May 23, 2017

CFPB Constitutionality in Question

  • This week, the U.S. Court of Appeals will hear arguments on whether the structure of the Consumer Financial Protection Bureau is constitutional. 
  • The CFPB has been challenged because it was designed to have all three powers of government – judicial, executive, and legislative. 
  • Congress should reform the CFPB to bring it into alignment with separation of powers principles, creating needed accountability and transparency.  

On May 24, the full U.S. Court of Appeals for the District of Columbia will hear oral arguments about whether the structure of the Consumer Financial Protection Bureau is illegal. Senate Republicans have argued since the bureau’s creation that it is ill-conceived and lacks accountability.  

“Because the CFPB is an independent agency headed by a single director and not by a multi-member commission, the director of the CFPB possesses more unilateral authority – that is, authority to take action on one’s own, subject to no check – than any single commissioner or board member in any other independent agency in the U.S. Government.” U.S. Court of Appeals for the District of Columbia, 10/11/2016

Constitutionality in doubt

Last year, a three-judge panel of the D.C. Circuit Court ruled that the bureau’s independent structure was unconstitutional. To fix the constitutional problem, the court gave the president “the power to supervise and direct the Director of the CFPB” and remove him or her “at will at any time.” The CFPB appealed, and now the full court will rehear the case.    

The case involves PHH Corp., a New Jersey mortgage lender. In 2014, an administrative law judge fined the company $6.4 million for illegally accepted kickbacks from mortgage insurers to which it referred customers. The CFPB director, Richard Cordray, rejected that fine and imposed a new judgment of $109 million. PHH argued that CFPB’s vesting of executive authority within a single director, as opposed to a commission, is unconstitutional because it gives its director unilateral authority to bring administrative enforcement actions.

flawed structure

The structure of the CFPB was flawed since its creation by the Dodd-Frank Act in 2010. It was created to be headed by a director, appointed by the president with the advice and consent of the Senate for a five-year term. The statute gave extraordinary authority to the director, stating that he may only be removed for cause, such as “neglect of duty” or “malfeasance.” Unlike other federal agencies, the CFPB has the authority to pursue its own litigation and does not need to rely on the Justice Department.   

In March, the Trump administration filed court papers opposing the CFPB. The Justice Department said that the bureau’s structure creates separation-of-powers problems under the Constitution because the director is not answerable to the president: “There is a greater risk that an independent agency headed by a single person will engage in extreme departures from the president’s executive policy.”

Senate Republicans also have criticized the CFPB’s funding stream. It is not subject to congressional appropriations, but receives its funding through the Federal Reserve System, which has no influence over the CFPB’s budget or personnel decisions. Under the Dodd-Frank Act, the bureau requests monetary transfers from the Federal Reserve. The amount of these transfers is capped at 12 percent of the Federal Reserve’s operating expenses in fiscal year 2009 and adjusted each year based on a formula set by statute. For fiscal year 2017, the bureau’s funding cap will be $646 million.

CFPB Fiscal Year Funding (in millions)


In short, Dodd-Frank gives CFPB a level of independence unique in American government – and at odds with our constitutional system. By shielding the director from presidential authority; by giving the CFPB the power to investigate, try, and fine; and by letting it set its own budget, the agency possesses the powers of all three branches at once.

Senate Republicans have argued for commonsense reforms to make the bureau accountable. These include establishing a bipartisan board of directors to oversee the CFPB, subjecting the bureau to the annual appropriations process, and establishing a safety-and-soundness check for the prudential regulators. Democrats remain resistant to any changes to the CFPB to ensure it is accountable and transparent. 

plenty of Critics of the cfpb

In addition to concerns being raised by Senate Republicans related to the structure of the CFPB, critics contend that the bureau has a record of exceeding its authority. For example, the bureau has attempted to regulate auto dealers even though they were explicitly excluded from its jurisdiction by the Dodd-Frank Act. To get around this constraint, one Congressman wrote in a Wall Street Journal op-ed in February, “the CFPB regulates auto dealers through enforcement ‘bulletins’ on auto lenders, employing statistical analysis rather than specific acts to charge lenders with discriminatory lending.”

The newspaper ran another opinion piece last November noting that a federal judge “tossed out the bureau’s investigation of college accreditation because the bureau has no authority to conduct such an investigation.” In March, a federal judge dismissed the CFPB’s complaint against a payment-processing company, stating that the agency “failed to provide sufficient factual allegations.”

As the courts once again examine the constitutionality of the CFPB, Congress and the Trump administration should push for reforms that make the agency more accountable and transparent.


Issue Tags: Housing, Banking, Taxes