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Supreme Court Orders Restructuring of Consumer-Finance Watchdog

High court rules Consumer Financial Protection Bureau’s single-director setup is too independent from president. Supreme Court Orders Restructuring of Consumer-Finance Watchdog

The Supreme Court ordered changes to a government consumer-finance watchdog created in the wake of the 2008 financial crisis, ruling the agency’s structure was unconstitutional because its director held too much unchecked power.

To address the problem, the court held that the president can remove the director of the Consumer Financial Protection Bureau for any reason. The court rejected broader legal arguments that it should strike down the bureau altogether.

The decision on Monday caps a 10-year legal battle over the CFPB, which was designed to protect consumers from abusive financial-industry practices on products like mortgages, student loans and credit cards.

The bureau, the brainchild of former Democratic presidential candidate Sen. Elizabeth Warren (D., Mass), has been politically polarizing since its inception. Democrats have wanted a muscular CFPB to take on what they saw as financial-industry excesses. Republicans and Wall Street have criticized the bureau as an instrument of runaway government regulation, with too much power over a significant slice of the economy.

In a 5-4 ruling, the court said Congress overstepped constitutional lines in 2010 when it created the CFPB and placed it under the control of a single director who was insulated from the White House’s political direction. Lawmakers, attempting to give the bureau a buffer from political influence, said the director could only be removed by the president for “inefficiency, neglect of duty, or malfeasance in office.”

But the court, in an opinion by Chief Justice John Roberts, said the setup meant the CFPB’s director was unaccountable to the executive branch, creating an unconstitutional reduction of presidential power.

“The CFPB’s single-director structure contravenes this carefully calibrated system by vesting significant governmental power in the hands of a single individual accountable to no one,” the chief justice wrote.

As a remedy, Chief Justice Roberts said it was enough to give the president the freedom to fire the director at will. While Congress preferred an independent CFPB, the court suggested that lawmakers more likely would have preferred a dependent CFPB to no agency at all.

Throwing out the bureau entirely “would trigger a major regulatory disruption and would leave appreciable damage to Congress’s work in the consumer-finance arena,” the chief justice wrote.

The decision means the bureau’s operations will continue without major interruption, but with a shorter leash if its actions stray from White House priorities.

Kathy Kraninger, the current CFPB director, on Twitter said the ruling “finally brings certainty to the operations of the Bureau. We will continue with our important mission of protecting consumers with no question that we are fully accountable to the President.”

The Trump administration declined to defend the CFPB and agreed with legal challengers who argued its structure was unlawful, abandoning the legal position of the Obama administration.

The central portion of Monday’s decision against the CFPB’s structure split the court along ideological lines, with conservatives in the majority. Joining Chief Justice Roberts were Justices Clarence Thomas, Samuel Alito, Neil Gorsuch and Brett Kavanaugh.

The court’s four liberal justices dissented.

“Today’s decision wipes out a feature of that agency its creators thought fundamental to its mission—a measure of independence from political pressure,” Justice Elena Kagan wrote. Joining her dissent were Justices Ruth Bader Ginsburg, Stephen Breyer and Sonia Sotomayor.

Ms. Warren on Twitter said the court’s decision “handed over more power to Wall Street’s army of lawyers and lobbyists to push out a director who fights for the American people.” But she also said the bigger picture was that the bureau had survived attacks from Republicans and regulated industries. “The CFPB is here to stay,” she said.

Republicans welcomed the ruling, but said more needed to be done to make the CFPB accountable.

“The Supreme Court recognized what Republicans have been saying for years—the CFPB’s leadership structure is unconstitutional,” said Rep. Patrick McHenry (R., N.C.), the top Republican on the House Financial Services Committee.

The case before the high court involved a challenge by debt-relief firm Seila Law LLC, which sought to contest a CFPB subpoena.

After President Trump won the White House, his administration began rolling back regulations at many agencies. But the CFPB was different. It continued to pursue its agenda under Richard Cordray, an Obama appointee who remained at the bureau until November 2017.

Under Mr. Cordray, the bureau brought significant changes to consumer finance, a corner of the financial industry that had previously escaped strict regulatory scrutiny. The agency introduced federal government oversight to payday lending and made it easier for consumers to sue banks in groups. Both measures were subsequently softened or gutted in the Trump era

After Mr. Cordray’s departure, Mr. Trump appointed Mick Mulvaney, a CFPB critic and former South Carolina congressman, as interim director. Mr. Mulvaney, who was also the White House’s budget chief at the time, saw it as an opportunity to soften the agency’s hard-charging approach that financial companies had long complained about. He drew industry praise for a pullback in enforcement actions and a pledge to redo a new payday-loan rule that lenders warned would decimate them.

Under the leadership of Ms. Kraninger, a Trump appointee who took over the agency in December 2018, the CFPB shifted its mission as a watchdog over the financial industry from enforcement to consumer education. Ms. Kraninger said her goal is to move the needle on the number of Americans who can withstand an economic shock, while Democrats and consumer advocates said the education push shifts the burden of consumer protection from financial companies to ordinary citizens.

