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Consumer Financial Protection Bureau's structure is constitutional, appeals court rules in a blow to agency's opponents

A federal appeals court ruled that the Consumer Financial Protection Bureau's structure is constitutional in a blow to opponents of the independent watchdog agency created in the aftermath of the financial crisis. (Jan. 31, 2018)

Supporters of the Consumer Financial Protection Bureau might have just won the war over the future of the controversial watchdog even as they are losing battle after battle over its operations under President Trump.

A federal appeals court ruled Wednesday that the bureau's structure is constitutional, dealing a blow to opponents of the independent agency created in the aftermath of the financial crisis.

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Although the Supreme Court could have the ultimate say, Wednesday's ruling upholds the broad powers granted to the bureau's director by Congress to oversee mortgages, credit cards and other financial products.

Republicans and business groups have fought aggressively to reduce the bureau's authority, arguing its aggressive actions have restricted access to credit.

But the calculus has changed since President Trump took office, said Alan S. Kaplinsky, head of the consumer financial services group at law firm Ballard Spahr.

The bureau's first director, Democrat Richard Cordray, resigned in November and Trump named Republican Mick Mulvaney, the White House budget director, to be the acting chief.

An outspoken opponent of the bureau, Mulvaney has moved quickly to make it more business-friendly and scale back enforcement actions even as his appointment is the subject of its own litigation.

"Before Cordray resigned, the Trump administration wanted the [structure] to be held unconstitutional so they could appoint their own director," Kaplinsky said. "The way things stand right now, Trump doesn't need that. He's got his man Mulvaney in charge."

The changing dynamic was clear in the reaction to the court decision by Rep. Jeb Hensarling (R-Texas), the chief congressional antagonist of the bureau during the Obama administration. He has argued the bureau's structure was unconstitutional and pushed legislation through the House last year that would gut the agency's authority.

While Hensarling said he was "deeply disappointed" in the ruling, he added that he took "great solace in the fact that Mick Mulvaney can use his unchecked, unilateral powers to continue the agency's transformation."

Democrats and consumer advocates hailed the ruling as guaranteeing the future of the bureau as a powerful watchdog of the often perilous financial marketplace.

"The court decision affirming the constitutionality of the CFPB demonstrates once again that the right wing's hysteria over the consumer bureau is baseless," said Sen. Elizabeth Warren (D-Mass.), who first conceived of the agency and helped set it up as an Obama aide.

"The president should follow the law and nominate a permanent director who has a track record of standing up for consumers and can garner bipartisan support in the Senate," she said.

The Republicans have just a one-seat Senate majority, and Sen. Susan Collins (R-Maine), was one of the few in her party to vote for the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that created the bureau.

"The Mulvaney experience is a mess, but we're hoping we get out of it soon," said Ed Mierzwinski, consumer program director at the nonprofit U.S. Public Interest Research Group.

In a 7-3 decision, the U.S. Court of Appeals for the District of Columbia ruled Wednesday that Congress acted appropriately in mandating that the bureau's single director — who serves a five-year term after being nominated by the president and confirmed by the Senate — can only be removed by the president for inefficiency, neglect of duty or malfeasance in office.

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Most presidential appointees can be removed at will and usually depart when a new president takes office.

The bureau also is funded directly by the Federal Reserve instead of having to get an annual appropriation from Congress, which limits the ability of lawmakers to influence policy by threatening to withhold money or limit its use.

"Congress's decision to provide the CFPB Director a degree of insulation reflects its permissible judgment that civil regulation of consumer financial protection should be kept one step removed from political winds and presidential will," Judge Cornelia T.L. Pillard, an appointee of President Obama, wrote for the majority in the 250-page ruling.

The decision reverses a 2-1 ruling in 2016 by a three-judge panel of the court that found that the bureau's structure violated the Constitution's separation of powers because it limited the president's authority.

That earlier ruling said the solution was to strike down the law's "for cause" provision, meaning that the president could remove the bureau's director for any reason, as with other executive branch appointees.

The CFPB appealed the 2016 ruling, backed by the Obama administration's Justice Department.

After Trump's election, the Justice Department reversed its position and told the full court that the president should be able to fire the bureau's director at will.

A bureau spokesperson said Wednesday that officials were analyzing the ruling. A Justice Department official said, "We are disappointed in the decision and reviewing our options."

Cordray, an Obama appointee who stepped down in November, said Wednesday's ruling that the bureau's structure was constitutional was historic and may be "soon on its way to the Supreme Court."

The court's decision "is all about maintaining independent law enforcement free from politics," tweeted Cordray, a Democrat now running for governor of Ohio.

"We fought this case against the naysayers and the critics, the financial industry and the Congress, as well as the Administration, which changed sides to oppose the independence of this new people's agency," he said in his Tweet. "We were right to do so."

In practice, though, the bureau already is being transformed under Mulvaney's leadership.

On Jan. 18, Mulvaney requested zero funding from the Fed for the second quarter of the fiscal year. He said the bureau had enough money on hand to cover its anticipated $145 million in expenses and that he planned to slash a reserve fund.

Mulvaney has launched a review of the bureau's entire operation as a first step in an overhaul. He has said he would consider revising or repealing regulations that were designed to protect consumers against harmful payday lenders.

And he has scaled back the bureau's enforcement efforts, including dismissing a suit filed in April under Cordray against four online payday lenders affiliated with a Northern California Native American tribe.

The case the appellate court ruled on Wednesday was brought by PHH Corp., a New Jersey mortgage services company, which had challenged the bureau's authority after being fined $109 million in 2015 for alleged mortgage kickbacks.

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The 2016 ruling tossed out the fine, saying the bureau exceeded its authority in enforcing the Real Estate Settlement Procedures Act, which covers mortgage closures. The court said the bureau applied a new interpretation of the law retroactively to PHH and then improperly contended that a three-year statute of limitations did not apply.

The appellate court upheld that portion of the lower court's ruling. PHH said that was "an important and gratifying outcome." Shares of PHH rose 2.2% Wednesday.

The court decision came amid an ongoing battle over who should lead the CFPB until a permanent director is chosen.

In a last-minute move before his resignation, Cordray appointed Leandra English, his chief of staff, to deputy director. Cordray said she would be the acting director under a Dodd-Frank provision.

Trump then appointed Mulvaney to be the agency's acting chief under the Federal Vacancies Act of 1998.

English filed suit to be installed as the rightful acting director, but her requests for a temporary restraining order and then a preliminary injunction were rejected by Judge Timothy J. Kelly of the U.S. District Court for the District of Columbia.

English is appealing the denial of the restraining order by Kelly, a Trump appointee, to the same court that ruled on the bureau's constitutionality.

Twitter: @JimPuzzanghera

UPDATES:

2:20 p.m.: This article was updated with comments from Alan S. Kaplinsky of Ballard Spahr, Ed Mierzwinski of U.S. Public Interest Research Group, Rep. Jeb Hensarling, Sen. Elizabeth Warren and additional details from the ruling.

11:15 a.m.: This article was updated with comment from the Justice Department and additional background about the decision and the Consumer Financial Protection Bureau.

9:20 a.m.: This article was updated with additional details about the ruling and reaction from the Consumer Financial Protection Bureau and former director Richard Cordray.

This article originally was published at 8:20 a.m.

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