On June 29, the U.S. Supreme Court issued a 5-4 decision in Seila Law LLC v. Consumer Financial Protection Bureau, Slip Op. 591 U. S. (2020), holding that the provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act limiting the president’s ability to fire the director of the Consumer Financial Protection Bureau (CFPB) only for “inefficiency, neglect, or malfeasance” violated the Constitution’s separation of powers. While the remainder of the CFPB’s structure and regulatory body remains solidly intact, the fact that its director can now be removed by the president at will creates an uncertain future for the consumer financial services industry that Congress never intended.
CFPB Structure Challenged
In July 2010, Congress passed (and President Obama signed) Dodd-Frank, a major provision of which was the creation of the CFPB, which would operate as an independent financial regulator within the Federal Reserve System. Its mission was to regulate the consumer lending marketplace with an emphasis on protecting consumers from unfair, deceptive or abusive practices through investigations and enforcement actions. 12 U. S. C. §§ 5511(a), 5562, 5564(a), (f). Congress intentionally established that the CFPB’s director’s term would last five years (longer than a sitting president) and that the director could only be removed for “inefficiency, neglect, or malfeasance.” 12 U.S.C. §§ 5491(c)(1), (3). This would allow the director to continue with his/her duties without enduring political pressure.
In 2017, the CFPB, then headed by Richard Cordray, its first director, who was appointed by President Obama, issued a civil investigative demand to Seila Law to determine whether the firm had “engag[ed] in unlawful acts or practices in the advertising, marketing, or sale of debt relief services.” Slip Op., at 6. When Seila Law refused to comply with the demand, the CFPB filed an enforcement action in the District Court. Seila Law argued that because the CFPB’s structure was unconstitutional, it need not comply with the demand. The District Court rejected Seila Law’s argument and the Ninth Circuit Court of Appeals affirmed. 923 F. 3d 680 (CA9 2019) (citing PHH Corp. v. CFPB, 881 F.3d 75 (D.C. Cir. 2018), which had rejected a similar constitutional challenge to the CFPB’s structure).
While on appeal to the circuit court, Director Cordray was replaced by interim Acting Director Mick Mulvaney, who was later replaced by Director Kathleen Kraninger (whose appointment was approved by the Senate). With a new director in place, the CFPB now agreed with the petitioner that its structure was unconstitutional. Because it adopted the petitioner’s argument that the CFPB’s structure violated the Constitution’s separation of powers, the Supreme Court appointed Paul Clement to defend the judgment below as amicus curiae. Slip Op. at 8.
Supreme Court Decision
In addressing the separation of powers issue, Chief Justice Roberts, writing for the majority, held “that the CFPB’s leadership by a single individual removable only for inefficiency, neglect, or malfeasance violates the separation of powers.” Slip Op. at 11. Noting that many executive multimember bodies have restrictions on removal, the Supreme Court found those restrictions only apply to “multimember bodies with ‘quasi-judicial’ or ‘quasi- legislative’ functions” and the President has “unrestrictable power … to remove purely executive officers.” Slip Op. at 15 (citing Humphrey’s Executor v. United States, 295 U. S. 602, 632 (1935)). Because the CFPB director functions purely as an executive, is not a multimember commission and wields vast executive power,1 the court concluded that Dodd- Frank’s restrictions on the president’s ability to remove the director violated the separation of powers.
This conclusion had the potential to seriously alter the consumer financial regulatory landscape, given the number of regulations the CFPB has established since its inception in 2010. However, diving further, the court ultimately found that the unconstitutional portion of Dodd-Frank relating to the CFPB’s director was severable from the remainder of the act. Slip Op. at 33 (noting the “provisions of the Dodd- Frank Act bearing on the CFPB’s structure and duties remain fully operative without the offending tenure restriction”). So ultimately, the result of Seila Law may appear to be much ado about nothing. But that is not the case.
Impact on the Industry
Not missing a moment, the very day the Supreme Court issued its opinion, former CFPB Director Richard Cordray penned an opinion column in The Washington Post entitled “Why the CFPB’s Loss at the Supreme Court Is Really a Win,” in which he notes that because of the ruling, even though Director “Kraninger had been confirmed for a five- year term lasting to December 2023 … after today’s ruling, she can be dismissed at any time – including Jan. 20, 2021, when a new president may take office.” His statement is entirely correct and shows a significant problem created by Seila Law.
As noted above, Congress wanted the CFPB to be free from political influence, but as its change in positions throughout this case revealed, a different director with political influences can immediately move direction and/or policy (consider Director Kraninger’s backtracking of small-dollar regulations originally proposed by Director Cordray). This means the industry could see drastic shifts in regulatory interpretation, enforcement and creation every four years. Perhaps seeing this as a potential issue, Sen. Deb Fischer, R-NE, reintroduced legislation that would turn the CFPB director into a multimember panel, much like that of the FTC. Historically, such proposals have never gained traction in Congress, but perhaps with the Seila Law decision, it will.
Thus, while the CFPB’s structure remains the same post- Seila Law, the future of its direction remains very much in question and may change significantly every four years.
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Compliments of Thompson Hine – a member of the EACCNY.