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Federal Judge Strikes Down CFPB Structure

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Consumer Financial Protection Bureau building in Washington, D.C. Photo by Diego M. Radzinschi/ALM

A federal judge in New York ruled Thursday that the makeup of the CFPB violates the Constitution because it is governed by a single director who only can be removed by the president for cause.

The ruling conflicts with a January ruling by the District of Columbia Circuit Court of Appeals, which ruled that the agency’s structure of having one director, who may only be removed for cause, is not unconstitutional. That ruling came in a lawsuit filed by PHH, a mortgage company.

The New York ruling throws even more uncertainty into the future of the CFPB. It only covers the Southern District of New York.

But the New York decision could lead to more lawsuits being filed challenging the constitutionality of the agency, according to Jeff Sovern, a law professor at the St. John’s University Law School. He wrote in a consumer law blog sponsored by Public Citizen that the constitutionality of the agency may end up before the U.S. Supreme Court.

In her ruling this week, Judge Loretta Preska of the Southern District of New York dismissed a lawsuit filed by the CFPB against RD Entities, saying that the CFPB “lacks authority to bring this enforcement action because its composition violates the Constitution’s separation of powers.”

The judge said she agreed with a dissent filed in the D.C. case, which stated that that the CFPB “is unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single Director.”

The CFPB and the New York State Attorney General’s office sued RD Entities and its founder Roni Dersovitz.  RD Entities offers cash advances to consumers waiting on payouts from lawsuit settlement agreements or judgements in their favor.

The agencies alleged that the company misled consumers into signing cash advance agreements that the company said were valid but amounted to “usurious loans.”

Preska said that the portion of the suit filed by the New York State Attorney General remains intact.

The decision could embolden some more companies to sue the agency.

Writing on a the consumer law blog, Sovern noted that some lawsuits already are pending. He also pointed out that Preska “went further than the PHH panel decision and held that the defects she saw in the Bureau’s structure could not be cured simply by allowing the president to fire the director without cause.”

A consumer advocate attacked Preska’s ruling.

“This decision is a clear and completely inappropriate example of legislating from the bench,” said Will Corbett, litigation counsel at the Center for Responsible Lending.

However, House Financial Services Chairman Jeb Hensarling (R-Texas) praised the decision, saying it confirms the position of House Republicans — that the bureau’s structure is unconstitutional.

“By design the Bureau is arguably the most powerful and least accountable Washington bureaucracy in American history — and under then-Director Richard Cordray, it showed,” he said.

House Republicans have pushed legislation that would drastically curtail the CFPB’s powers, but the Senate has not considered any proposal that would affect the agency.

During the last Congress, Hensarling pushed legislation that would have transformed the agency into a commission.

However, during this Congress, he pushed and the House passed, financial regulatory overhaul legislation that would keep the single agency director structure.