On June 29, 2020, the Supreme Court of the United States ("Supreme Court") ruled that the single-director leadership structure of the Consumer Financial Protection Bureau ("CFPB" or "Bureau") violates the separation of powers of the US Constitution. By a 5-to-4 vote, the Supreme Court leaves the CFPB fully operative but makes its Director removable at will by the President. While this ruling resolves nearly a decade of politically charged battles over the scope of presidential authority, it also subjects the CFPB to partisan control and casts doubt on the independence of other federal agencies.
Congress created the CFPB as an independent federal agency in Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") as an attempt to address the consumer financial protection issues that became salient in the wake of the 2008 financial crisis. The CFPB was given extensive rulemaking, enforcement and adjudicatory powers to administer 18 existing federal consumer protection laws as well as the Dodd-Frank Act's newly enacted prohibition on unfair, deceptive or abusive acts or practices in the consumer-finance sector.
In an effort to protect the Bureau's independence, Congress structured the CFPB as an agency headed by a single director appointed by the President and confirmed by the Senate to serve a five-year term. Once appointed, the President may only remove the Director for "inefficiency, neglect of duty, or malfeasance in office." In addition, and unlike most other regulatory agencies, the Bureau does not rely on the Congressional annual appropriation process for funding. Rather, the CFPB's budget is set by its Director and allocated directly by the Federal Reserve System.
Challenges to the constitutionality of statutory restrictions on the President's ability to remove the Bureau's Director from office are not new. Unlike the governance structure of other financial regulators, which generally rely on a bipartisan commission structure, the CFPB's single-director leadership has spurred significant constitutional challenges from its inception.
One such challenge occurred before the Court of Appeals for the DC Circuit in PHH Corp. v. Consumer Financial Protection Bureau. In this case, PHH Corp., a New Jersey-based mortgage lender and servicer, contested the imposition by the CFPB of a US$109 million fine over alleged kickback violations under the Real Estate Settlement Procedures Act ("RESPA"). Among other arguments, PHH Corp. pointed to the constitutional defect surrounding the CFPB's single-director structure and asked the court to dismantle the Bureau in its entirety. The US Department of Justice ("DOJ") filed an amicus brief backing PHH Corp. while advocating for a more limited remedial measure, namely, keeping the CFPB intact with a director removable at will by the President. In January 2018, the DC Circuit, sitting en banc, rejected PHH Corp.'s challenge to the CFPB's constitutionality but sided with the mortgage lender on other RESPA issues. Supreme Court Justice Kavanaugh, then on the DC Circuit, dissented from the majority opinion and highlighted that the CFPB's executive power and single-director structure lacked any "settled historical practice."
Neither PHH Corp. nor the CFPB sought Supreme Court review. As a result, other federal courts grappling with similar constitutional challenges to the CFPB's structure have reached opposite conclusions:
- In June 2018, Judge Preska of the US District Court for the Southern District of New York found the CFPB to be unconstitutionally structured and rejected the DC Circuit's majority decision in PHH Corp. This decision came after a New Jersey-based settlement advance firm made a constitutional challenge to the CFPB's structure a major prong of its attempt to dismiss the suit, which was brought jointly by the CFPB and the New York Attorney General. Of note, Judge Preska's ruling struck down Title X of the Dodd-Frank Act in its entirety and dismissed the CFPB from the case. The Bureau's appeal to the Second Circuit was put on hold until after the Supreme Court weighed in on the constitutionality challenge and issued a controlling decision on the matter.
- More recently, on March 3, 2020, the US Court of Appeals for the Fifth Circuit ruled that the CFPB's structure is constitutional. In this case, the court's decision struck down a payday lender's attempt to dismiss a CFPB enforcement action filed against it in a Mississippi federal district court for alleged abusive business practices. In upholding the CFPB's structure, the Fifth Circuit stressed that the CFPB remains subject to the Financial Stability Oversight Council, which allows the President to review the Bureau's actions. The majority also offered support for interpreting "inefficiency" to encompass policy disagreements.
These constitutional challenges have reached an end with the Supreme Court's decision, thereby resolving nearly a decade of litigation over the constitutionality of the CFPB's structure.
