U.S. regulator may have edge in court arguments on its structure

WASHINGTON (Reuters) - A divided U.S. appeals court on Wednesday appeared to tilt slightly in favor of the Consumer Financial Protection Bureau's arguments that its structure does not violate the Constitution, in one of two cases that could weigh on the policing of Wall Street.

A crowded courtroom at the U.S. Court of Appeals for the District of Columbia Circuit heard a number of judges on the 11 member panel vigorously question Theodore Olson, an attorney whose mortgage company client PHH Corporation brought the case against the regulator after the CFPB sued the company on allegations it was involved in an illegal kickback scheme.

Six judges on the panel were appointed by Democratic presidents and five were appointed by Republican presidents.

The harshest questioning came from Democratically-appointed judges, though Republican-appointed Judge Thomas Griffith also at times raised concerns on whether Olson's arguments run counter to Supreme Court precedent.

The case hinges on whether the court should reconsider a ruling last October by a three-judge panel that found the powers of the bureau's director Richard Cordray were unconstitutional because he can only be fired by the president for cause, and not at will.

The hearing featured an added layer of drama after Justice Department attorney Hashim Mooppan also stood up to argue against the regulator and in favor of PHH - an unusual about-face that occurred after President Donald Trump, a Republican, took office in January.

The bureau's own attorneys represented the regulator, which was established by the 2010 Dodd-Frank law under President Barack Obama, a Democrat. The agency's creation was in response to the 2008 financial crisis to protect people from predatory lending.

If the CFPB prevails, it could take the wind out of the sails of Republican-led efforts in the White House and in Congress to rein in the bureau and fire Cordray before his term expires in 2018.

HIRING OF SEC JUDGES DEBATED

The CFPB case was one of two major legal challenges to hiring practices at financial regulators that were heard in the same courtroom on Wednesday.

Earlier, the court reconsidered arguments on an appeal of a ruling that the Securities and Exchange Commission did not violate the Constitution when it hired its administrative law judges to preside over in-house court proceedings.

At issue is whether administrative law judges are employees or "inferior officers" who wield significant decision-making authority covered by the appointments clause of the Constitution, which would then require them to be appointed by the President, the SEC chairman or a court.

The SEC argues the judges are employees because their decisions are still subject to SEC review. Critics say their ability to decide what evidence is admissible, preside over trials and impose penalties makes them officers.

If a majority of the 10 judges who heard the case affirm that finding, then the matter could eventually land in the Supreme Court, after the Tenth Circuit Court of Appeals ruled that the SEC had violated the Constitution when it hired its in-house judges.

The Tenth Circuit's ruling has already led the SEC to suspend all its in-house pending cases with appeal rights to the Denver-based court, creating a legal limbo and raising questions about the future of other pending cases.

TOO MUCH POWER?

Republican critics of the CFPB say it has too much power.

Olson, the lawyer for PHH, listed multiple concerns on Wednesday that he said collectively make the agency too unaccountable, saying its budget is not controlled by Congress, the president cannot fire the director at will, and the five-year term forces the director to be held over after a change in administration.

"This agency goes further than anything Congress has ever attempted to do in history," Olson told the court.

CFPB lawyer Lawrence DeMille-Wagman rejected those complaints, saying Congress can change the law as needed.

Olson and Mooppan at times were met with deep skepticism by some of the judges.

Judge Patricia Millett, an Obama appointee, opined that a single director structure may actually give the president more authority compared with other financial regulators which have multiple members of differing political parties who in some cases are also funded outside of the congressional appropriations process.

"This director is more accountable than, say, the Federal Reserve Board," she said.

Some of the Republican-appointed judges, meanwhile, tended to be more skeptical of CFPB's arguments.

Brett Kavanaugh, who authored the prior opinion finding the bureau violated the U.S. Constitution, raised concerns that a new administration is greatly impeded from tapping its own director, and asked if it is right to let the "dead hand of the past president" continue to dictate policy decisions.

No decisions were expected on the same day. Rulings in appeals court hearings typically take weeks or even months to be published.

The cases are Raymond J. Lucia Companies, Inc v. SEC, U.S. Court of Appeals for the District of Columbia Circuit, 15-1345 and PHH Corporation v. CFPB, 15-1177.

(Reporting by Sarah N. Lynch; editing by Grant McCool)