The leadership structure of the Consumer Financial Protection Bureau is constitutional, a federal appeals court ruled Wednesday.

The U.S. Court of Appeals for the D.C. Circuit said that having a single director of the agency, as opposed to a commission, does not violate the constitution, overturning an earlier court ruling that concluded the opposite. The decision means that the president can only fire a CFPB director "for cause," and cannot do so at will, as the earlier court ruling claimed.

"Today, we hold that federal law providing the director of the CFPB with a five-year term in office, subject to removal by the president only for 'inefficiency, neglect of duty, or malfeasance in office,' is consistent with the president’s constitutional authority," said the ruling, which was approved by eight of 11 justices involved in the review of the case.

CFPB Director Richard Cordray
"I feel very vindicated," said former CFPB Director Richard Cordray. "It feels to me like this is a good day for America. What this vindicates is that Congress can provide for the independence of a federal agency especially with respect to law enforcement." Bloomberg News


But the ruling was not a complete victory for the CFPB. It affirmed the lower court ruling throwing out the CFPB's $109 million fine against PHH, a nonbank mortgage lender that was fined over an alleged kickback scheme. The appeals court said that then-CFPB Director Richard Cordray had erred in reinterpreting the Real Estate Settlement Procedures Act and applying penalties retroactively.

"Even if the director’s contrary interpretation (that Respa prohibits tying arrangements) were permissible, the panel held, it was an unlawfully retroactive reversal of the federal government’s prior position," the ruling said. "The court said that the panel had stated that a three-year statute of limitations applies both to administrative proceedings and civil actions enforcing Respa."

The case was remanded to the CFPB for it to set a new penalty.

PHH sued in part over the fine, but also claimed the CFPB's leadership structure and funding outside of congressional appropriations were unconstitutional.

Still, Cordray, who is now running for Ohio governor, claimed victory on Wednesday.

"I feel very vindicated," Cordray said in a phone interview. "It feels to me like this is a good day for America. What this vindicates is that Congress can provide for the independence of a federal agency especially with respect to law enforcement."

The ruling's importance has diminished since the voluntary departure of Cordray in late November. Prior to that time, Republicans had been hoping an appeals court ruling against the CFPB would give President Trump the freedom to fire Cordray.

Ironically, the ruling may help Trump now because it means whoever he appoints as a permanent director of the CFPB can serve a five-year term without being fired, even if Trump were to lose his likely re-election bid in 2020.

The ruling was not entirely a surprise given that several justices in oral arguments had referenced a 1935 Supreme Court decision, Humphrey's Executor v. U.S., in which the high court said the president could not remove a member of the Federal Trade Commission at will.

"We follow that precedent here to hold that the parallel provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act shielding the director of the CFPB from removal without cause is consistent with Article II," the court said in its decision on Wednesday.

But three judges — Karen LeCraft Henderson, Brett Kavanaugh and A. Raymond Randolph — dissented from the majority opinion. Henderson filed her own opinion while Kavanaugh and Randolph joined in a separate dissenting opinion. Randolph also filed his own brief dissent to the majority opinion.

All three of the dissenting judges agreed that the CFPB’s single-director structure, five-year terms and self-contained funding mechanism amounted to a violation of Title II of the constitution. Henderson said in her opinion that “consent of the governed is a sham if an administrative agency, by design, does not meaningfully answer for its policies to either of the elected branches.”

Henderson went on to say that the constitutional protections for independent regulators identified in Humphrey’s Executor do not apply in the case of the CFPB, precisely because those protections are meant to extend to a “legislative agency” headed by “non-partisan … body of experts,” whose terms are staggered, thus leaving leadership in the hands of the sitting president. Those provisions do not apply to the CFPB, Henderson said.

“First principles, not Humphrey’s Executor, control here,” Henderson said. “This unaccountable agency violates them.”

Kavanaugh — who wrote the lower-court opinion striking the “for cause” provision in the CFPB’s governing statute — similarly relied on an appeal to first principles in his dissent to the majority opinion, saying that the fundamental protection against tyranny is the separation of powers. The advent of independent regulatory agencies poses a “fourth branch” of government that poses a threat to individual liberty — unless its powers are checked.

“To prevent tyranny and protect individual liberty, the Framers of the Constitution separated the legislative, executive, and judicial powers of the new national government,” Kavanaugh writes. “The independent agencies collectively constitute, in effect, a headless fourth branch of the U.S. Government … [that poses] a significant threat to individual liberty and to the constitutional system of separation of powers and checks and balances.”

That internal check on independent agencies has been the multimember commission structure of those agencies, Kavanaugh said. CFPB’s critical difference from other independent agencies is its vesting of all of its authorities into a single director. Striking the for-cause provision from the Dodd-Frank Act would remedy this unconstitutional concentration of power, he said.

“In other words, the heads of executive agencies are accountable to and checked by the President; and the heads of independent agencies, although not accountable to or checked by the President, are at least accountable to and checked by their fellow commissioners or board members,” Kavanaugh said.

“Precedents require that we sever the CFPB’s for-cause provision, so that the Director of the CFPB is supervised, directed, and removable at will of the President.”

Henderson disagreed on this point, arguing that instead the agency should be completely dissolved and its governing statute revoked as unconstitutional.

“Excising only the for-cause removal provision would leave behind a one-legged agency that, by all indications, the Congress would not have created,” Henderson said. “Accordingly, I would invalidate [Dodd-Frank] Title X in its entirety and let the Congress decide whether to resuscitate—and, if so, how to restructure—the CFPB.”