Seila Law LLC v. Consumer Financial Protection Bureau
The case before the Supreme Court was Seila Law LLC v. Consumer Financial Protection Bureau. The constitutionality challenge came to the Supreme Court in 2019 after the CFPB issued a civil investigative demand ("CID") to Seila Law, a California-based law firm that provides debt-relief services to consumers, for alleged violations of telemarketing sales rules. Following Seila Law's refusal to respond fully to the CID, the CFPB filed suit in California federal court to enforce the request. In response, Seila Law lodged a number of objections, including that the CID was invalid because the Director was unconstitutionally insulated from presidential control. The US District Court for the Central District of California rejected Seila Law's constitutional challenge and upheld the CID. The US Court of Appeals for the Ninth Circuit affirmed, opting to follow the DC Court of Appeals' majority reasoning in PHH Corp.
Seila Law pressed its constitutional challenge further and filed a petition for a writ of certiorari on the question of "[w]hether the vesting of substantial executive authority in the [CFPB], an independent agency led by a single director, violates the separation of powers." The Supreme Court granted certiorari and heard oral argument on March 3, 2020.
Of note, the CFPB, along with the DOJ, agreed with Seila Law that the restrictions on the President's ability to remove the Bureau's Director without cause violate the US Constitution. The Supreme Court therefore appointed an amicus curiae to defend the Ninth Circuit's ruling and the CFPB's structure.
The Supreme Court's Ruling
In a 5-to-4 vote, with the Supreme Court's five more conservative Justices in the majority, the Supreme Court held that Congress overstepped constitutional boundaries when it insulated the CFPB's Director from the President's removal power. The Supreme Court, however, stopped short of striking down the CFPB in its entirety, with seven Justices agreeing that the Bureau's constitutional defect could be cured by severing the "for-cause" removal restriction from the remainder of Title X.
The constitutional issue in this case is governed by a small universe of Supreme Court precedent. In 1926, the Supreme Court in Myers v. United States struck down a law that prevented the President from removing certain appointed postmasters without the advice and consent of the Senate. The Myers decision thus established the principle that the President has the expansive power to remove at-will subordinate officers in the executive branch. In 1935, in Humphrey's Executor v. United States, the Supreme Court introduced an exception to Myers for independent agencies when it upheld a provision of the Federal Trade Commission Act restricting the President's at-will removal of Federal Trade Commission ("FTC") commissioners. Unlike postmasters in Myers, the Supreme Court reasoned that FTC commissioners did not qualify as "executive officers" as they only performed quasi-legislative and judicial functions, and, as such, the Myers decision did not control. In 1988, in Morrison v. Olson, the Supreme Court recognized a second exception to the President's removal power and approved the for-cause removal protection for an inferior officer (an independent investigative counsel) who, the Supreme Court argued, had limited duties and no policy or administrative authority. More recently in 2010, in Free Enterprise Fund v. Public Company Accounting Oversight Board, the Supreme Court refused to recognize a third exception to Myers and declined to uphold a provision of the Sarbanes-Oxley Act providing members of the PCAOB a "double for-cause" protection from at-will presidential removal.
Similar to its decision in Free Enterprise Fund, the Supreme Court in Seila Law LLC declined to extend the Humphrey's Executor and Morrison exceptions to the CFPB's configuration. Specifically, the Supreme Court stressed that such precedent did not control, as the Bureau's Director is not a mere legislative or judicial aid (Humphrey's Executor) or an inferior officer lacking policy-making or administrative authority (Morrison). Rather, the CFPB's Director is vested with significant adjudicatory and executive power—a leadership structure that the Supreme Court explained has "no foothold in history or tradition." Indeed, the Supreme Court dismissed three other examples of independent agencies led by a single director, namely the Social Security Administration ("SSA"), the Office of Special Counsel, and the Federal Housing Finance Agency ("FHFA"), arguing that each are isolated, modern, and contested governance structures that do not wield authority comparable to the CFPB.
