While the newest federal agency, the Consumer Financial Protection Bureau (CFPB), has been controversial for many reasons, its most troubling feature may simply be its unconstitutional structure. Its sole director reports to no one but himself, and, under the terms of Dodd-Frank, can be removed by the president only for cause. And it receives its funding not through Congress, but through the Federal Reserve. Not even the Fed has the authority to challenge its spending, however. Instead, the law says the Fed “shall” give the CFPB the funds it requests, up to 12 percent of the Fed’s total operating expenses. As of 2015, that meant the CFPB could demand up to $443 million in one year.

Last year, a federal appeals court, ruling against the agency, issued a stinging indictment of this structure in PHH v. CFPB. The CFPB, however, sought a rehearing en banc. In a typical federal appeals case, a three-judge panel will hear and rule on the matter. The losing party can request that the entire court—in this case, the 11 active judges of the D.C. Circuit Court of Appeals—to hear and rule on the case again. The courts rarely grant such requests, except when the matter is one of particular importance. In this case, the request was granted and the court will hear argument again on May 24, 2017.

Cato has filed an amicus brief in support of PHH. In it, Cato argues that the CFPB’s unconstitutional structure poses a threat to liberty in two ways. First, by violating core principles of separation of powers. Although this principle is often invoked to preserve the powers of the various governmental branches, in fact its purpose is to safeguard individual rights, not any “right” of the government. Second, by existing unfettered by any accountability to the people, either through direct election or through control by an elected office. Although any independent agency is constitutionally suspect, most other independent agencies have certain structural protections to ensure some checks on their power. For example, the Securities and Exchange Commission is headed by a five-member panel. This panel must include no more than three members from any one political party, and the chair serves in that capacity at the pleasure of the president. Even though the individual members are removable only for cause, these safeguards assure some restraint. 

The constitutional problems would be reason enough to fear the CFPB, but these problems are not merely academic. The way Director Cordray has wielded his considerable authority demonstrates just how important these checks are. In the case of PHH, not only did the company suffer from prosecution by an unconstitutionally structured agency, it suffered clear violations of due process. After PHH appealed a ruling by one of the CFPB’s in-house judges (for further discussion of the problems with such in-house judges, see our filing in Lucia v. SEC), Director Cordray not only applied a brand-new interpretation of a relevant regulation without first providing notice of the new interpretation, he applied that new understanding retroactively to earlier conduct, and based on this retroactive application, increased 18-fold (yes, eighteen-fold) the penalty already assessed by the in-house judge, resulting in a penalty of $109 million.

This has to stop. The CFPB has an unconstitutional structure, vests enormous power in one individual, and includes no real checks on this power. We hope that the D.C. Circuit will uphold the earlier finding that the CFPB exists in clear violation of the Constitution and that the people have a right to be free of such tyranny.