Consumer Financial Protection Bureau

A Limited Victory for Limited Government as CFPB's Structure Ruled Unconstitutional

Tuesday's federal court ruling won't stop the Consumer Financial Protection Bureau from acting, but will give the president more control over its activities.


Bill Clark/CQ Roll Call/Newscom

A federal court ruling that says the Consumer Financial Protection Bureau is "structurally unconstitutional" won't stop the powerful federal regulatory agency from carrying out its agenda, but it's a small victory for limited government nonetheless.

The U.S. Court of Appeals for the District of Columbia on Tuesday said the CFBP's unelected and largely unaccountable director must have more oversight from the president, a decision that echoes one major concern that has been raised by libertarians and conservatives since before the bureau was created in 2011 as part of the Dodd-Frank Act. The CFPB is a major element of that law, which was passed in the wake of the 2008 economic collapse and gave the government broad powers to regulate financial institutions.

In the ruling, a three judge panel took issue with the virtually unlimited power vested with the director of the CFPB, Richard Cordray.

"The Director enjoys significantly more unilateral power than any single member of any other independent agency," wrote judge Brett Kavanaugh in the unanimous opinion. "Indeed, other than the President, the Director of the CFPB is the single most powerful official in the entire United States Government, at least when measured in terms of unilateral power," by which the court said it mean "power that is unchecked by the President or other colleagues."

Regulatory agencies headed by a single executive must be directly accountable to the president, the court observed, while independent agencies authorized by Congress—like the SEC and the FCC—must have a multi-member commission at the helm. The CFPB was created by Congress but a political compromise during negotiations over Dodd-Frank left the bureau with a single executive.

That makes the bureau "structurally unconstitutional," Kavanaugh concluded. He noted that the ruling will have little effect on the day-to-day activities of the bureau, but giving the president more authority over the CFPB means there is greater potential to rein in the bureau's power—depending on the president, of course.

The CFPB is the creation of progressive darling U.S. Sen. Elizabeth Warren, D-Massachusetts, and the unchecked power of the board's director is a feature, not a bug, of the agency's design. In theory, the bureau is supposed to operate without being subject to political influences that could shape regulatory decisions made by other agencies or by Congress—similar to how the Supreme Court and the Federal Reserve work.

In reality, though, the board has used its unaccountable power to target small businesses, payday lenders, community banks and mortgage brokers.

One of those targets, a mortgage company called PHH Corp., brought the legal challenge that led to Tuesday's important ruling. The CFPB had fined PHH for referring customers to insurers who purchased reinsurance from a PHH subsidiary. The bureau said that maneuver constituted an illegal kickback, but PHH claimed the CFPB had overstepped its authority, Politico reported.

The PHH lawsuit is now a secondary issue, with the court's decision to tackle the structure of the CFBP taking center stage and, appropriately, getting the headlines on Tuesday.

The Reason Foundation (which publishes this blog) warned about the problems of having a single person running a vast regulatory agency like the CFPB as far back as July 2011, before Cordray was confirmed as the bureau's director.

"The current structure gives the Director too much authority to determine the breath of the CFPB's actions without any check and balances," wrote Carson Bruno, a policy analyst, in July 2011. "If (Republicans) cannot eliminate the CFPB completely, which would be the best option, converting the leadership to a multi-person commission, like every other regulatory body, will help ensure appropriate, balanced, and checked regulations."

In a lawsuit challenging the authority of the CFPB (a different lawsuit than the one decided by the DC Circuit on Tuesday), attorneys from the Competitive Enterprise Institute made a similar argument.

"The Consumer Financial Protection Bureau's lack of checks and balances violates the Constitution's separation of powers," said Hans Bader, an attorney with CEI in June 2012. "It's director is like a czar. He is not accountable to anyone, and can't be fired even if voters elect a president with different ideas about how to protect consumers."

The director still can't be fired directly by voters, but if Tuesday's decision survives any future appeals, it would mean that the president could supervise, hire and fire the head of the CFBP for any reason.

Potentially, that creates a bunch of new problems. Most obvious is the potential for turning a powerful regulatory agency into a political pawn that can be wielded by future presidential administrations. That seems to undercut the very idea behind the creation of the CFBP—that it would be independent of political influence. Now, it will quite literally be subjected to political influence.

In a statement responding to Tuesday's decision, Warren called the ruling a "technical tweak" to the CFPB. She said the ruling is likely to be appealed and predicted it would be overturned.

Opponents of the CFPB, like the U.S. Consumer Coalition, said the ruling struck a blow against the legitimacy of the agency and called for further congressional action to bring the CFBP under additional oversight. "Congress must pass comprehensive Dodd-Frank reform that includes an overhaul of the CFPB, including a change in the leadership structure," said Brian Wise, the organization's president.

Tuesday's ruling does not put an end to the poltiical wrangling over the role of the CFPB, and may only add to it. In the meantime, though, the D.C. Circuit ruling is a win for limited government by forcing the CFPB director to be accountable to someone.