6.5 by an administrative judge. Unsatisfied with this determination, however, CFPB Director Richard Cordray threw out the fine and decided that PHH should instead pay $109 million — 1700 percent more than previously required.
In a subsequent lawsuit, PHH challenged Cordray's interpretation of the rule used to impose the larger fine, and the reasoning behind his decision that a 3-year statute of limitations outlined in the regulation did not apply to alleged infractions by PHH, which dated back to the mid-1990s.
But most importantly, PHH challenged the constitutionality of the structure Congress had established for the CFPB, which allowed it to make such a decision unilaterally and without review.
As an independent agency, the CFPB is not subject to oversight by either the executive or legislative branch of the government. There are other agencies, Treasury being one, that also were established in this way, under the assumption that independent status prevents politically motivated interference by the party in power.
However, there is one great big difference between the CFPB and every other independent agency established by the U.S. government: All of the others are headed by multiple leaders from both major political parties to ensure that decisions at the top are not subject to partisanship — or sheer caprice.
In an unprecedented departure from the norm, Congress established the CFPB as an independent agency with just one leader from one political party.
In a perfect Catch-22, the leader of this independent agency cannot be removed. Not by Congress. Not by the president. Which makes it the only government body in the nation not subject to constitutionally mandated checks and balances.
Splitting the baby
In the decision released this week, the appeals court mostly agreed with PHH's arguments. The judges vacated the $109 million fine and kicked the case back down to the administrative level for further consideration. And they found that, in his reading of the rule used to calculate the fine, Cordray incorrectly dispensed with the statute of limitations.
Most importantly, they agreed that the structure of the CFPB violated the U.S. Constitution.
But, instead of abolishing the Consumer Financial Protection Bureau altogether, as PHH had requested, the court chose a less radical solution, simply striking the portion of the original legislation that had framed the agency in an unconstitutional way.
As of Oct. 11, the CFPB is no longer an independent government agency.
As a result of the court's action, the director of the CFPB will now report directly to the president, who will bear responsibility for supervision of the agency and possess the power to terminate its director at will.
Yes, but …
The banking industry was clearly pleased with the court's ruling vis-a-vis constitutionality, but just as clearly less pleased with its remedy.
American Bankers Association President and CEO Rob Nichols said in a statement on the decision:
We’ve long believed that a five-member, bipartisan commission, as originally proposed, would strike a reasonable balance between independence and accountability. A commission would broaden the perspective on any rulemaking and promote fair enforcement activity at the Bureau, and it would provide necessary and appropriate checks and balances in the exercise of the CFPB’s authority, consistent with the court’s decision.
In a separate statement, the Independent Community Bankers Association seconded ABA sentiments, saying:
While today’s court ruling rightly concludes that the CFPB’s existing structure places excessive executive power in its director, its decision to require the agency head to serve at the pleasure of the president does not solve the underlying issue. Restructuring the agency so that it is governed by a five-member commission … would instead ensure more balanced regulatory oversight and consumer protection.
An article in JD Supra said "Aye" to both association's worries that the U.S. Court of Appeals signaled a touchdown but didn't change the score:
This ruling potentially could turn the CFPB into a political football, depending on who occupies the White House, since the CFPB is now treated as any other federal agency where the head can be replaced solely at the discretion of the president.
Congress must now decide whether to amend its legislation and reframe the CFPB as an independent agency run by a nonpartisan panel or leave this week's decision as it now stands.
It's sure that legislators will not act before the November elections; it's likely that they'll delay longer than that, until a new president takes office.
And with three weeks to go in the nastiest political season any living American has ever seen, what will happen then is anybody's guess.
The case is No. 15-1177 PHH Corporation, et al., petitioners v. Consumer Financial Protection Bureau, respondent, on petition for review of an order of the Consumer Financial Protection Bureau (CFPB File 2014-CFPB-0002)
/ Suzanne’s editorial career has spanned three decades and encompassed all B2B and B2C communications formats. Her award-winning work has appeared in trade and consumer media in the United States and internationally.