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Justice Department Files Brief Arguing CFPB's Structure is Unconstitutional

The Wall Street Journal. logo The Wall Street Journal. 3/17/2017 Yuka Hayashi, Brent Kendall

WASHINGTON—The Justice Department on Friday took the unusual step of opposing the Consumer Financial Protection Bureau in a major court case, arguing the structure of the independent consumer regulator created under the Obama administration was unconstitutional.

The department, now under Trump administration leadership, filed a friend-of-the court brief in a case where the CFPB is fighting to keep its current setup, which gives the consumer watchdog’s director protection from political interference from the White House.

Justice Department lawyers argued the current structure is problematic because it allows the president to remove the CFPB director only for negligence or malfeasance.

Instead, the president should be able to fire the director at will, the department said in the brief, filed with the U.S. Court of Appeals for the District of Columbia Circuit.

“There is a greater risk that an independent agency headed by a single person will engage in extreme departures from the president’s executive policy,” the department said. That creates separation-of-powers problems under the Constitution, it added.

The brief sided with PHH Corp., a New Jersey mortgage lender challenging the authority of the six-year-old agency. It also created a rare split between executive-branch entities in the courts.

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The case is part of a partisan battle over the bureau and whether President Donald Trump can remove its director, Richard Cordray. A number of trade associations, consumer groups, lawmakers and attorneys general from both parties have submitted briefs in the case, trying to influence judges ahead of an oral argument scheduled for May 24.

The CFPB declined to comment. It intends to file a new brief in the case by the end of March.

The case has gone through surprising twists and turns since 2015 when PHH challenged a fine imposed by the CFPB for alleged violations of a real-estate procedural law. A three-judge panel of the D.C. Circuit last year ruled the CFPB’s single-director structure unconstitutional and gave the president power to remove the director for any reason. At the request of the CFPB, the D.C. Circuit vacated that ruling and set the case for rehearing by the entire court.

Legal experts say judges will likely pay close attention to the Justice Department’s filing, although the CFPB still may enjoy better odds of success this time around. A majority of D.C. Circuit judges are Democratic appointees who could be more sympathetic to the bureau than the three Republican appointees on the earlier panel that ruled against the CFPB.

It is unusual for two federal government entities to square off in court, making the CFPB case one of a few to feature such a situation in recent decades.

As Republicans have escalated attacks on the CFPB, PHH has raised the ante in its case. In a recent and related legal filing, the company said the CFPB was plagued by “many constitutional problems” and that giving the president power to remove the director at will won’t be enough to resolve the case. “The appropriate remedy is to strike down the CFPB in its entirety,” lawyers representing PHH wrote.

The Justice Department didn’t embrace that argument.

© Andrew Harnik/Associated Press

Write to Yuka Hayashi at yuka.hayashi@wsj.com and Brent Kendall at brent.kendall@wsj.com

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