WASHINGTON — An appeals court decision declaring that the director of the Consumer Financial Protection Bureau's must serve at the pleasure of the president might have more far-reaching implications than even the judge who wrote the opinion might want.

The ruling in PHH v. CFPB found that a single clause in the Dodd-Frank Act establishing the agency — stipulating that its director could only be removed "for cause" — violates the constitutional separation of powers because it vests executive authority in a single person who is not accountable to the president.

The ruling effectively set the precedent that federal agencies can be headed by an executive single director who answers to the president or can be an independent regulatory commission which does not.

That is a new constitutional standard that may impact a host of other agencies run by a single director, said Richard Horn, former senior counsel at the CFPB.

"There's not just two specific categories of agencies, executive and independent — it's more of a spectrum," Horn said. "This could affect agencies that typically one might think of as independent."

Aaron Klein, an economist with the Brookings Institution and former Treasury official, said the bright line laid out by the ruling would have immediate implications for the Federal Housing Finance Agency, which was established in 2008 under President George W. Bush, and the Office of the Comptroller of the Currency, formed in 1863 under President Lincoln.

"It immediately begs the question, 'Does this apply to the FHFA and the OCC?' — two agencies created under Republican presidents which have single agency heads that are largely appointed and removable by similar processes," Klein said. "When judges set precedents like this, they impact more than just the case before them."

The constitutional basis of independent executive agencies is somewhat convoluted and, with the exception of the OCC, relatively recent. The first independent federal agencies began cropping up in the early 20th century with the passage of the Federal Trade Commission and Federal Reserve. But in 1935 the Supreme Court handed down a ruling, Humphrey's Executor v. United States, that affirmed Congress' authority to create independent federal agencies and to limit the President's authority to remove the head of such an agency if it so chooses.

Since that time, several independent agencies have proliferated with varying degrees of executive oversight — the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Communications Commission, the National Labor Relations Board, etc.

The FHFA was formed as a successor to the Federal Housing Finance Board, which regulated the Federal Home Loan banks, and the Office of Federal Housing Enterprise Oversight, which oversaw Fannie Mae and Freddie Mac. But the two agencies were not structured the same. The FHFB had a five-member board while Ofheo was run by a single independent director. When the FHFA was created, it retained Ofheo's structure.

Judge Brett Kavanaugh, who authored the PHH ruling, said in his opinion that the FHFA — along with the Social Security Administration and Office of Special Counsel — may have single directors but are distinct from the CFPB because it exercises the executive branch-derived power of "bringing law enforcement actions or imposing fines and penalties against private citizens for violation of statutes or agency rules."  

The OCC, meanwhile, was formed as an offshoot of the Treasury in order to oversee the creation and disbursement of a national currency — a novel concept at the time. But while the OCC ostensibly answers to the Secretary of the Treasury, the Comptroller has certain protections that are not afforded to most department heads.

The Comptroller may not be dismissed except "upon reasons to be communicated by [the president] to the Senate", and the Treasury Secretary "may not delay or prevent the issuance of any rule or the promulgation of any regulation by the Comptroller of the Currency, and may not intervene in any matter or proceeding before the Comptroller of the Currency (including agency enforcement actions), unless otherwise specifically provided by law."

One former Treasury official speaking on the condition of anonymity said that, based on its present construction, the ruling would make the OCC into a totally subservient arm of the Treasury.

"I presume that the court would have found unconstitutional a statute that prevented the president from interfering in any legislative, regulatory or enforcement actions by the CFPB," the former official said. "It's hard to see how equivalent provisions in current law restricting the Secretary of the Treasury's authority over the Comptroller would be any more constitutional."

Klein said another question would be whether regional Federal Reserve Banks might be considered constitutional by the same logic. The Supreme Court decided in its 2010 ruling in Free Enterprise Fun v. Public Company Accounting Oversight Board that the Sarbanes-Oxley Act had violated the constitutional separation of powers by creating a commission — the PCAOB — that was appointed by the SEC and whose members could only be removed for cause.

"That same [theory] is true for the PCAOB as it is for the regional Federal Reserve banks, which are appointed by the Federal Reserve Board and who have regulatory responsibilities — and, by the way, are run by single heads," Klein said.

But the PHH ruling might have other effects as well. Walt Mix, head of the financial services practice at Berkley Research Group, said having the CFPB director more accountable to the president would have the secondary effect of making the agency more akin to other bank regulators. That, in turn, could incentivize the CFPB to act in a more coordinated fashion with other agencies.

"The ruling makes the other federal bank regulatory agencies — the OCC, the Fed, FDIC — more coequal with the CFPB because it's no longer the case that the director of the CFPB has to be removed for cause," Mix said. "The CFPB will more likely work more closely with the other agencies."

Horn said that one other uncertain effect of the ruling is whether it would require CFPB's rules to go through the White House Office of Management and Budget before being approved — a step required for cabinet-level agencies but one from which CFPB and other bank regulators are exempt.

"The executive order that directs agencies to submit their final rules to OMB for review relies on a specific definition of independent regulatory agencies … that explicitly excludes CFPB, as well as other banking agencies," Horn said. "That hasn't changed — or at least the court didn't say if that would change based on their opinion."

But all of this relies on the assumption that the PHH ruling will stand, Klein said. The CFPB has not yet publicly indicated whether it will appeal the decision, but most analysts assume that it will. The agency filed a brief in an unrelated case on Oct. 14 that sharply criticized the ruling, saying it has "no basis in the text of the Constitution or in Supreme Court case law" and "is not likely to withstand further review."

Klein said that, depending on who wins the White House and who is appointed to the vacant seat on the Supreme Court, there is still more reason to believe that Kavanaugh's opinion will be overturned.

"There is a long history of corporate interests who sue [over] regulation under a wide variety of theory — including regulatory structure — where usually courts following precedent have upheld the law," Klein said.

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