CFPB Director Richard Cordray

CFPB Director Richard Cordray Steve Helber/AP

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Consumer Bureau Declared Unconstitutional by Appeals Court

Longtime philosophical opponents cheer ruling on newest agency.

This story has been updated

The controversial Consumer Financial Protection Bureau—set up by the 2010 financial reform law with funding independent of Congress—was declared unconstitutional on Tuesday by the powerful U.S. Court of Appeals for the D.C. Circuit.

In a case involving a New Jersey mortgage lender challenging a $109 million fine levied by the bureau, a three-judge panel ruled that the agency's structure is unconstitutional because the director has wide-ranging power with little oversight, according to news reports.

The arrangement of having a presidentially appointed director and funding through the Federal Reserve “represents a gross departure from [the] settled historical practice” of having multi-member commissions at independent agencies to keep them in check, said the 110-page opinion from Judge Brett Kavanaugh.

“The CFPB is the first of its kind and a historical anomaly,” wrote the judge appointed by President George W. Bush. “In short, when measured in terms of unilateral power, the director of the CFPB is the single most powerful official in the entire U.S. Government, other than the president. Indeed, within his jurisdiction, the director of the CFPB can be considered even more powerful than the president.” 

Republicans in Congress and banking industry officials hailed the ruling. “This is a good day for democracy, economic freedom, due process and the Constitution,” said House Financial Services Committee Chairman Rep. Jeb Hensarling, R-Texas. “The bureau has infringed on the economic freedoms of consumers, limited their financial choices, increased their costs and failed to hold managers accountable for widespread discrimination and abuse of its own employees. This must change.”

Hensarling repeated past criticisms of President Obama’s 2012 recess appointment of CFPB Director Richard Cordray, and the lawmaker touted his Financial CHOICE Act, approved by his panel in September, which would replace CFPB’s single director with a five-member commission similar to other financial agencies.

Noting that the bureau can continue to operate pending clarification of its structure, National Association of Federal Credit Unions President Dan Berger said in a statement that his group “urges an immediate moratorium at the CFPB on any rulemaking not already implemented. The bureau should consider ceasing and desisting all rulemakings until the legality is resolved.”

The FreedomWorks Foundation, a conservative grass-roots political group, said, “While this ruling is a step in the right direction, it does nothing to address the overreach of the CFPB. This agency still represents a massive expansion of the federal regulatory state. It’s imposing new costs on Americans at a time when the economy is still struggling to gain steam. While the unconstitutionally of the CFPB’s structure is addressed for now, the destructive regulatory impact of the agency continues.” 

Consumer and liberal groups were disappointed. “As the CFPB’s work to stop the Wells Fargo’s fraud demonstrated once again, the CFPB is doing exactly what Congress established it to do: serve as an effective enforcer of fair rules of the road to prevent unfair deceptive and abusive financial practices, practices that led to the financial crisis and cost trillions of dollars in lost homes, lost jobs, and lost wealth,” said the coalition that includes Americans for Financial Reform and the nonprofit Center for Responsible Lending. “Precisely because the CFPB is achieving that mission, Wall Street banks, predatory lenders, and their allies have worked determinedly to undermine and defang it, including by compromising its decision-making structure, independence and authority.”

Robert Weissman, president of Public Citizen, said the decision “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,” Weissman said. “No matter how the CFPB is structured, it is crucial that it continue its work to protect consumers from abusive and deceptive practices, such as unscrupulous behavior by predatory lenders that entrap consumers in a cycle of debt and unfair arbitration clauses that rip off consumers by preventing them from getting their day in court.”

A spokesperson for CFPB said in a statement that while the bureau disagrees with the court ruling and is considering options for further review of the decision, it will "continue its important work. 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.”

"This split decision — which bizarrely relies on a mischaracterization of my original proposal for a new consumer agency — will likely be appealed and overturned," said Sen. Elizabeth Warren, D-Mass., in a statement. "But even if it stands, the ruling makes a small, technical tweak to Dodd-Frank and does not question the legality of any other past, present, or future actions of the CFPB. The CFPB has been, and will remain, highly accountable to both Congress and the President, and continued Republican efforts to transform the agency's structure or funding should be seen for what they are: attempts fostered by big banks to cripple an agency that has already forced them to return over $11 billion to customers who have been cheated."