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Court of Appeals set to hear landmark challenge to CFPB constitutionality

D-Day for CFPB coming this week

The Consumer Financial Protection Bureau’s moment of truth (in the courtroom, at least) is coming this week as the full Court of Appeals for the District of Columbia Circuit is set to rehear the landmark challenge to the agency’s constitutionality brought by PHH Corp.

On Wednesday, both the CFPB and PHH will make their case before the full Court of Appeals, which agreed to rehear the court’s October decision that declared the CFPB’s leadership structure unconstitutional by a 2-1 vote and vacated a $100 million fine levied by the CFPB against PHH.

The court’s earlier decision declared the leadership structure of the CFPB to be unconstitutional, ruling that CFPB’s current structure allows the director to wield far too much power, more than any other agency in the government.

“Because the Director alone heads the agency without Presidential supervision, and in light of the CFPB’s broad authority over the U.S. economy, the Director enjoys significantly more unilateral power than any single member of any other independent agency,” the court wrote in its October decision.

The case began with CFPB Director Richard Cordray adding a $103 million increase onto a $6 million fine initially levied against PHH for allegedly illegally referring consumers to mortgage insurers in exchange for kickbacks.

PHH fought the fine, arguing that Cordray did not have the authority to increase the fine. The case made its way to the Court of Appeals, which ruled in October that the CFPB’s leadership structure was unconstitutional and vacated the additional $103 million fine.

The CFPB fought the ruling, asking the court to rehear the case en banc, meaning that it wanted the entire court to hear the case, which the court agreed to do back in February.

The court’s previous ruling in the CFPB-PHH case also made the director of the agency removable at will. Under the CFPB’s current structure, the director serves a five-year term and may only be terminated by the president for “inefficiency, neglect of duty, or malfeasance in office.”

And now, the CFPB’s day of reckoning is nigh upon us, as the sides are due before the full Court of Appeals on Wednesday to argue for the future of the embattled agency.

And as the CFPB fights for its continued existence, it will do so without the help of the rest of the government.

Earlier this year, the government began to indicate that it might be switching sides in the battle between the CFPB and PHH, signaling that the Trump administration would not be as supportive of the CFPB as the Obama administration had been.

And indeed that’s what happened, as the Department of Justice filed an amicus brief in March, asking the court to rule the CFPB’s leadership structure unconstitutional and grant President Donald Trump the authority to fire the CFPB director at will.

In its filing, the DOJ stated that the CFPB’s structure is a violation of the separation of powers and should be ruled unconstitutional.

The DOJ’s filing is limited to the issue of whether the CFPB director is removable for cause or not. The government does not weigh in on the fine against PHH, nor does the government ask for the abolishment of the CFPB, as PHH did in a recent filing.

“In sum, a removal restriction for the director of the CFPB is an unwarranted limitation on the President’s executive power,” the DOJ argued in the filing.

While the CFPB and PHH will make their arguments on Wednesday, it’s not believed that the court will rule on the case for some time, as noted by Keefe, Bruyette & Woods analyst Brian Gardner.

In a note sent to clients on Monday, Gardner writes that both sides could see a victory whenever the court hands down its decision.

“While we are unsure of when the court will release its decision in the case, when the court does rule, we expect it will probably uphold the court's initial ruling in favor of PHH and against the CFPB's fine,” Gardner writes.

“However, we also think the court is likely to overturn the ruling on the CFPB's constitutionality. The fact that the court granted an en banc appeal suggests to us that there is enough opposition to that part of the appeals court's decision,” Gardner continues.

“We do not expect to see an opinion in the case for several months, but with the Department of Justice indicating that it believes the CFPB's structure is unconstitutional and the CFPB unlikely to give in on defending itself, we expect that whatever the outcome, it will be appealed to the Supreme Court,” Gardner concludes.

But even in the event that the CFPB does secure a reversal of the court’s earlier ruling, the bureau is still in the crosshairs of several legislative challenges brought by the Republicans in the House of Representatives and the Senate.

Chief among those is the Financial CHOICE Act, the Republican-crafted replacement for the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The bill, if passed, would change the structure of the CFPB to make the director fireable at will, which would make a Court of Appeals decision in the CFPB’s favor a moot point.

However, last week Senate Majority Leader Mitch McConnell, R-Kentucky, said he is not optimistic about the passage of the Financial CHOICE Act.

“I’d love to do something about Dodd-Frank, particularly with regard to community banks, but that would require Democratic involvement,” McConnell told Bloomberg News last week. “I’m not optimistic.”

Either way, the saga of the CFPB is likely far from over.

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