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Court Ruling: CFPB Power Structure is Unconstitutional

10/13/2016

By Karen Kerrigan-

A three-judge panel of the U.S. Court of Appeals for the D.C. Circuit declared the power structure of the Consumer Financial Protection Bureau (CFPB) unconstitutional, stating that its Director isn’t sufficiently accountable.

The Center for Regulatory Solutions and SBE Council have long expressed our deep concerns about CFPB’s transparency, accountability, and broad authority that Director Richard Cordray has exploited. The CFPB’s secret operations and budget impinge on freedom, and the scope of its regulations and actions are hurting capital access for small businesses. SBE Council is supporting various legislative proposals, including the Financial CHOICE Act, which makes vast changes to Dodd-Frank, including an overall of the CFPB that would lead to greater accountability and openness.

The legal challenge to CFPB was brought by mortgage lender PHH Corporation (PHH).  PHH challenged an arbitrary penalty increase (from $6.4 million to $103 million) that the CFPB unilaterally imposed under an alleged Real Estate Settlement Procedures Act (RESPA) violation. In its decision, the court called CFPB’s actions a “gross departure” from the customary checks and balances of our regulatory system.

“As an independent agency with just a single Director, the CFPB represents a sharp break from historical practice, lacks the critical internal check on arbitrary decision making, and poses a far greater threat to individual liberty than does a multi-member independent agency,” wrote the court in its decision.

The court also declared that the CFPB Director “enjoys significantly more unilateral power than any single member of any other independent agency.” Indeed, “other than the President, the Director of the CFPB is the single most powerful official in the entire United States Government, at least when measured in terms of unilateral power.”

In terms of how the CFPB is currently structured, the president does not have the power to discharge the director at will.

The court also said the CFPB “violated bedrock due process principles” as it imposed Director Cordray’s interpretation of the RESPA rule retroactively: “The CFPB obviously believes that captive reinsurance arrangements are harmful and should be illegal. But the decision whether to adopt a new prohibition on captive reinsurance arrangements is for Congress and the President when exercising the legislative authority. It is not a decision for the CFPB to make unilaterally.”

Congress has recognized the extent to which the CFPB has run amok in its work and rulemakings. For example, legislation to ensure all meetings are subject to public disclosure and attendance has been introduced (even a member of the U.S. House was turned away from one of its “public” meetings), as well as a bill that rebukes the secret analysis conducted by the CFPB when it issued guidance on indirect auto financing. The bill would rescind that guidance. The House-passed the Consumer Financial Freedom and Washington Accountability Act, which would make broad reforms to the CFPB (most of which were included in the Financial CHOICE Act.)

And even though the CFPB is legally required to consider the impact of its regulations on small businesses, it is largely ignoring and sidestepping that requirement. The Bureau of Consumer Financial Protection Advisory Boards Act would provide small businesses with a meaningful voice at the CFPB.

In response to the court, the CFPB is studying the decision but it is expected that the Obama Administration will appeal the ruling.

Related resources:

New CFPB Rules Will Destroy Small Businesses and Harm Consumers, The Hill

Regulatory Reforms to Help Small Business Financing, SBE Council

Consumer Financial Protection Bureau: Hurting Community-Based Credit Unions, SBE Council/Center for Regulatory Solutions

Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council. CRS is a project of SBE Council.