A federal appeals court ruled the structure of the Consumer Financial Protection Bureau is unconstitutional, setting aside an enforcement action against a mortgage lender and handing a blow to the 5-year-old agency.  The decision Tuesday by a 3-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit said the CFPB violated the Constitution’s separation of powers because its director isn’t sufficiently answerable to the President.

However, it rejected the idea of shutting down the CFPB and instead said the remedy is to give the President the power to remove the bureau’s director at will and to supervise and direct the watchdog’s chief.  That change could make the CFPB a more political agency than it is now, because the White House would be able to exert more control over its direction – e.g., the ruling would give the next President a freer hand to remove Director Richard Cordray before his term expires in 2018.

In addition to rejecting the structure of the CFPB, the appeals-court panel said the agency made considerable legal errors in its enforcement action against mortgage lender PHH Corp. Among them, the CFPB adopted a new interpretation of a real-estate industry law and wrongly applied that interpretation retroactively to business conduct that took place before the switch, the panel said.

The CFPB, created by a Democratic Congress after the 2008 financial crisis and long criticized by Republicans, is headed by a single director who can be removed by the president only for cause. The ruling, written by Judge Brett Kavanaugh, allowed the CFPB to continue operating as an agency, but ordered a restructuring of how it operates in the executive branch. “