A federal appeals court has ruled that the single-director structure of the Consumer Financial Protection Bureau is unconstitutional but stopped short of shutting the controversial agency down.

The D.C. Circuit Court of Appeals said having a single director who can only be removed by the President for cause violates the separation of powers, agreeing with a mortgage lender that challenged an enforcement action brought by the CFPB.

“Never before has an independent agency exercising substantial executive authority been headed by just one person,” the court said, noting that the CFPB “wields vast power over the U.S. economy.”

The creation of the CFPB has been one of the most controversial provisions of the Dodd-Frank financial reforms. PHH Corp. brought its constitutional challenge after the CFPB fined it $109 million for allegedly accepting kickbacks from mortgage insurers.

But the D.C. Circuit did not, as PHH requested, shut down the entire CFPB until Congress, if it so chooses, fixes the constitutional flaw. Instead, the court severed the for-cause provision from Dodd-Frank, allowing the President to remove the director at will.

“The CFPB therefore will continue to operate and to perform its many duties, but will do so as an executive agency akin to other executive agencies headed by a single person,” it said.

The Wall Street Journal called the decision a “strong rebuke” to the CFPB while Rep. Jeb Hensarling, the chairman of the House Financial Services Committee, said it was “a good day for democracy, economic freedom, due process and the Constitution.”

Republican lawmakers and financial groups have been trying to weaken or dismantle the agency and Hensarling has proposed replacing the director with a five-person commission.

Consumer groups reacted with alarm but Robert Hockett, a law professor at Cornell Law School, said the ruling was “virtually without significance” in terms of affecting the CFPB’s current work to protect consumers.

“If it has any effect at all, [it] probably will render the CFPB even more zealous” in its investigative efforts “because it reinforces a growing perception that there’s a systematic backlash against financial regulation,” he told the Los Angeles Times.

, , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *