Federal Judge Rules CFPB Structure Unconstitutional

A New York federal judge ruled on Thursday that the structure of the Consumer Financial Protection Bureau is unconstitutional. The rationale: it’s an “independent agency with a director that can only be dismissed for wrongdoing,” Justin Hosie, an attorney with Hudson Cook LLP, told Auto Finance News.

The ruling is a part of a decision to dismiss the CFPB from a previous lawsuit that accused Cresskill, N.J.-based lender RD Legal Funding LLC and founder Roni Dersovitz of scamming 9/11 first respondents and NFL retirees with high-cost loans.

“Because the CFPB’s structure is unconstitutional, it lacks the authority to bring claims under the Consumer Financial Protection Act and is hereby terminated as a party to this action,” Judge Loretta Preska of the U.S. District Court for the Southern District of New York wrote in her case filing.

While the judge ruled in RD Legal’s favor on the CFPB’s constitutionality issue, she did not dismiss the suit altogether. “Accordingly, the defendants’ motion to dismiss the complaint is denied,” she wrote.

As such, the state will continue to pursue its case against RD Legal for “as many victims as possible,” Amy Spitalnick, press secretary for the N.Y. attorney general’s office, said in a statement to Law360.

Still, RD Legal’s counsel, David Willingham of Boies Schiller Flexner LLP, viewed Thursday’s outcome as a win, stating that the CFPB never should have brought this action in the first place. Willingham noted that the defendants are pleased with the ruling, as it limits the ability of the government to overreach this suit.

Meanwhile, at least one trade group agreed with the decision.

“The court’s ruling further proves one person should not have the sole authority over the financial lives of every American consumer,” Consumer Bankers Association told AFN in a statement. “It creates uncertainty, limits opinions, and turns the bureau into a political pendulum, swinging with each new Administration.”

However, if the U.S. Supreme Court ultimately shuts down the CFPB — rather than reform Dodd-Frank to impose a constitutional structure as a lower court had proposed — Hosie said the “big question” that needs an answer — is whether civil penalties imposed by the agency on the industry would need to be returned to the organizations that were fined.

CBA proposes creation of a bipartisan commission to lead the bureau and “ensure a diverse set of views have a seat at the table when important consumer financial policies are being crafted.”

The CFPB declined to comment.