A U.S. consumer watchdog agency that helped unravel the Wells Fargo & Co. scandal has an unconstitutional structure because it gives too much power to its director, a federal appeals court ruled Tuesday.
The court said the way that the Consumer Financial Protection Bureau is organized violates the Constitution's separation of powers because it limits the president's ability to remove the agency's director, currently Richard Cordray, a Democrat and former Ohio attorney general.
The ruling, if upheld, would curtail the authority of an agency that has been opposed by the banking industry and some Republican critics.
They view the CFPB – established as part of the Dodd-Frank reforms after the financial crisis of 2008 and 2009 – as a thorn in the side of the industry and one that has overreached in its regulation of consumer financial matters.
"This is a good day for democracy, economic freedom, due process and the Constitution," Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, said in a statement.
The law now states that the bureau's director can only be removed "for cause," such as neglect of duty. The court said that conflicted with the Constitution, which allows the president to remove executives for any reason.
Hensarling has proposed overhauling Dodd-Frank, including replacing the CFPB's single director with a bipartisan, five-member commission. On Tuesday he called the CFPB "arguably the most powerful and least accountable Washington bureaucracy in American history."
But consumer advocates and some top Democrats decried the court's ruling, saying it opened the door to the prospect that the CFPB's efforts could be weakened under increased political pressure from the White House and Congress.
The law creating the CFPB "carefully struck a balance between protecting the consumer bureau from politics and the [financial] industry's political allies while insuring it was accountable and had effective oversight," said Dennis Kelleher, president of the consumer advocacy group Better Markets.
The court's ruling is "damaging to American consumers" and "it's going to embolden the industry that's been trying to kill" the agency, Kelleher said.
The CFPB said it disagreed with the ruling by the three-judge panel of the U.S. Court of Appeals for the District of Columbia, and asserted that the ruling would not slow its efforts to investigate wrongdoing and seek enforcement actions.
"The bureau will continue its important work" while "considering options for seeking further review" of the court's ruling, CFPB spokeswoman Moira Vahey said in a statement. "Today's decision will not dampen our efforts or affect our focus on the mission of the agency."
Even the court, in a ruling written by Judge Brett Kavanaugh, said it rejected the notion of shutting down the CFPB and that the bureau instead "will continue to operate and perform its many duties."
But the court ruled that the CFPB should do so "as an executive agency akin to other executive agencies headed by a single person, such as the Department of Justice and the Department of the Treasury."
That means the president "now will have the power to remove the director at will, and to supervise and direct" the CFPB's chief, the court said.
For now, the court's ruling is unlikely to be noticed by consumers because "it's virtually without significance" in terms of affecting the CFPB's current work to protect consumers, said Robert Hockett, a law professor at Cornell Law School who tracks the financial industry.
"If it has any effect at all, [the ruling] 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," Hockett said.
The CFPB was one of the U.S. regulators that investigated Wells Fargo over the San Francisco bank's creation of some 2 million unauthorized checking, savings and credit card accounts.
The bank last month agreed to pay the agency, along with the Los Angeles City Attorney's Office and other government entities, $185 million to settle the case, which has prompted a broader investigation into banking industry sales practices.
The settlement included a $100-million fine paid to the CFPB, the largest fine yet levied by the agency.
"That is a dramatic amount as compared to the actual financial harm to consumers, but it is justified here by the outrageous and abusive nature of these fraudulent practices on such an enormous scale," Cordray told the Senate Committee on Banking, Housing and Urban Affairs at a hearing last month on Wells Fargo's sales practices.
The agency has taken legal action against banks, mortgage companies, credit card issuers, payday lenders and debt collectors and others. The CFPB says that over five years, it has recovered $11.7 billion that it returned to more than 27 million harmed consumers.
On Tuesday, the agency issued yet another enforcement action, ordering the Navy Federal Credit Union to pay $28.5 million to settle civil charges alleging that it made "false threats" about debt collection to its members, which include active and retired service members.
The CFPB has been enmeshed in partisan politics since it was created by Congress in a major financial overhaul law in 2010 to protect consumers from harmful banking and lending practices.
The CFPB was conceived by Sen. Elizabeth Warren (D-Mass.), a fiery critic of Wall Street who lambasted Wells Fargo Chairman John Stumpf for the bank's sales practices at the Senate Banking Committee hearing last month.
President Obama had considered naming Warren to head the CFPB, but her nomination probably would have run into strong opposition from congressional Republicans. Cordray has run the agency since it began operating in 2011.
Warren said Tuesday that the court ruling "will likely be appealed and overturned." But even if it's upheld, the CFPB "has been, and will remain, highly accountable to both Congress and the president," she said in a statement.
"Republican efforts to transform the agency's structure or funding should be seen for what they are: attempts fostered by big banks to cripple an agency that has already forced them to return over $11 billion to customers who have been cheated," Warren said.
The case heard by the appellate court involves allegations that New Jersey mortgage lender PHH Corp. was involved in a scheme to refer customers to certain mortgage insurance companies in exchange for illegal kickbacks.
The CFPB penalized PHH $109 million for illegal payments it had received. PHH claims that its conduct was legal and challenged the bureau's structure as unconstitutional.
The court sent the PHH matter back to the CFPB for revision. The company said it was "extremely gratified" by the court's decision.
4:00 p.m.: This article was updated with additional details, including comments from Rep. Jeb Hensarling (R-Texas), Sen. Elizabeth Warren (D-Mass.) and Dennis Kelleher, president of the consumer advocacy group Better Markets.
12:45 p.m.: This article was updated with staff reporting and includes comments from the Consumer Financial Protection Bureau and more details on the court decision.
10:15 a.m.: This article was updated with additional details about the legal case and the political dispute over the Consumer Financial Protection Bureau.