By Lisa Lambert
WASHINGTON (Reuters) - The U.S. watchdog for consumer finance scored a major victory last week when it was part of the government group that forced Wells Fargo & Co <WFC.N> into a $190 million settlement of fraud charges, but the Consumer Financial Protection Bureau still faces an ugly fight to justify its own existence.
The agency, which has taken on businesses ranging from small car dealers and major financial institutions, is at the center of a philosophical debate about the value and limits of regulation. Both presidential candidates have offered opinions on the five-year-old agency, and Republicans and Democrats have worked to rally public opinion against and for the agency, which was created in the 2010 Dodd-Frank Wall Street reform law in response to the widespread deception and abuse of borrowers that helped lead to the financial crisis.
The CFPB could lose its first battle as early as Friday, the earliest that a U.S. District Court could rule on whether the CFPB's single-director structure is unconstitutional. The lawsuit, brought by mortgage servicer PHH Corporation over a fine for allegedly taking kickbacks for referring customers to an insurance company, is the most serious legal test the agency has faced.
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PHH contends that the CFPB's structure is unconstitutional because the agency's director is not directly answerable to the president or to Congress.
Should PHH prevail, the CFPB would likely appeal. But any ruling against the agency would give its critics - primarily regulated industries and Republicans on Capitol Hill - ammunition in the longer-term fight to dismantle or reorganize the agency.
In the meantime, lawmakers have been fighting the agency on two other fronts: power and money. On Tuesday, the House of Representative Financial Services Committee approved a bill that would cut the CFPB's powers and require that its funding from the Federal Reserve be made dependent on the more typical Congressional appropriations process. Democrats argued doing that would wipe out the agency's ability to go after financial wrongdoers, which is its main reason for existing.
And in the days after the Wells Fargo settlement, Republican Speaker of the House Paul Ryan repeated his calls for a reorganization of the agency and tweeted: "The #CFPB supposedly exists to protect you, but instead it tries to micro manage your everyday life."
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Any real change to the activist agency will not likely come until after the November elections. The CFPB, which has taken on (and drawn opposition from) the payday lending and debt collection industries, was originally championed by Senator Elizabeth Warren, who is now stumping for Democratic presidential nominee Hillary Clinton.
A victory by Republican presidential nominee Donald Trump would strengthen the Republicans' reform efforts, said Benjamin Saul, a partner at law firm White & Case who has represented clients in CFPB cases.
Republicans' main argument has been that there is too much power vested in the director, resulting in the agency not being accountable to anyone. Republicans have pushed for a five-member commission to govern the agency and for lawmakers to decide its budget.
Questions posed by one of the PHH case's three judges during oral arguments at the U.S. Court of Appeals for the District of Columbia Circuit this spring have led many to expect that the bureau's structure, with a single director in charge of both rule making and enforcement, will be dealt a serious blow.
The panel could decide the entire structure is unconstitutional, or merely that a clause saying that the director can only be dismissed "for cause" is unconstitutional. PHH has argued that the clause keeps the director from being accountable to either the president or Congress.
"It's a full-frontal constitutional attack on the CFPB ..., and it's in front of a panel of judges in the D.C. circuit who seemed very hostile toward the CFPB during the oral arguments," said Alan Kaplinsky, who chairs the Consumer Financial Services Group at law firm Ballad Spahr.
A decision against the agency "will literally cast a cloud over everything the CFPB has done since it was created," he added.
The losing side could appeal to the Supreme Court or ask for a review from the entire district court. The CFPB declined to comment for this story.
For now, the agency is pushing ahead on several fronts, including proposing a rule that would ban forced arbitration clauses from financial contracts.
"The likelihood of the bureau fading into the background is low," said Quyen Truong, a partner at Stroock & Stroock & Lavan in Washington who was the assistant director and deputy general counsel for the CFPB until earlier this year.
"The CFPB's leadership is fervently committed to its mission. Their intent is to move forward zealously regardless of which administration is in place."
(Reporting by Lisa Lambert; Editing by Linda Stern and Leslie Adler)