Appeals Court Rules CFPB’s Structure Is Unconstitutional

Published

February 16, 2018

Christine DiGangi is the former Deputy Managing Editor - Engagement for Credit.com and covered a variety of personal finance topics. Her writing has been featured on USA Today, MSN, Yahoo! Finance and The New York Times International Weekly, among other outlets.

A federal appeals court ruled the structure of the Consumer Financial Protection Bureau (CFPB) unconstitutional, in a decision issued Oct. 11 (PHH Corp. v. CFPB).

That may seem like a victory for people and agencies who, to put it lightly, aren’t huge fans of the CPFB, but whether or not this has a huge impact on the CFPB’s ability to enforce consumer protection laws remains to be seen. The president can now remove the director of the CFPB at will, so the effect of the ruling relies on the whims of future presidents. The way the agency was created, the director of the CFPB could only be removed from their position for cause, meaning “inefficiency, neglect of duty or malfeasance in office,” during the director’s five-year term. The Senate confirmed Director Richard Cordray’s appointment to the post in 2013, so his term expires in 2018. Should the ruling stand, the next president could now replace him before 2018 if he or she disagrees with his policy positions or the direction Cordray is taking the agency.

The court opted to remove two words (“for cause”) describing the structure of the bureau to fix the constitutional problem, which, in the exact words of the ruling, “will not affect the ongoing operations of the CFPB.”

Historically, independent federal agencies with significant power have been run by boards or commissions made up of multiple people. The CFPB, with its ability to enforce consumer protection laws and issue guidance on such laws, is one of those powerful agencies, but all that influence was concentrated into a single director.

That concentration of power and the limits on the president’s ability to remove that person from power is what made the court rule the CFPB’s structure unconstitutional.

“PHH contends that the constitutional flaw means that we must shut down the entire CFPB (if not invalidate the entire Dodd-Frank Act) until Congress, if it chooses, passes new legislation fixing the constitutional flaw. But Supreme Court precedent dictates a narrower remedy. To remedy the constitutional flaw, we follow the Supreme Court’s precedents, including Free Enterprise Fund, and simply sever the statute’s unconstitutional for-cause provision from the remainder of the statute,” the appeals court wrote in its ruling. “With the for-cause provision severed, the President now will have the power to remove the Director at will, and to supervise and direct the Director.”

Concerns about this ruling vary and many groups — from consumer advocacy organizations to banking industry associations — have issued statements on the matter. Some expressed disappointment, while others claimed it wouldn’t change the bureau’s ability to enforce consumer protection laws and others still called for more changes to the CFPB, mostly in how future presidents choose to supervise future directors.

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