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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.

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