Court ruling against consumer bureau opens the door to lawsuits

Court ruling against consumer bureau opens the door to lawsuits
© Greg Nash

A federal appellate court ruling against the Consumer Financial Protection Bureau (CFPB) is likely to spark a wave of litigation against the agency, attorneys say.

The U.S. Court of Appeals for the D.C. Circuit this week ruled that the structure of the CFPB is unconstitutional because it is an independent agency with a single director — a level of power given to no other regulator in the federal government.

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Businesses have complained bitterly about the CFPB since its creation, and they are likely to use the decision as an opportunity to challenge previous actions and rules from the agency, said John Cole Gayle Jr., founder of The Consumer Law Group based in Richmond, Va.

“There’s a little blood in the water, so they are going to attack,” he said.

Though the D.C. Circuit's ruling is likely to be appealed, Gayle said prior CFPB regulations could be vacated if the decision is upheld.

“It’d be awful,” he said. “CFPB has been a wonderful addition to consumers’ very limited arsenal in trying to get an even playing field with large corporate entities such as insurance companies and banks, who previously have been able to use certain laws to their advantage and consumers’ great disadvantage.” 

One area where consumers have turned to CFPB for help, Gayle said, is forced arbitration. The clauses, often hidden in the fine print of contracts for financial services, prevent consumers from being able to settle disputes in court. 

“CFPB has been involved in helping consumer have the ability to have their problems resolved without having to resort to very expensive litigation,” he said. “I have people now going to CFPB with complaints that never would have gotten heard by these other entities.”

While the ruling against the CFPB was a welcome development for the agency’s critics, some corporate lawyers aren’t advising their clients to pop the champagne just yet.

The ruling against the CFPB doesn't shut the agency down. Instead, the judges said the president now has the power to remove the CFPB director at any time, for any reason, and supervise his or her actions. Previously, the director could only be removed for cause. The position is now held by Richard Cordray, whom President Obama appointed.

“I don’t think, from a business perspective, people see this yet as any kind of a big win because it doesn’t change CFPB operations,” said Nick Gess, an attorney at the Morgan Lewis Washington office.  “I think ... it means CFPB is going to have to look internally at some of the legal decisions it’s made.”

Tom Rohback, a financial litigator and partner at Axinn Veltrop & Harkrider, said businesses are likely to jump at the chance to question all of the CFPB's previous actions.

“We’re looking at a decision that says the structure of this agency is unconstitutional," he said. "That throws everything into question."

But regulatory advocates say just because more lawsuits are likely doesn’t mean they will succeed.

“The separation-of-powers ruling shouldn’t open the door to challenges to other past actions taken by the CFPB, because the court declined to hold that the constitutional violation it found affected the validity of the CFPB action that was before it for review," Scott Nelson, an attorney at Public Citizen’s Litigation Group, said in an email to The Hill.

"Instead, it 'remedied' what it saw as the constitutional problem by invalidating and severing the limitation on presidential removal of the CFPB director. Other actions taken by the CFPB should likewise retain their validity in light of the court’s ruling.”

In a statement, the CFPB said it disagrees with the ruling and is considering seeking further review of the decision.

“In the meantime, as the court expressly recognized, the Bureau will continue its important work,” an agency spokesperson said. “Congress has charged the Bureau with ensuring that the markets for consumer financial products and services are fair, transparent and competitive and with protecting consumers in these markets from unlawful practices.” 

The CFPB was created by the 2010 Dodd-Frank financial reform law.