A key provision of the Obama-era financial reform package that limits the president's ability to fire the head of the Consumer Financial Protection Bureau is constitutional, a federal appeals court ruled on Wednesday.
The consumer watchdog bureau, created as part of the Dodd-Frank Act in 2010, is led by a single director, who serves a five-year term and can only be removed by the president for "good cause," defined as "inefficiency, neglect of duty, or malfeasance in office." Republicans opposed the bureau and its first director, Richard Cordray, from the start, and the legal challenge to the bureau's structural independence from the White House had support from conservative and business groups.
Wednesday's ruling from the US Court of Appeals for the DC Circuit has different significance than it would have had in the fall, however, when Cordray was still in charge. At that point, the stakes were about Trump's ability to remove Cordray.
But with Cordray gone — he left the bureau in November to run for governor of Ohio — it's now Trump's turn to choose a nominee to lead the bureau. The director serves a five-year term, so if Wednesday's court ruling stands, it would insulate a Trump administration pick confirmed this year from removal for at least two years if the president doesn't win reelection in 2020.
The mortgage lending company that brought the challenge, PHH Corporation, could petition the US Supreme Court to review Wednesday's ruling. There were already signs that it planned to do so if it lost in the DC Circuit — PHH's lawyers expressed interest in revisiting Supreme Court precedent that the bureau cited in arguing that the constitutionality of having an independent agency with a director only removable for good cause was a settled question.
Although PHH lost on the constitutional issue, it won the reinstatement of an earlier ruling that found the bureau wrongly applied federal law in assessing the legality of the company's mortgage reinsurance activities; the bureau had imposed a $109 million penalty, which is now vacated. PHH released a statement calling the DC Circuit's decision "an important and gratifying outcome for PHH and the industry."
PHH's lead attorney, Ted Olson, did not immediately return a request for comment. Olson is a veteran Supreme Court litigator, and the fact that PHH brought him on was seen by lawyers following the case as another sign the company was prepared to take the case to the high court.
A CFPB spokesperson said in a statement, "We are analyzing the decision.”
There are two people claiming to be the rightful acting director of the bureau at the moment: Office of Management and Budget Director Mick Mulvaney, who was named acting director by Trump, and Leandra English, who Cordray named as his deputy director when he left. English is suing to stop Mulvaney from serving as acting director; a trial judge denied her request for an injunction earlier this month, and the case is now before the DC Circuit.
A three-judge DC Circuit panel ruled in October 2016 that the CFPB's single-director structure was unconstitutional. The bureau asked the full court to reconsider the issue, and the case was re-argued in May.
On Wednesday, the three judges who originally heard the case found themselves in the minority. The other seven judges who considered the case concluded that the single-director structure was constitutional.
Judge Nina Pillard wrote in the main opinion that a 1935 Supreme Court opinion that upheld the constitutionality of the Federal Trade Commission — an independent regulatory agency with powers similar to the CFPB's — applied to the CFPB fight. Later high court rulings that followed established that a good-cause removal standard could stand when an agency's independence was important to its ability to function, she wrote.
"Congress’s decision to provide the CFPB Director a degree of insulation reflects its permissible judgment that civil regulation of consumer financial protection should be kept one step removed from political winds and presidential will," Pillard wrote. "We have no warrant here to invalidate such a time-tested course."
The three DC Circuit judges who heard the first round of the case — Karen LeCraft Henderson, Brett Kavanaugh, and A. Raymond Randolph — each wrote their own dissenting opinions, saying that they would find the CFPB's structure unconstitutional. (Including opinions from judges who supported the ruling in favor of the bureau and the dissents, the total document comes to 250 pages.)
Trump in November added Kavanaugh to the list of judges the president would consider for the Supreme Court if another seat opened up. Kavanaugh, a former George W. Bush-era Justice Department official who was confirmed to the DC Circuit in 2006, wrote that the bureau's structure ran afoul of the president's constitutional responsibility to "take care that the laws be faithfully executed." That responsibility included supervising and holding accountable the president's subordinates in the executive branch, he wrote, but that was hampered by the kind of good cause restriction laid out in the Dodd-Frank Act, especially when just one person is in charge.
"Any new President who is elected in 2020, 2024, or 2028 may spend a majority of his or her term with a CFPB Director who was appointed by a prior President. That does not happen with the chairs of the traditional multi-member independent agencies. That dramatic and meaningful difference vividly illustrates that the CFPB’s novel single-Director structure diminishes Presidential power more than traditional multi-member independent agencies do," Kavanaugh wrote.
Sitting out the ruling entirely were Judge Greg Katsas, who was confirmed to the court in late November, and Chief Judge Merrick Garland.
UPDATE
Updated with comment from PHH Corp.