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Structure of agency conceived by Warren ruled unconstitutional

Senator Elizabeth Warren.Susan Walsh/AP/file 2016

The Consumer Financial Protection Bureau — the brainchild of Massachusetts Senator Elizabeth Warren and among the most controversial programs to come out of the financial crisis — is too powerful, a federal appeals court ruled Tuesday.

In the first notable legal challenge to the financial regulator, a three-judge panel of the US Court of Appeals for the District of Columbia Circuit faulted the agency’s structure and found that its director was too independent.

The bureau’s director can be fired by the president only “for cause,” such as negligence. But that level of authority stretches far beyond the power of most other independent executive offices and is unconstitutional, the court found.


“The Director enjoys more unilateral authority than any other officer in any of the three branches of the US Government, other than the President,” while possessing enormous power over American businesses and the US economy, the court said.

Warren, a Democrat, said the ruling is likely to be appealed, and she expected it to be overturned. She also took issue with the Republican-nominated judges’ suggestion that she had envisioned the agency as a commission run by several members, rather than a single director.

It “bizarrely relies on a mischaracterization of my original proposal,” Warren said in a statement Tuesday. Warren did initially use the Consumer Product Safety Commission as a model for the financial watchdog, but she has said it was based on its mission, not structure, and after researching the issue further she settled on a single-director agency.

Warren called the appeals court’s decision to expand the president’s power to hire and fire the director at will a “small, technical tweak” that shouldn’t change the bureau’s past decisions or current actions.

“The CFPB has been, and will remain, highly accountable to both Congress and the president, and continued 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.


Still, financial institutions and their lobbyists hailed the ruling as a victory in their ongoing efforts to rein in the agency, challenge Dodd-Frank financial reforms, and push for a commission instead of a single director.

“This means the CFPB would no longer be an independent agency, as originally intended,” said Richard Hunt, president of the Consumer Bankers Association, a lobbying group for retail banks. “Congress could resolve both problems by creating a commission to run the agency, in place of a sole director.”

The CFPB disagrees with the decision and is reviewing its options, officials with the agency said. In the meantime, the agency will continue its work.

The CFPB has the power to supervise much of the financial industry, from banks and credit card companies to payday lenders and debt collectors. Since its launch in 2011, it has frustrated financial companies, many of which see it as an additional layer of regulation and have accused the agency of overreaching.

The agency says it has recovered $11.7 billion from credit card companies it alleges used deceptive practices to market and bill consumers; banks that have charged unfair overdraft fees; debt collectors who have intimidated borrowers to pay amounts they may not owe; and mortgage companies that have wrongly foreclosed on homes.


The case before the court involved allegations that a 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 ordered PHH to return $109 million it had received. PHH claimed its conduct was legal and that the CFPB was unconstitutional and should be shut down.

The court tossed out the fine against PHH, but said the solution wasn’t to shut down the agency but to make it more accountable to the president.

Consumer advocates worried that while the court decision may be narrow, it could open the floodgates to weakening the agency.

The consumer watchdog was designed to be different from other financial regulators, many of which missed signs of the impending crisis, said Ethan Bernstein, assistant professor of leadership and organizational behavior at Harvard University, who helped set up the agency.

Allowing the president to hire and fire the director at will could inject politics into the position and make him or her less effective, especially during an election season, Bernstein said.

“The markets don’t stop in the months before the election,” Bernstein said. “And it would be really nice if our regulators stayed focused on protecting consumers, not on their jobs.”

The fallout from this decision should be limited, said former congressman Barney Frank, a Massachusetts Democrat and coauthor of the 2010 financial reform law that bears his name.

Frank said he agrees the president should have authority to hire and fire the CFPB director. Ultimately, the agency will survive because it has proven its value, he said.


“The CFPB has been one of the great successes that the government has done in a long time,” Frank said.

Deirdre Fernandes can be reached at deirdre.fernandes@globe.com. Follow her on Twitter @fernandesglobe.