June 27, 2018.
On Thursday, New York federal Judge Loretta Preska ruled the U.S. Consumer Financial Protection Bureau’s structure to be unconstitutional. As a result of the ruling, the CFPB could not sue a cash advance company that supplies funds to those waiting on structured settlement payouts.
This is the second time in a year that a federal court has found the CFPB to be in violation of the constitution. Judge Preska’s ruling forced the consumer watchdog agency to drop their case against New York’s RD Legal Funding for allegedly cheating 9-11 and NFL concussion settlement members out of money. RD Legal Funding argued that the CFPB’s unconstitutional structure invalidated the bureau’s suit brought under the Consumer Financial Protection Act. Judge Preska found in favor.
In January 2018, the United States Court of Appeals for the District of Columbia Circuit reversed its previous ruling in the 2016 CFPB-PHH case, where the CFPB was found to be unconstitutionally structured. After having its $109 million fine vacated, PHH Corp., a mortgage lender and servicer, opted not to appeal the Consumer Financial Protection Bureau’s constitutionality at the Supreme Court level.
Days after being declared unconstitutional, the CFPB also dropped its case against Zillow for potential RESPA violations.
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Did the Bureau overreach? A recap of the arguments against the CFPB
Since its creation in 2010, when the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed in the Obama administration, the CFPB has sparked bipartisan debate. Those pushing for reform question the CFPB’s funding and, like Judges Preska and Kavanaugh, its director. The CFPB’s director sits at a five-year term. Only the president can fire the director with cause. The Bureau is also funded by the Federal Reserve, not Congress.
Judge Preska supported Judge Brett Kavanaugh’s original decision in the Court of Appeals, where he found the CFPB structure to be unconstitutional. Judge Kavanaugh ruled against the CFPB’s function as an “independent agency that exercises substantial executive power and headed by a single Director.” Judge Preska also ruled to strike the section of the Dodd-Frank Act establishing the CFPB.
Challenging the CFPB supports democracy and economic freedom, Rep. Jeb Hensarling, R-Texas, House Financial Services Committee Chairman, said when he spoke out in favor of the ruling. “By design, the Bureau is arguably the most powerful and least accountable Washington bureaucracy in American history.”
Those who back the CFPB say this independence grants the Bureau necessary financial and political freedom.
The CFPB needs these liberties, supporters say, to maintain its primary purpose in protecting American consumers of financial products and services. Within its seven years of operation, the CFPB has supplied 31 million Americans with over $12.4 billion in relief funds in cases of illegal financial dealings. “The 2008 financial crisis proved the need for the CFPB, a successful independent consumer watchdog,” Will Corbett, Litigation Counsel for the Center for Responsible Lending (CRL), said. “Under the radical logic of this court’s ruling, our consumer watchdog would be eliminated. The door would be reopened for financial predators, such as those who steal from 9-11 heroes.”
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Amidst these court battles, the National Association of Consumer Advocates (NACA) has urged CFPB supporters to write letters to the editor, op-eds, and blog posts to help levy against Wall Street’s and Congress’ attacks.
Next stop Supreme Court: Big changes ahead for the CFPB
The CFPB must inform the courts by July 9 of their decision to appeal. If the latest ruling holds up in appeals, it’s possible the CFPB’s case for constitutionality will reach Supreme Court level. Currently, the CFPB declines to comment. New York’s Attorney General says the state plans to continue to “vigorously pursue” their charges against RD Legal.
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Judge Preska hasn’t ordered the CFPB to shut down yet. Because its atypical management structure is now in the spotlight, the Bureau is probably prepping to make changes. Until then, the CFPB may not be able to function as a consumer watchdog agency. Courts found the Bureau lacking in the authority, or the constitutional structure, needed to bring legal claims.
Should the CFPB dissolve, or will restructuring help restore the agency to its intended purpose? Rep. Jeb Hensarling made strong allegations against the CFPB that leave consumers searching for answers. “The Bureau infringed on the economic freedoms of consumers… Limited their financial choices, increased their costs, and failed to hold managers accountable for widespread discrimination and abuse of its own employees,” Hensarling said.
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As a result, sources deemed reliable but not guaranteed.