Federal court rules consumer bureau structure unconstitutional, setting up likely high court decision

Setting up a likely hearing at the Supreme Court of the U.S., a federal court in New York ruled Thursday that the structure of Bureau of Consumer Financial Protection (BCFP, formerly known as the CFPB) is unconstitutional.

U.S. District Court Judge Loretta Preska of the Southern District of New York ruled that the bureau’s creation as an independent agency with a director that could only be dismissed for wrongdoing was unconstitutional. The decision is in conflict with a federal appeals court decision issued in January, setting up a possible showdown in the Supreme Court for a final resolution.

She was ruling in a case brought by the consumer bureau and the state of New York against RD Legal Funding, et al. The bureau asserted in its action that the RD Entities violated certain provisions of the Consumer Financial Protection Act (CFPA). The New York Attorney General, the judge noted, independently asserted that the RD Entities are liable under New York law for the same actions and events that form the basis of the CFPA claims.

Preska found that the CFPB “lacks authority to bring this enforcement action because its composition violates the Constitution’s separation of powers,” and thus the CFPB’s claims are dismissed.

“Because Plaintiff Consumer Financial Protection Bureau is unconstitutionally structured and lacks authority to bring claims under the CFPA, the Clerk of Court shall terminate Plaintiff Consumer Financial Protection Bureau as a party to this action,” Preska concluded in her ruling. “Counsel shall confer and inform the Court by letter no later than July 9 how they propose to proceed.”

Judge Loretta Preska decision in BCFP/NYAG vs. RD Entities