The Supreme Court's decision in Seila Law LLC makes the CFPB directorship an at-will position and has far- reaching consequences for the Bureau, for consumers and for other federal agencies:
Casting doubt on the fate of other independent agencies. Although the Supreme Court's ruling narrowly focuses on the CFPB, this decision nevertheless casts doubt on the constitutionality of other federal agencies' for-cause removal provisions. Importantly, the Supreme Court's ruling will likely significantly influence the fate of the FHFA's leadership structure, which bears a striking resemblance to that of the CFPB. Like the CFPB, the FHFA was created in response to the 2008 financial crisis and established as an "independent agency" led by a single director appointed by the President (subject to Senate confirmation) for a five-year term and who benefits from the same tenure protection. In addition, the FHFA is not funded through the appropriation process but rather through assessments collected from Fannie Mae and Freddie Mac. While the Supreme Court did not explicitly consider the constitutionality of the FHFA in Seila Law LLC, it noted the Fifth Circuit's 2019 en banc decision in Collins v. Mnuchin, which found the FHFA's leadership structure unconstitutional, and described the FHFA as a "companion of the CFPB." Litigation regarding whether the FHFA's structure violates the separation of powers is currently pending before the Supreme Court, and a similar outcome may therefore ensue.
The Supreme Court's decision may also be interpreted as an opportunity to challenge the tenure protection of other independent single-director agencies, such as the SSA. Going forward, the decision may also plant the seeds to undo for-cause removal provisions of multimember agencies that wield significant executive and adjudicatory powers, including the FTC, the Board of Governors of the Federal Reserve System, and the US Securities and Exchange Commission.
CFPB's leadership and agenda likely to reflect partisan control. The removal of the Director's tenure protection de facto renders the Bureau less independent and more sensitive to political pressure and partisan control. As a result, the CFPB's rulemaking and enforcement agenda will be more informed by the White House's priorities and likely be subject to sharp regulatory shifts with each administration. Such pressures may result in current and future CFPB Directors focusing primarily on politically sensitive areas, such as debt collection, payday lending and credit reporting, while overlooking other industries. Attorneys General may decide to ramp up their enforcement efforts at the state level to the extent they perceive any void left by the Bureau. Congress may also consider converting the CFPB into a multimember commission to mitigate ideological swings between administrations.
Uncertainties remain as to the validity of past and pending enforcement actions. The Supreme Court's decision settles nearly a decade of constitutional challenges to the CFPB's structure but does not take a position as to the validity of CFPB's actions taken to date. Specifically, the Supreme Court remanded this issue to the Ninth Circuit to determine whether the CID against Seila Law—first issued under former CFPB Director Cordray and pressed forward by then-Acting Director Mulvaney (who was removable at will by the President as an acting officer)—was properly ratified. To resolve uncertainties as to the validity of rulemakings initiated when the Bureau was constitutionally defective, CFPB Director Kraninger recently ratified the large majority of the Bureau's existing regulations taken between January 4, 2012, and June 30, 2020, with the notable exception of the CFPB's arbitration rule (which was invalidated under the Congressional Review Act in 2017) and the Payday, Vehicle, and Certain High-Cost Installment Loans rule, which the Bureau separately revoked in part. The CFPB, however, declined to ratify pending or resolved enforcement actions and indicated that it would make such ratifications separately. Accordingly, this outcome may trigger a wave of lawsuits to challenge past and ongoing enforcement actions initiated when the Bureau was constitutionally defective that may not have been properly ratified by a CFPB Director accountable to the President.
The Seila Law LLC decision resolves an almost decade-long, politically charged battle over the scope of presidential authority and may have far-reaching implications for other independent agencies going forward. Meanwhile, however, the Supreme Court's ruling leaves the Bureau fully operative and does not fundamentally alter the current regulatory landscape for CFPB-supervised entities. Director Kraninger, who was confirmed by the Senate in December 2018, will almost certainly remain in office for the foreseeable future unless the November presidential election brings a change in administrations. The Bureau is therefore expected to press forward and quickly release rulemakings currently in the pipeline to preempt any potential change in Presidential leadership. Accordingly, CFPB Director Kraninger has already indicated that she expects to finalize the Bureau's debt collection regulation and propose changes to the Home Mortgage Disclosure Act rules in the fall of 2020.
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