Trump team fights its own federal consumer finance agency in court

March 22, 2017

Donald Trump isn't terribly sentimental about government agencies. The National Endowment for the Arts, the Corporation for Public Broadcasting, the Low Income Home Energy Assistance Program, and 59 other agencies and programs stand to be eliminated under the president's current budget. 

But Trump's tactic for getting rid of the Consumer Financial Protection Bureau--or at least scaling back its authority--is a little different and a lot more complicated.

A quick recap

The CFPB was created in 2010, in the wake of the Great Recession. Its purpose was to protect consumers from shady behavior by banks. If you've taken out an auto loan in the past six years, the CFPB probably had a hand in shielding you from fraudulent lending practices.

But the CFPB hasn't been popular with businesses, especially car dealerships and their lending arms. In late 2013, for example, a CFPB probe concluded that Ally Financial had charged higher loan rates to non-white borrowers. Ultimately, Ally settled for nearly $100 million. 

If that investigation had been straightforward, it probably wouldn't have caused much controversy. However, because racial data isn't recorded on auto loans, the CFPB had to undertake some creative forensic analysis to establish Ally's guilt. Critics say that the agency's methods were deeply flawed. 

Those critics had their day in court last October, in a case involving mortgage lender PHH Corporation. The CFPB had charged PHH with receiving kickbacks illegally. PHH countersued, arguing that the CFPB had overstepped its authority. 

Ultimately, the U.S. Court of Appeals for the District of Columbia sided with PHH. However, the court's ruling may have also overstepped by focusing on a tangential issue: the question of whether the CFPB's structure was constitutional.

Two of the three justices agreed that because the CFPB director can only be fired for cause--that is, "inefficiency, neglect of duty, or malfeasance"--the position violates the U.S. Constitution's system of checks and balances. The justices suggested that allowing the president to fire the CFPB's director at will could fix that.  

More recently

The CFPB has appealed the D.C. court's decision, requesting an en banc review--that is, a sort of re-trial that would involve all of the judges on the D.C. Court of Appeals, not just three. The review is slated for on May 24

As you might expect, the Trump administration would love to chip away at the CFPB's authority, if not do away with it entirely. Were this a different agency, the president would be able to direct the Justice Department to withdraw the CFPB's appeal, forcing the appeals court decision to stand. But because the CFPB is an independent entity, Trump has no such power.

And so, he's done the next best thing: he's asked the Justice Department to file a brief on behalf of the CFPB's in-court opponent, PHH. In other words, one federal agency is now trying to undo another federal agency by swaying the court's opinion.

That's unusual. And maybe a little awkward. 

What's to become of the CFPB?

It's unlikely that the court could do away with the CFPB entirely, especially in an appeals setting where the agency's existence wasn't initially a topic of debate. 

However, it seems pretty likely that the CFPB's director will face new limitations going forward--namely, the ability to be fired at the discretion of the president. After all, if the appeals court affirms the three-judge ruling, the CFPB could appeal to the Supreme Court, but due some legal issues, it would have to rely on outside representation (e.g. from the Justice Department, which is trying to scale back the CFPB's authority). Its chances of success would likely be reduced, especially after two hearings at the appeals level.

If, on the other hand, the en banc decision overturns the previous ruling, PHH could appeal to the Supreme Court. That would, again, force the CFPB to rely on outside representation, which could doom its chances of success. 

Complicated? Yes, but deeply important for consumers, banks, and the administration, among others. Stay tuned. 

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