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Court Rules CFPB Is Unconstitutional, but Not Out of Business

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A federal appeals court on Tuesday ruled that the structure of the Consumer Financial Protection Bureau is unconstitutional since it is operated by a single person, but the court said that the agency may continue to operate. 

The bureau, which was spearheaded by Sen. Elizabeth Warren, D-Mass., after the financial crisis, will operate as a federal agency whose director is supervised and may be removed by the President, according to the court ruling. 

“This split decision — which bizarrely relies on a mischaracterization of my original proposal for a new consumer agency — will likely be appealed and overturned,” Warren said 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.”

Agency officials vowed to continue their work, although President and CEO B. Dan Berger of the National Association of Federal Credit Unions called for an immediate halt to the CFPB’s rulemaking process. 

The court was blunt in its ruling.

“The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency,” the U.S. Court of Appeals for the District of Columbia said, in its ruling.

(Related: Bill to Replace Dodd-Frank Passes House Panel)

The ruling came in a case in which, PHH, a mortgage lender, was the subject of $109 million penalty from the CFPB. The appeals court voided that penalty and sent the case back to a lower court for review.

Opponents of the CFPB, including credit unions and Republican members of Congress have argued that the agency was unconstitutional ever since it was established by the Dodd-Frank Act. Congressional Republicans have attempted to reorganize the CFPB, with the agency being supervised by a commission. However, those efforts have failed.

The appeals court agreed, saying the director has too much power. “The Director enjoys more unilateral authority than any other officer in any of the three branches of the U.S. Government, other than the President,” the court said.

A CFPB spokesperson said agency officials disagreed with the ruling. 

“The Bureau believes that Congress’ decision to make the Director removable only for cause is consistent with Supreme Court precedent and the Bureau is considering options for seeking further review of the Court’s decision,” the spokesperson said.

Meanwhile, agency officials vowed to continue their work. 

However, Berger said much of the agency’s work should stop.

“NAFCU urges an immediate moratorium at the CFPB on any rulemaking not already implemented,” said Berger. “The bureau should also consider ceasing and desisting all rulemakings until the legality is resolved.”

The Credit Union National Association praised the ruling. 

“I applaud the ruling from the U.S. Court of Appeals for the D.C. Circuit regarding the PHH case against the Consumer Financial Protection Bureau, in that it will establish a meaningful check and balance and bring needed accountability to the Director’s role,” CUNA President Jim Nussle said. “This ruling confirms CUNA’s concern that the structure of the CFPB is flawed and that an unchecked, independent director who answers to no one can’t lead to good public policy. CUNA continues to support a five-person commission for the CFPB instead of its current structure.”

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