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WASHINGTON (Reuters) - A U.S. appeals court said on Thursday it will reconsider an October ruling that the Consumer Financial Protection Bureau's structure is unconstitutional, virtually guaranteeing the battle over an agency borne of the financial crisis will reach the Supreme Court.
A full panel of 10 judges on the U.S. Court of Appeals for the District of Columbia Circuit will decide the case after hearing oral arguments on May 24.
The court's order indicated that its chief judge, Merrick Garland, will not participate; leaving six judges appointed by Democratic presidents and four appointed by Republicans to decide the case.
A three-judge panel ruled in October that the CFPB vests too much power in its sole director. It also said the president should be able to fire the director at will, but stayed the decision pending appeal.
Republicans have criticized the agency for overreaching, and have pressed President Donald Trump to fire the current director, Richard Cordray.
The October decision has now been wiped off the books. Banks worry that the full-court review will prolong confusion about the CFPB's powers, while consumer advocacy groups say it could shore up the bureau's independence.
“The court’s decision only creates further uncertainty regarding the constitutionality of the CFPB," said Richard Hunt, head of the Consumer Bankers Association. "Congress and the administration must move immediately to address this concern."
The losing side - either the agency created in the 2010 Dodd-Frank Wall Street reform law or the mortgage lender PHH Corp that sued it - is expected to appeal to the Supreme Court after the court issues its ruling. The CFPB declined to comment on the pending litigation.
Given the many Republican attempts to limit or kill the agency since its inception, Democratic leaders had asked the appeals court that they be allowed to argue the case on behalf of CFPB. The court refused.
The agency can represent itself in this review, but the Justice Department, led by Republican Attorney General Jeff Sessions, will represent the CFPB if the case goes to the Supreme Court. It is not clear that the Trump administration will take the case further if the CFPB loses the next round.
Republicans say the CFPB pushes unnecessary regulation on small banks and uses large fines to direct lenders' behavior without going through proper rule-making processes.
Democrats say that having a sole director allows the CFPB to avoid political fights and fairly guard consumers against fraud in mortgages, student loans and other financial products.
The review "throws a wrench in the plans of those clamoring for a weakened consumer agency," said Rohit Chopra, senior fellow at the Consumer Federation of America and formerly assistant director of the CFPB.
The Republican chairman of the House of Representatives Financial Services Committee, Jeb Hensarling, is floating the possibility of using legislation to give the president freedom to fire the CFPB's director for any reason.
He and many other Republicans say Trump can already fire Cordray, because Dodd-Frank allows presidents to remove directors for cause. They say Cordray has provided cause through how he has both written and enforced rules. Democrats say the power to fire the director is intended to be used only in extreme situations.
The court's review "has no bearing on the president's ample authority to remove CFPB Director Cordray," Hensarling said in a statement.
Alan Kaplinsky, head of the Consumer Financial Services Group at law firm Ballard Spahr, though, said the review limits Trump's options and makes it harder to fire Cordray for cause.
Republican lawmakers are also working on bills to wipe out the agency or change its governance to a commission.
Reporting by Lawrence Hurley and Lisa Lambert; Editing by Linda Stern and Jonathan Oatis