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Court ruling on CFPB constitutionality could be 'blessing in disguise' for agency

Republicans celebrated and consumer advocates decried anOct. 11 ruling thatthe Consumer Financial Protection Bureau is unconstitutional, but the rulingmight actually derail Republican efforts to revamp the regulator.

The U.S. Court of Appeals for the District of ColumbiaCircuit found the regulator's single-director leadership structure isunconstitutional. However, rather than suggesting adoption of a commission —something Republicans have attempted to legislate — the justices merely sentthe CFPB to the executive branch.

"This decision is actually a blessing in disguise forthe CFPB," said Adam Levitin, a law professor for Georgetown Universitywho serves on the bureau's Consumer Advisory Board. He said the decision shouldkill Republican efforts to implement a commission structure since the justiceshave already addressed the constitutionality issue. "The D.C.Circuit did agree with [Republicans], but the D.C. Circuit also thinks they'vefixed the problem," Levitin said.

Created by the Dodd-Frank Act to enforce consumer law, theCFPB has been a lightning rod for Republican criticism. Rep. Jeb Hensarling,R-Texas, the chairman of the House Financial Services Committee, has often calledthe agency "the single most powerful and least accountable federal agencyin American history."

Similarly, the Oct. 11 ruling railed against the agency's"single, unaccountable, unchecked Director" as a "threat toindividual liberty."

Justin Schardin, director of the Bipartisan Policy Center'sfinancial regulatory reform initiative, said Republicans will likely use thejustices' language as ammunition in arguments. But he said it is unlikely theruling affects the chances of reforming the agency. "Whetherthe agency should exist in the first place has been a constant battle sinceDodd-Frank was passed," he said. "And I don't think this changesmuch."

Levitin said the ruling might politicize the CFPB more bysubjecting it to presidential discretion. The decision allows the president tofire the CFPB director at will; previously, such a removal could only come"for cause."

Laurence Platt, a partner for Mayer Brown's consumerfinancial services practice, agreed that the ruling dampens Republicans'unconstitutionality argument. "It doesn't undercut the policyargument of the advantages of a full board rather than a single director, butit does make the constitutional argument harder," Platt said.

Despite the narrow judicial remedy, the CFPB suggested in astatement that it plans to appeal: "The Bureau respectfully disagrees withthe Court's decision. The Bureau believes that Congress's decision to makethe Director removable only for cause is consistent with Supreme Courtprecedent and the Bureau is considering options for seeking further review ofthe Court's decision."

Brian Simmonds Marshall, policy counsel for Americans forFinancial Reform, a consumer advocate that supports the agency, said he thinksthe CFPB's appeal will be successful. "An eight-decades-oldprecedent makes clear that removal restrictions are constitutional,"Marshall said.

Republicans celebrated the ruling and foreshadowed astrategy of using the court's rhetoric to support reform efforts. "Thisis a good day for democracy, economic freedom, due process and theConstitution," Hensarling said in a statement. Hensarling has ledregulatory relief efforts, headlined by legislation known as the , whichincludes implementation of a commission structure. Hensarling'sstatement welcomed the ruling but stopped short of full endorsement. In thestatement, Hensarling said the Financial CHOICE Act "solves theconstitutional defect identified by the court today."

Democrats, meanwhile, responded by painting the decision aspartisan. "It's no surprise that a small panel of thecountry's most conservative judges has made such an anti-consumer ruling,"said Rep. Maxine Waters, D-Calif., in a statement.

While the unconstitutional finding will likely garner themost headlines, the court's decision on the actual case might prove moremeaningful. The unconstitutional finding was part of a case brought by to fight a CFPBorder regardingpayments to a subsidiary. Whereas the three-judge panel was split on theconstitutionality question, all justices agreed that the CFPB erred in itsaction against PHH.

"The CFPB quite often takes very broad interpretationsboth of its powers and of the laws that it administers. … They just learned animportant lesson: somebody's watching," Platt said.

Alan Kaplinsky, a partner with Ballard Spahr, also saidpossible dampening of the CFPB's aggressive enforcement arm would be theruling's largest impact. "The CFPB is going to be subject tomore scrutiny in the future — scrutiny from the President and scrutiny from thecourts," he said.

As lawyers often representing industry interests, Kaplinskyand Platt both said the regulator habitually oversteps its bounds and that thecourt ruling could force the CFPB to be more cautious. "TheCFPB is very often taking extreme positions. … It's almost everything theydo," Kaplinsky said.

Georgetown's Levitin, who has testified in Congressdefending the agency, said he thinks there will be little change in how theCFPB operates. "There is some good language in the ruling for[Republicans], no question about that," Levitin said. "But, at theend of the day, what they get to take home for dinner is pretty measly."