Since its creation as part of the sweeping financial reforms of 2010, the Consumer Financial Protection Bureau has, through settlements and enforcement actions, returned billions of dollars to Americans who were wronged by financial institutions. But consumer advocates say a new ruling from a federal appeals court threatens to undercut the Bureau’s independence and its ability to hold banks, credit card companies, mortgage lenders, and others accountable.

Unlike several other federal regulatory agencies that have multiple commissioners who must vote together before making important decisions, the CFPB has always had a single Director. More importantly, that Director can not be removed from office on the President’s whim, but only for cause. So if a President is being politically pressured by a target of CFPB regulation, the Director can not be readily pushed aside and replaced with someone who will play nice.

This structure has been a bone of contention among critics of the Bureau, particularly bank-backed lawmakers who have repeatedly — but so far unsuccessfully — tried to pass legislation that would reorganize the CFPB into a committee-led format and make it answerable to Congress. Today, a D.C. Circuit Court of Appeals panel took a big step toward making that anti-consumer dream a reality.

The Case At Hand

Back in Jan. 2014, the CFPB accused mortgage lender PHH Corporation of accepting illegal kickbacks from mortgage insurers.

A hearing before an administrative law judge followed, and then an appeal to CFPB Director Richard Cordray. In the end, Cordray ordered PHH to pay a penalty of more than $109 million for these alleged violations.

PHH petitioned the D.C. Circuit in June 2015 [PDF], asking the appeals court to review the CFPB’s order, calling it — as it boilerplate in such petitions — an “arbitrary, capricious… abuse of discretion.” The company contends that the single-director structure of the CFPB runs afoul of Article II of the U.S. Constitution, which details the executive branch of the federal government.

The “Headless Fourth Branch”

In today’s 110-page 2-1 ruling [PDF], Judge Brett Kavanaugh, acknowledges in his majority opinion that for more than 80 years, there have been independent agencies of the federal government with directors and commissioners appointed by the President, but who can only be removed for cause.

“The independent agencies collectively constitute, in effect, a headless fourth branch of the U.S. Government,” writes Kavanaugh. “They exercise enormous power over the economic and social life of the United States. Because of their massive power and the absence of Presidential supervision and direction, independent agencies pose a significant threat to individual liberty and to the constitutional system of separation of powers and checks and balances.”

However, notes these independent agencies have generally been kept from running amok because they are are traditionally “headed by multiple commissioners, directors, or board members who act as checks on one another.”

And then came the Dodd-Frank financial reforms of 2010, which called for the establishment of the CFPB under the leadership of a single director. This, says Kavanaugh, puts too much authority in the hands of a single individual.

“[T]he Director of the CFPB possesses enormous power over American business, American consumers, and the overall U.S. economy,” reads the opinion. “The Director unilaterally enforces 19 federal consumer protection statutes, covering everything from home finance to student loans to credit cards to banking practices. The Director alone decides what rules to issue; how to enforce, when to enforce, and against whom to enforce the law; and what sanctions and penalties to impose on violators of the law.”

“Unconstitutionally Structured”

While there is no law explicitly stating that independent agencies must be headed by commissioners or boards, the court’s majority concluded that there was no precedent for vesting this level of authority in a single director.

“In light of the consistent historical practice under which independent agencies have been headed by multiple commissioners or board members, and in light of the threat to individual liberty posed by a single-Director independent agency,” concluded Kavanaugh. “We therefore hold that the CFPB is unconstitutionally structured.”

As such, the $109 million order against PHH has been remanded back to the CFPB for further consideration.

The End Of The CFPB?

PHH had argued that if the court found the CFPB’s structure to be unconstitutional, it should rule that the entire Bureau be dismantled. However, the majority in this case found that there is a less harsh remedy.

The simplest answer, notes Kavanaugh, is to throw out the condition that the CFPB Director can only be fired “for cause,” meaning a President could remove a CFPB chief from office at will, regardless of then the director’s term ends or the quality of their work. This will make the CFPB more like the Justice or Treasury Departments, who function under the leadership of a single director that can be removed from office at the President’s discretion.

“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,” explains Kavanaugh.

A Dissenting Voice

In her partial dissent from the majority, Judge Karen Lecraft Henderson accuses her fellow panelists of putting the cart before the horse by leaping to resolve a constitutional question when the issues surrounding the validity of the $109 PHH penalty could have been dealt with solely through existing statutes.

“[T]hey unnecessarily reach PHH’s constitutional challenge, thereby rejecting one of the most fundamental tenets of judicial decisionmaking,” writes Henderson. “With respect, I cannot join them in this departure from longstanding precedent.”

What Now?

In a statement to Consumerist, the CFPB says it disagrees with the court’s ruling and maintains that the “for-cause” condition on the Director’s job is consistent with Supreme Court precedent. The Bureau says it is considering its options for further review.

“In the meantime, as the court expressly recognized, the Bureau will continue its important work,” reads the statement. “Congress has charged the Bureau with ensuring that the markets for consumer financial products and services are fair, transparent, and competitive and with protecting consumers in these markets from unlawful practices. Today’s decision will not dampen our efforts or affect our focus on the mission of the agency.”

In fact, shortly after this morning’s ruling, the CFPB ordered Navy Federal Credit Union to pay $28.5 million over allegedly improper debt collection practices.

Reaction To The Ruling

Consumer advocates were, not surprisingly, displeased with this morning’s news.

Robert Weissman, President of Public Citizen said today’s ruling “threatens the ability of the agency to be a tough protector of consumer interests. If not reversed on further review, the decision will make it incumbent on future presidents to shield the agency from improper political interference and to encourage it to maintain its aggressive posture.”

“The CFPB is a watchdog that has helped millions of consumers in a short period of time,” says Pamela Banks, senior policy counsel for Consumers Union. “But it has some very powerful opponents in the financial industry that are determined to challenge the bureau every step of the way.”

Mike Calhoun of the Center for Responsible Lending labeled the 2-1 decision “disappointing, but not surprising,” accusing the two-judge majority of making “common cause” with lawmakers who have spent the last five years attempting to gut the CFPB of its authority.

“If the 2008 financial crisis showed us anything, it’s that consumers need an independent regulator to look after the interests of consumers,” explains Calhoun. “We’ve already seen the agency hard at work against bad actors like ITT Tech, car-title and payday lenders, and big banks that deceive their customers. Any efforts to change CFPB’s structure would reduce its effectiveness and harm hardworking people across the country.”

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