Supreme Court to Decide on CFPB Constitutionality
Will we finally settle whether the single-director structure is unconstitutional?
On October 18, the U.S. Supreme Court agreed to hear the case of Seila Law LLC v. Consumer Financial Protection Bureau. The outcome of this case will finally settle the question that captured headlines in the 2018 case of PHH v. CFPB—is the single-director structure of the CFPB unconstitutional, and, if so, how will its past decisions and future activities be affected?
The Seila Law Case
Seila Law, a firm involved in consumer debt cases, refused to comply with a CFPB civil investigative demand (CID) because the CFPB’s structure violates the Constitution’s separation of powers doctrine because it was headed by a single director who can only be removed by the President for cause.
A California federal district court rejected Seila Law’s claim, and the Ninth Circuit Court of Appeals affirmed that ruling. Seila Law then appealed to the Supreme Court. Interestingly, the CFPB, which had defended the constitutionality of its structure in the PHH case and before the lower Court in Seila Law, has reversed its position and will argue before the Supreme Court that the for-cause restriction on the President’s authority to remove the CFPB’s single-director is unconstitutional.
The Possible Outcomes
There potentially will be two issues before the Court: Is the CFPB’s single-director structure constitutional?
Seila Law’s argument is as follows: The CFPB, which has unprecedented regulatory and enforcement authority over 19 federal consumer protection laws, has powers similar to those exercised by the heads of the Executive Departments. However, it is run by a single, unelected Director who, unlike Executive Department heads, only can be removed by the President for “inefficiency, neglect of duty, or malfeasance in office.” Removing the CFPB even further from accountability to any branch of government is the fact that its funds are approved by the Federal Reserve Board instead of through the Congressional appropriations process. Therefore, the CFPB leadership structure violates the separation of powers in the U.S. Constitution, which divides the different functions of government among the executive, judicial, and legislative branches.
The opposition likely will argue in amici briefs that limitations on the President’s at-will removal of the CFPB director are not central to the functioning of the Executive Branch; that the Supreme Court has long given financial agencies political independence, and that the Supreme Court has upheld restrictions on at-will removal of independent agencies in the past.
The Supreme Court’s ruling on the issue of the CFPB’s constitutionality may be close, but many attorneys point out that its 5-4 conservative majority makes a finding of unconstitutionality more likely. Justice Brett Kavanaugh’s vote is a safe bet since he wrote the three-judge panel D.C. Circuit Court of Appeals’ opinion in the PHH case that found the CFPB to be unconstitutional and dissented in the Full Court’s decision to overturn that ruling.
If it is unconstitutional, what is the remedy?
The Supreme Court has asked the parties in Seila Law a second question: If it finds the CFPB to be unconstitutional, can the for-cause removal provision be severed from the rest of Dodd-Frank, the law that created the CFPB?
The Court’s ruling on this issue (if it does rule) could significantly impact the future of the CFPB.
If the Supreme Court decides that the for-cause removal provision is severable from Dodd-Frank, the CFPB Director would be supervised, directed, and removable at will by the President in the future.
If the Supreme Court rules that the for-cause removal provision is not severable from the Dodd-Frank Act, it could invalidate the CFPB’s actions over the last nine years as being beyond its legal authority. It could even invalidate Title X of Dodd-Frank, which created the CFPB.
Most observers predict that the Court would sever the for-cause removal provision in Dodd-Frank, making the CFPB Director directly accountable to the President. Dodd-Frank contains a severability clause stating that if any provision of the Act is held to be unconstitutional that the remainder of the Act shall not be affected, and even Justice Kavanaugh adopted the narrower remedy of severability in his PHH decision.
What Lies Ahead
Seila Law likely will be scheduled for oral argument in early 2020, with a decision expected in the summer.
In the short term, many lawyers have pointed out that companies will have an advantage when negotiating terms of settlements while the case is pending. Some federal judges already have stayed or even closed CFPB enforcement litigation while they wait for a Supreme Court ruling on the Bureau’s structure.
In the end, the Supreme Court’s ruling in Seila Law will affect every entity now regulated by the CFPB. It will set a significant precedent for future cases involving other independent federal agencies in the financial sector.
Sue Johnson is the former executive director of RESPRO, the Real Estate Services Providers Council Inc. She retired in 2015 and is now a strategic alliance consultant.