Court agrees to revisit ruling against consumer bureau

A federal court on Thursday agreed to re-hear a case questioning the constitutionality of the Consumer Financial Protection Bureau (CFPB) amid swirling questions about the future of its director, Richard Cordray.

The order from the U.S. Court of Appeals for the District of Columbia Circuit vacates an original judgment from October that found the CFPB to be “unconstitutionally structured” because it is helmed by Cordray, a single individual, who could only be removed by the president and “for cause.” 

In addition to temporarily restoring Cordray’s power, Thursday’s order could mean the previous ruling stating that a $109 million penalty against the mortgage company PHH Corp. — which sued the agency — would be thrown out. 

An 11-judge panel — including D.C. Circuit Chief Judge Merrick Garland, President Obama’s unsuccessful pick for the U.S. Supreme Court — will hear arguments on May 24. Garland had recused himself from the previous hearings on this case, as he was a candidate for the Supreme Court.

The October ruling was a blow to the agency — which was formed in the wake of the global financial crisis of 2008 under the Dodd-Frank financial reform law — but left it able to continue operations.

Now, the court wants answers to several questions, including whether CFPB’s structure follows Article II of the Constitution, which gives the president “executive power” over executive agencies, providing a check on those Cabinet departments. 

Independent agencies, however, have long been structured to allow board members or commissioners to keep the heads of those agencies accountable. Until the CFPB, there had not been an independent agency led by one person.  

By not allowing the president to fire a CFPB director at will — rather than “for cause” — the court reasoned in October, the structure of the bureau takes away the power of the president to supervise the agency’s leadership.

The court is asking the government and the mortgage lending company to offer arguments on how to resolve any violations of Article II, should they exist. Specifically, “is the proper remedy to sever the for-cause provision of the statute?”

The government must file its brief by March 31, and PHH Corp. is directed to respond by April 10. 

CFPB does not comment on matters in the process of litigation, and lawyers for PHH Corp. are bullish on their second round in court.

“We are confident that we will prevail before the full D.C. Circuit for PHH, which was subjected to a fundamentally unfair order promulgated by an unconstitutionally structured agency.  Importantly, although the separation of powers issues will be reheard, the Court’s stay of the CFPB’s order remains in place,” said Helgi Walker, the co-chair of the administrative law and regulatory practice group at Gibson, Dunn & Crutcher, the firm representing the mortgage lender.

The move is set to spark a new debate around the consumer bureau, which critics have said is much too powerful, flooding businesses with new regulations and fines.

“The court’s decision to grant another hearing, while not unexpected, has no bearing on the president’s ample authority to remove CFPB Director Cordray from office,” said Rep. Jeb Hensarling (R-Texas), the chair of the House Financial Services Committee. “I encourage President Trump to take immediate action to uphold the Constitution by reining in this unconstitutional and out-of-control agency.” 

While Trump hasn’t said anything about the CFPB or Cordray directly, he has promised to unwind many aspects the financial reform efforts of the Obama administration.

“We expect to be cutting a lot out of Dodd-Frank,” Trump said at a meeting with business leaders, including JPMorgan Chase CEO Jamie Dimon, earlier this month.

Sean Spicer, the White House press secretary, declined to talk about the administration’s plans for the CFPB.

“That’s an area that we need to work with Congress on,” Spicer said during a press briefing.

Consumer and civil rights organizations came to the agency’s defense in November, filing an amicus brief in support of the CFPB after it petitioned the initial ruling, and filed a motion to intervene in January. In those filings, the groups expressed that Trump may try to get rid of the agency as he seeks to dismantle financial regulations enacted after the Wall Street crash.

“Its current structure and leadership has helped millions of families across the country fight against abusive financial practices,” said Hilary Shelton, the director of the NAACP’s Washington bureau and senior vice president for policy and advocacy, in a statement Thursday.

“The impact of unscrupulous and predatory financial services providers on the communities we serve and represent, which contributed immensely to the economic downturn of 2008, is well documented and continues to decimate our families and our neighborhoods.” 

Supporters of the agency point to the CFPB’s own data, which says nearly $12 billion has been returned to 27 million consumers since it opened its doors in 2011. 

“We’ve already seen conservative members of Congress and their political allies attempt to weaken CFPB’s authority for meritless reasons, but Director Cordray has led the bureau with a steady hand and worked tirelessly with his staff to return billions of dollars back to hardworking people across the country harmed by abusive financial practices,” said Mike Calhoun, the president of the Center for Responsible Lending in an emailed statement. 

Critics like Hensarling say that other agencies have the same power to protect consumers as the CFPB. They say the new agency has taken a heavy-handed approach. 

“We have set up, basically, a dictator,” the Texas congressman told CNBC’s “Squawk on the Street” earlier Thursday morning.

“Now, some would argue he’s a benevolent dictator, but no person in America, particularly an unelected person, should have the power, unilaterally, to decide what credit cards should go in our wallet, whether or not we can have a mortgage, and whether or not, if we like our banker, we can keep her.” 

– This story was updated at 6:16 p.m.