Why Trump wants power to remove director of Consumer Financial Protection Bureau

On Friday, the DOJ joined a legal challenge to the CFPB, the government’s consumer watchdog for financial affairs. Declaring the CFPB’s structure unconstitutional, as the lawsuit seeks to do, might support the Trump administration’s deregulation efforts.

First Look

In an unusual move, the Trump administration has signed on to a legal challenge against one of the government’s own agencies.

On Friday, the Department of Justice (DOJ) filed an amicus brief in an appeal of a case involving the Consumer Financial Protection Bureau (CFPB), a consumer watchdog, and the PHH Corp. mortgage company. In its brief, the DOJ sided with a three-judge panel that had originally described the CFPB’s structure unconstitutional, saying it gave the bureau’s director too much power.

“There is a greater risk that an independent agency headed by a single person will engage in extreme departures from the president’s executive policy,” the DOJ wrote in the brief, according to The Wall Street Journal.

If the full court decides to uphold the verdict of the three-member panel, the president would be able to fire the bureau head at will, something he currently cannot do. This would likely benefit President Trump, who has expressed a desire to replace current director Richard Cordray with someone who might be more business-friendly. But the bureau’s independence is seen as a positive by many Democrats, who say it has helped consumers.  It’s unclear how the court will rule.

The CFPB was created in 2010 as part of the Dodd-Frank Act. In the aftermath of the financial crash, it was seen as a way to tighten regulation, prosecute irregularities and make banks more oriented toward the needs of consumers. 

In the six years since its creation, the CFPB contends, it has fulfilled that mandate. The Bureau’s programs are designed to educate people about their financial choices, provide tools to help them make decisions, and enforce the law to prevent companies from taking advantage of consumers. The CFPB’s actions, it says, have provided $11.8 billion in “relief” to more than 29 million consumers.

Critics, however, suggest the bureau has hurt the financial industry, inhibiting job creation by making financial institutions more wary about lending and business opportunities.

At issue in this case is the CFPB’s autonomy, specifically the power of its director. Directors can only be fired by the president for cause: that is, “inefficiency, neglect of duty, or malfeasance in office.” Otherwise, they serve five-year terms, regardless of presidential transitions. But critics, including Republican legislators, say they give the agency, and its director, too much power.

This concern has been playing out in a case between the CFBP and PHH Corp, a New Jersey-based mortgage lender. Last year, an administrative judge ruled that PHH had violated the Real Estate Settlement Procedures Act by accepting kickbacks from mortgage insurers, and levied a $6.4 million fine. Mr. Cordray, the CFPB director, took a more critical view of the violation, and imposed a $109 million sanction.

The case went to appeals court, where a panel from the Washington, D.C. Circuit ruled 2-1 against Cordray’s interpretation of the law and the CFPB’s decision to enforce that interpretation. Cordray, they concluded, had too much power, thanks to the CFPB’s structure, which they declared unconstitutional. To prevent CFPB overreach, they said, the president should be allowed to remove the director for any reason.

The Obama-era DOJ backed the CFPB’s efforts to get the case reheard, saying the bureau’s structure and independence from the president preserve its watchdog power. A larger subset of the DC appeals court vacated the ruling until the case could be heard by the entire DC circuit court, allowing the CFPB to continue its work for the time being. 

The current DOJ wrote Friday that the president should be allowed to replace the head of the CFPB at will, though it did not endorse eliminating the bureau altogether. For Mr. Trump, that might be an opportunity to install a head who is more business-friendly. Cordray’s term does not expire until July 2018.

But while the DOJ’s brief will likely be taken seriously, the outcome of the appeal is uncertain. The judges who struck down the bureau structure as unconstitutional were Republican appointees, whereas the DC appeals court was largely appointed by Democrats.

The CFPB is expected to file a brief laying out its own perspective by the end of March. Oral arguments are set to begin May 24.