CFPB Fights Federal Judges’ Order to Restructure Agency

Published December 17, 2016

A federal agency tasked with enforcing financial industry restrictions is fighting a court order demanding it reorganize to comply with the Constitution.

In October 2016, three judges on the U.S. Court of Appeals for the DC Circuit ruled in favor of a mortgage lending company that had filed a lawsuit against the Consumer Financial Protection Bureau (CFPB) alleging the agency is improperly organized because it grants too much power to its director.

CFPB is an independent government agency created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as “Dodd-Frank,” to enforce government restrictions on financial activity.

CFPB, headed by director Richard Cordray, appealed the ruling in November 2016, asking for an en banc hearing in which the full U.S. Court of Appeals for the District of Columbia would hear the case, instead of just a panel. In December 2016, lawyers representing CFPB filed a motion asking for more time to respond to the plaintiffs’ claims. 

Unconstitutional by Nature?

Sam Kazman, general counsel for the Competitive Enterprise Institute, says CFPB’s structure and operation are unconstitutional.

“The constitutional claim was that Cordray could only be removed for cause, and that was an unconstitutional violation of the president’s power in the appointment clause,” Kazman said. “There’s [also] the fact that the CFPB does not get funding through congressional appropriations but rather from the Federal Reserve’s budget.”

Calls for Abolition

Kazman says federal lawmakers should eliminate CFPB.

“Lawmakers would be well-advised to uproot the CFPB, root-and-branch,” Kazman said. “I think the best of all reforms would be for Congress to abolish the agency. The notion of centralizing this huge amount of power over practically every financial instrument and financial transaction into one agency, then making it unaccountable to this degree from the constitutional branches of government, is, frankly, insane.”

Suggests Reform Instead

Thaya Brook Knight, associate director of financial regulation studies at the Cato Institute, says CFPB should restructure itself like another financial regulatory body, the Securities and Exchange Commission (SEC), adding more checks and balances.

“At the SEC, you see an appropriate antagonism against bad actors; you don’t find this antagonism toward the industry as a whole,” Knight said. “I would structure it very similarly to the SEC: a chair appointed by the [U.S.] president, who serves at the president’s pleasure so he can have that ability to have the president setting policy, and then additional commissioners.”

As currently constituted, CFPB is failing to achieve its stated goals, Knight says.

“Part of CFPB’s mandate is to ‘foster access to financial products,'” Knight said. “That statement recognizes access to financial products is important to the economy, to consumers’ lives, to the way America functions. I think Cordray has been derelict in his duty in not focusing on financial access.”