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CFPB Operations Could Shift After Court Ruling

CFPB Director Richard Cordray. Photo by Sharon Farmer/flickr

A federal court’s decision last week to make the director of the Consumer Financial Protection Bureau report to the president sounded alarm bells in Washington, D.C.’s business and legal community. The change could have an effect, both politically and practically, on the young agency’s operations.

Financial professionals say the decision will likely have two major effects on CFPB operations. First, the agency’s prioritization of rules and enforcement actions could change because they fear a court’s reprisal. Second, the next president could opt to terminate the current director, Richard Cordray.

Whether either of these things will substantially change the agency is up for debate.

“It could, in a million small ways, affect the bureau’s operations,” said Benjamin Olson, an attorney at the law firm BuckleySandler LLP.

Separately, Lisa Gilbert of the consumer advocacy group Public Citizen said the ruling “is not going to change anything day to day” for the agency.

A panel of three judges on the U.S. Court of Appeals for the District of Columbia circuit ruled in PHH Corp. vs. CFPB that the 2010 Dodd-Frank Act crafted the director’s position in a manner that consolidated too much power at the top. Judge Brett Kavanaugh, who authored the majority opinion, argued that the CFPB’s director has more power than virtually any other government official, save the president.

To remedy this, Kavanaugh ruled that the director must report to the president. The agency’s Republican opponents viewed the ruling as a victory for their efforts to overhaul the CFPB, and Democrats largely brushed off the decision as a minor setback. The decision is at least a small loss for President Obama, who championed Dodd-Frank and counts the creation of the CFPB, with its political independence, as a hallmark achievement of his presidency.

Future Democratic administrations might also want the CFPB to remain politically insulated, but if the D.C. circuit’s decision stands that might be more difficult. “Now, it’s going to be harder for an administration to disown actions taken by the CFPB,” Olson said.

The president wants to be able to tell complaining companies that the CFPB makes decisions on their fate without political involvement from the White House, said Nick Gess, an attorney for Morgan, Lewis & Bockius LLP, a Philadelphia-based firm with offices in Washington. Now, that will be more difficult.

Gess pointed out that Kavanaugh, despite having written an acerbic opinion that was highly critical of the CFPB, ended up choosing that minimum remedy to change the powerful organization by using Supreme Court legal precedent to tweak a small portion of Dodd-Frank. The ruling specifies that the president has broader powers than before to dismiss the CFPB’s director.

With this minimal action, the court sent a message to the agency about its operations and structure, Gess said. “If you are the CFPB and its staff director, and looking at these recent decisions — most importantly PHH — you have to step back and say, ‘There’s a message here.'”

Olson, who previously served as the deputy assistant director for the CFPB’s office of regulations, noted that the CFPB’s enforcement priorities could change so that the agency doesn’t expose itself to future litigation risks. “I would think it would have the effect of making them even more reflective about the cases that they choose to expose themselves to [with] the risk of a negative court decision,” Olson said. “It’s going to change the calculus somewhat.”

The next president could also opt to terminate Cordray and replace him with someone more suited to his or her political views. Republican lawmakers have blasted Cordray using terms such as “dictator” to describe his tenure. However, Democratic presidential nominee Hillary Clinton as recently as last month singled out Cordray for praise during a speech on economic issues in Ohio.

If the power to dismiss the director remains, future presidents could also find themselves under the same kind of pressure that Obama encountered last week, when Sen. Elizabeth Warren (D-Mass.) urged him to use his power to effectively remove Mary Jo White as the chair of the Securities and Exchange Commission.

The path forward for the PHH litigation could either go through the Supreme Court, or again through an en banc rehearing of the D.C. circuit. Both parties in the lawsuit could, in theory, make the decision to appeal, especially since PHH didn’t succeed in its efforts to, in effect, shut down the agency until Congress comes up with a more constitutionally sound structure. The ruling also did not address the criticism of how the CFPB is funded.

Both a Supreme Court petition or an en banc rehearing have their strengths and weaknesses, Olson said. The most obvious risk of a Supreme Court hearing comes from the high court’s current eight-member roster. If the status quo remains in place and the justices deadlock on the case, the D.C. circuit’s ruling would stand.

Submitting a request for an en banc rehearing also would be risky since the appeals court has high standards for accepting such petitions.