A New York federal judge ruled Thursday that the structure of the Consumer of Financial Protection Bureau is unconstitutional and that the watchdog agency should be eliminated.
Senior U.S. District Judge Loretta A. Preska threw out the bureau’s lawsuit against a New Jersey company that the bureau alleged had scammed former NFL players and 9/11 emergency medical workers out of millions of dollars.
Preska’s ruling contradicts a decision by a U.S. appeals court on the issue this year and increases the likelihood that the CFPB’s constitutionality could become fodder for the Supreme Court. Noting that the decision by the U.S. Court of Appeals for the District of Columbia Circuit was not binding in New York, Preska said she “respectfully” disagreed.
The independent structure of the CFPB has long been at the center of a partisan debate over the agency, created during the Obama administration in response to the global financial crisis. The CFPB is ruled by a single director rather than a multi-member commission and gets its funding from the Federal Reserve rather than Congress. The bureau’s director also can be fired only for cause, by the president, another element of independence.
The CFPB’s supporters say these streaks of independence give the agency needed freedom from political and financial pressures. But Republicans and business leaders complain that it has made the CFPB a rogue, unaccountable force.
The ruling means the Supreme Court could ultimately be called on to decide the fate of the agency, legal experts said. “It will make the issue more attractive for the court,” said Allison Schoenthal, an attorney with Hogan Lovells who represents banks before the CFPB and other regulators.
In the New York case, the CFPB and the New York attorney general sued RD Legal Finding last year, accusing the company of scamming retired NFL players suffering from brain injuries and 9/11 first responders anticipating money from large settlements. RD Legal contacted the alleged victims after they had been awarded a settlement but before they had received all of it, tricking them into taking out high-interest loans while they waited for their money, according to the lawsuit. Some borrowers ended up paying back more than twice as much as they borrowed.
Preska sided with RD Legal Finding and ruled that the CFPB does not have standing to pursue its case. “Because the CFPB’s structure is unconstitutional, it lacks the authority to bring claims” against the company, the ruling says. But the New York attorney general can continue to pursue a claim, Preska said.
“We are pleased that Court correctly found that the CFPB is unconstitutional as structured, and this underscores that the CFPB never should have brought this action in the first place,” David Willingham, the Boies Schiller Flexner attorney representing RD Legal, said in a statement.
Preska also ruled that the section of the 2010 Dodd-Frank financial overhaul law that created the CFPB should be eliminated. “I would strike Title X in its entirety,” the ruling says.
Will Corbett, litigation counsel for the Center for Responsible Lending, called the ruling inappropriate.
“Under the radical logic of this court’s ruling, our consumer watchdog would be eliminated and the door would be reopened for financial predators, such as those who steal from 9/11 heroes,” he said in a statement.
The ruling comes at a time when the CFPB is already in upheaval. Another court is still weighing a case challenging the legitimacy of President Trump’s pick to temporarily run the agency, Mick Mulvaney. Since taking control of the CFPB late last year, Mulvaney has launched a broad review of the bureau’s operations and called for reining in its enforcement powers and slashing its budget. Democrats have warned that he is weakening the agency.