Elizabeth Warren’s Wall Street Watchdog Ruled Unconstitutional In Current Form

The appeals court decision won't necessarily doom the Consumer Financial Protection Bureau.
Sen. Elizabeth Warren (D-Mass.) is viewed as one of Congress' fiercest Wall Street critics.
Sen. Elizabeth Warren (D-Mass.) is viewed as one of Congress' fiercest Wall Street critics.
Bill Clark/Getty Images

WASHINGTON ― A federal appeals panel ruled on Tuesday that the structure of the Consumer Financial Protection Bureau, the Wall Street watchdog conceived by Sen. Elizabeth Warren (D-Mass.), is unconstitutional.

Rather than disband the CFPB entirely, a tribunal of judges on the United States Court of Appeals for the D.C. Circuit ruled that the agency will now function under direct oversight of the president, who will have the power to fire the agency’s director at will.

The decision, if it stands, would likely weaken the CFPB’s effectiveness by subjecting it to the political whims of a less hospitable White House some time in the future.

U.S. Circuit Judge Brett Kavanaugh wrote in the decision that the CFPB’s “single-director structure” violates the separation of powers specified by the Constitution by vesting one person with vast power “unchecked by the president.” Prior to the decision, the president could only fire the director for very specific reasons.

The president and Congress have imposed accountability on federal agencies of comparable authority to the CFPB by structuring them so they are headed by multiple individuals, according to Kavanaugh.

“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 judge wrote.

The case against the CFPB was brought by PHH Corp., a mortgage services firm fighting a $109 million fine levied by the agency. The court’s decision also does away with PHH’s fine.

The panel of judges was not expected to rule in favor of the CFPB. Kavanaugh and fellow Circuit Judge Raymond Randolph appeared to be sympathetic to PHH’s case during oral arguments in April.

The federal government can ask the full D.C. Circuit to reconsider its ruling. The recent wave of Obama appointees to the court may suggest a rehearing is possible.

Regardless of that outcome, the next stop would be the U.S. Supreme Court, which in recent years hasn’t shied away from defining the powers of administrative agencies.

Sen. Elizabeth Warren (D-Mass.) talks with CFPB Director Richard Cordray (R) after he testified about Wall Street reform on Capitol Hill on Sept. 9, 2014.
Sen. Elizabeth Warren (D-Mass.) talks with CFPB Director Richard Cordray (R) after he testified about Wall Street reform on Capitol Hill on Sept. 9, 2014.
Jonathan Ernst / Reuters

The appeals court ruling represents a major victory for financial companies and conservatives, who have been dead set against the agency’s existence since it was created by the Dodd-Frank financial reform law of 2010.

The agency’s role in revealing Wells Fargo’s misdeeds in September ― and punishing the bank ― illustrates why financial institutions view the CFPB as such a fierce adversary. Together with other regulators, it caught Wells Fargo secretly opening unauthorized accounts for its customers. The consumer watchdog then slapped the bank with a $185 million fine ― the largest in the agency’s history ― for encouraging the illegal behavior.

Warren, a bankruptcy law expert who chaired the congressional oversight panel on bank bailouts prior to being elected to the Senate, is credited with coming up with the idea for the CFPB. She envisioned it policing financial products in a way that resembles how the U.S. Consumer Product Safety Commission supervises material goods.

President Barack Obama tapped Warren to set up the organization, but did not choose her to lead it. Instead, he appointed Richard Cordray, the current CFPB director, during a congressional recess in January 2012, in order to circumvent congressional opposition.

Kavanaugh acknowledged Warren in the ruling, arguing that Congress had departed from her original vision for the CFPB, as well as that of the White House and some House Democrats, by making it a single-director agency.

“As proposed by then-Professor and now-Senator Elizabeth Warren, the CFPB was to be another traditional, multi-member independent agency,” Kavanaugh wrote.

But, he noted, “Congress ultimately departed from the Warren and Administration proposals, and from the House bill.”

The CFPB expressed its disappointment in the court’s decision, arguing that requiring “cause” to remove the agency director is constitutional.

“The Bureau believes that Congress’s 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,” CFPB spokeswoman Moira Vahey said in a statement.

Americans for Financial Reform, a nonprofit coalition that supports tough banking regulations, also denounced Tuesday’s ruling.

“Compromising the CFPB’s independence would be a huge gift to Wall Street greed and a loss for consumers. We are hopeful that this erroneous decision will be overturned,” the group’s executive director, Lisa Donner, said in a statement.

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