In a setback for President Obama, a federal appeals court curtailed the power of the Consumer Financial Protection Bureau, ruling Tuesday that the agency championed by Sen. Elizabeth Warren of Massachusetts violated the Constitution with a structure that gives too much unelected authority to its sole director.
The highly anticipated ruling by the U.S. Court of Appeals for the District of Columbia Circuit said the consumer watchdog agency, forged by Democrats five years ago, violates the Constitution’s separation of powers and was an example of a “gross departure from settled historical practice.”
The court said the CFPB director had “massive” power, with more unilateral authority than any single officer in the three branches of the federal government, aside from the president.
“The Director unilaterally enforces 19 federal consumer protection statutes, covering everything from home finance to student loans to credit cards to banking practices,” the court said. “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.”
Given the historical precedent of independent agencies being headed by multiple commissioners or board members, and in light of the threat to individual liberty posed by a single-director independent agency, the court said, “We therefore hold that the CFPB is unconstitutionally structured.”
But rather than shutting down the agency, as a mortgage lender in the case requested, the court said the CFPB should operate by allowing the president to remove the director at will rather than for cause.
“The CFPB therefore will continue to operate and to perform its many duties, but will do so as an executive agency akin to other executive agencies headed by a single person, such as the Department of Justice and the Department of the Treasury,” the court said.
The court threw out the CFPB’s $109 million penalty against New Jersey-based PHH Corp., a fine that was imposed by Director Richard Cordray after the agency accused the lender of arranging for kickbacks from insurers. Mr. Cordray’s stiff penalty came after an administrative judge at CFPB had found that PHH violated the law and ordered the company to pay back $6.4 million of illegal financial gains.
John Eastman, professor of law and former dean of the Chapman University School of Law, called the ruling “a major step in the right direction of restoring separation of powers.”
“Our Constitution simply does not allow for unelected, unaccountable bureaucrats to wield as much power as Congress tried to delegate to the CFPB,” Mr. Eastman said. “Our Constitution vests ‘the executive power’ in a unitary president so that all executive functions are supervised by the one person in the executive branch who is directly accountable to the people.”
Circuit Judge Brett Kavanaugh said the structure of the CFPB “poses a far greater risk of arbitrary decision making and abuse of power, and a far greater threat to individual liberty, than does a multimember independent agency.” The judge said CFPB has a “novel” structure with a single person leading it, unlike other independent agencies whose leaders must answer to commissions.
The CFPB was created in the Dodd-Frank legislation after the 2008 financial crisis, aimed at regulating mortgages, credit cards and other consumer financial products. Democrats such as Ms. Warren and Mr. Obama have campaigned for the agency. Republicans have criticized it as an abuse of power and executive overreach.
Theodore B. Olson, counsel to PHH, said the ruling “vindicates” the firm and also clarifies that CFPB is bound by a three-year statute of limitations in the disputed enforcement action. CFPB asserted it could bring a complaint at any time in the future.
“The CFPB’s numerous and clear legal errors in this case are not surprising given the unconstitutional level of the director’s insulation from any democratic accountability,” Mr. Olson said. “As the court recognized, the Dodd-Frank Act attempted to give a single individual historically unprecedented power over regulated entities, in violation of the bedrock separation of powers principles enshrined in the Constitution.”
Kyle Hauptman, executive director of the nonprofit Main Street Growth Project in Arlington, Virginia, agreed with Judge Kavanaugh that the agency’s structure posed “a threat to individual liberty.”
“The CFPB operates like the unaccountable agency that it is. Main Street deserves real consumer protection, not just job protection for the CFPB’s director,” Mr. Hauptman said.
Consumer groups were enraged, accusing Judge Kavanaugh of pursuing an ideological agenda.
“He cut his teeth in the conservative political movement and as a partner at one of the most popular law firms in corporate America — a place that bragged about its work surrounding ‘white-collar crime,’” said Karl Frisch, executive director of Allied Progress.
He said he expects the full D.C. circuit to review the case, and he predicted the ruling will be overturned.
Richard Hunt, president and CEO of the Consumer Bankers Association, said Congress could resolve the leadership issue by creating a commission to run the CFPB instead of a sole director.
“We applaud the court’s decision to repeal the amplified penalty on PHH,” Mr. Hunt said. “At the same time, the decision puts the CFPB under the direct control of the administration to resolve the Constitutional question. This means the CFPB would no longer be an independent agency, as originally intended.”
He added, “We agree with the DC Circuit Court of Appeals when it said in the decision ‘the deliberative process and multiple viewpoints in a multimember independent agency can help ensure that an agency does not wrongly bring an enforcement action or adopt rules that unduly infringe individual liberty.’
“For this reason, we still assert a five-person, bipartisan board would preserve the bureau as a strong, stable and effective regulator that would give the banking system certainty and consistency, regardless of a President Trump or Clinton,” Mr. Hunt said.
⦁ Stephen Dinan contributed to this report.