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A U.S. consumer watchdog agency that helped unravel the Wells Fargo & Co. scandal has an unconstitutional structure because it gives too much power to its director, a federal appeals court ruled Tuesday.
The court said the way that the Consumer Financial Protection Bureau is organized violates the Constitution’s separation of powers because it limits the president’s ability to remove the agency’s director, currently Richard Cordray, a Democrat and former Ohio attorney general.
The ruling, if upheld, would curtail the authority of an agency that has been opposed by the banking industry and some Republican critics.
They view the CFPB — established as part of the Dodd-Frank reforms after the financial crisis of 2008 and 2009 — as a thorn in the side of the industry and one that has overreached in its regulation of consumer financial matters.
“This is a good day for democracy, economic freedom, due process and the Constitution,” Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, said in a statement.
The law now states that the bureau’s director can be removed only “for cause,” such as neglect of duty. The court said that conflicted with the Constitution, which allows the president to remove executives for any reason.
Hensarling has proposed overhauling Dodd-Frank, including replacing the CFPB’s single director with a bipartisan, five-member commission. On Tuesday he called the CFPB “arguably the most powerful and least accountable Washington bureaucracy in American history.”
But consumer advocates and some top Democrats decried the court’s ruling, saying it opened the door to the prospect that the CFPB’s efforts could be weakened under increased political pressure from the White House and Congress.
The law creating the CFPB “carefully struck a balance between protecting the consumer bureau from politics and the (financial) industry’s political allies while ensuring it was accountable and had effective oversight,” said Dennis Kelleher, president of the consumer advocacy group Better Markets.
The court’s ruling is “damaging to American consumers” and “it’s going to embolden the industry that’s been trying to kill” the agency, Kelleher said.
The CFPB said it disagreed with the ruling by the three-judge panel of the U.S. Court of Appeals for the District of Columbia, and asserted that the ruling would not slow its efforts to investigate wrongdoing and seek enforcement actions.
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