Aside from the CFPB, the ruling could have immediate ramifications for the Federal Housing Finance Agency, the regulator for Fannie Mae and Freddie Mac, which has a similar single-director structure.

A lower court, hearing a challenge to the government’s capturing of the mortgage-finance companies’ profits, already ruled the FHFA’s setup is unconstitutional.

An FHFA spokesman didn’t have immediate comment on Monday’s ruling.

Isaac Boltansky, of Compass Point Research & Trading, said the decision could increase a sense of urgency in FHFA director Mark Calabria to take steps to return Fannie and Freddie to private ownership prior to the November election or shortly thereafter. Ending the companies’ so-called conservatorships has been a top policy goal of Mr. Calabria.

Updated: 1-31-2021

Banks Brace For Tougher Rules Under Biden On Consumer Protection, Fair Lending

Obama-era focus on financial stability gives way to concerns about racial equity, climate change.

After the 2008 financial crisis, regulatory reform efforts sought to make the system safer. This time, the goal will be to make it fairer.

In keeping with President Biden’s focus on helping minorities and people with low and moderate incomes—groups hit hardest by the coronavirus-induced downturn—financial regulators are expected to emphasize racial equity as they focus on consumer protection and expanding access to financial services.

That would mark a departure from the last time Democrats controlled the White House and Congress at the start of the Obama administration. Early efforts then centered on fighting the crisis, followed by a push to ensure that it would never happen again with the Dodd-Frank Act of 2010, the most sweeping financial legislation in a generation.

“Obama looked at how to make the financial system stable,” said Karen Petrou, head of Federal Financial Analytics, a regulatory advisory firm. “Biden is looking at, ‘How do we make the banking system just?’ That’s very different.”

In practice, that will translate into tougher rules on payday lenders—who charge high rates of interest on short-term loans—and stronger enforcement of fair-lending requirements, an administration official said.

Biden’s team will also push to establish a government-backed consumer credit firm as an alternative to the companies that create credit reports, the official said.

Mr. Biden’s choices for top regulatory posts highlight his push to protect consumers from what some Democrats view as predatory behavior by financial firms.

Rohit Chopra, currently on the Federal Trade Commission, is the nominee to head the Consumer Financial Protection Bureau.

Michael Barr, a former Treasury Department official who helped craft Dodd-Frank and create the CFPB, is said to be the top candidate to lead the Office of the Comptroller of the Currency, which oversees national banks such as JPMorgan Chase & Co. and Bank of America Corp.

“While the Trump-era regulators were not blind to areas like consumer protection, they weren’t at the top of the list of their priorities,” said Daniel Stipano, a former top attorney at the Office of the Comptroller of the Currency. “They’re going to be back at the top of the list now.”

At the FTC, Mr. Chopra has repeatedly advocated bolder enforcement actions. In 2019, he and another Democratic commissioner objected to a settlement in which Facebook Inc. agreed to pay $5 billion following a probe into the tech giant’s privacy missteps, contending it wasn’t tough enough.

Mr. Chopra is seen as likely to step up enforcement actions at the CFPB, with a focus on higher monetary penalties and a crackdown on repeat offenders. Actions fell sharply early in the Trump administration before rising again last year.

He may also revisit a provision, repealed under the Trump administration, requiring so-called payday lenders to verify borrowers’ incomes to ensure they can afford to repay high-interest, short-term loans. He also is expected to boost the power of the bureau arm focused on fair lending.

Republicans in Congress and bankers, who have criticized the CFPB as an instrument of government overreach, are wary of the prospect of yet another swing of the regulatory pendulum.

“The banking industry needs regulations written for years, not election cycles,” said Richard Hunt, president and chief executive officer of the Consumer Bankers Association. “The more regulators from both parties can put politics aside, draft regulations with input from all parties and explain their positions, the more Americans can benefit from a well-regulated banking industry.”

Consumer advocates are looking to the Biden administration to ease lending standards that tightened during the pandemic, which they say has disproportionately harmed minorities who tend to have lower credit scores and less cash for down payments, said Mike Calhoun, president of the Center for Responsible Lending.

The Biden administration’s focus on racial equity also means banks likely will be required to lend and invest more in low- and moderate-income communities under revamped rules for the Community Reinvestment Act. The OCC and other regulators can block mergers and new branches if banks fail to meet these requirements.

Banks are unlikely to see further easing of rules. During the Trump administration, banks saw some requirements of Dodd-Frank scaled back through legislation that increased a key regulatory threshold at which larger firms are subject to tougher rules.

On the other hand, Treasury Secretary Janet Yellen could move to undo Trump administration changes that made it more difficult to subject nonbank financial firms, such as Wall Street money managers, to heightened supervision.

On climate change, Ms. Yellen could work with other regulators to require banks to better assess risks posed by the impact of climate change.

“I think we need to seriously look at assessing the risk to the financial system from climate change,” Ms. Yellen told a Senate panel this month.

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