Today, June 29, 2020, the U.S. Supreme Court issued its opinion in the Seila Law LLC v. Consumer Financial Protection Bureau case, in which it held that the CFPB’s structure with a single Director removable only “for cause” violates the U.S. Constitution’s separation of powers (specifically, the Dodd-Frank Act states that the President can only remove the CFPB’s Director for “inefficiency, neglect of duty, or malfeasance in office”).  In addition, the Court found that the unconstitutional removal provision is severable from the other provisions of Dodd-Frank that established the CFPB, allowing the agency to continue with a single Director removable at will by the President.  Below I provide a very brief synopsis of the case and raise some potential implications for the industry arising from this opinion.

Brief Synopsis

This case arose because in 2017, the CFPB issued a Civil Investigative Demand (“CID”) to Seila Law LLC, a law firm that provides debt relief services.  Seila Law asked the CFPB to set aside and refused to comply with the CID on the grounds that the CFPB’s single-director structure was unconstitutional.  The CFPB sued in District Court to enforce the CID, which eventually resulted in a decision by the U.S. Court of Appeals for the Ninth Circuit finding the CFPB’s structure to be constitutional, relying on the decision by the D.C. Circuit in PHH Corp. v. CFPB (I wrote about that opinion here).  The U.S. Supreme Court agreed to hear the case, and Seila Law argued that the CFPB’s structure was unconstitutional and that the Court should strike down Title X of the Dodd-Frank Act, which created the CFPB, in its entirety, invalidating the CFPB and rendering the CID unenforceable. 

As noted above, while the Court agreed with Seila Law that the CFPB’s structure was unconstitutional, it instead severed the “for cause” provision, leaving the CFPB intact.  This means that it is an open issue whether the CID is enforceable, which the Court remanded back to the Ninth Circuit.  The CFPB had argued before the Ninth Circuit that because former Acting Director Mulvaney had authorized the CFPB’s filings in the case, and he was appointed under the Federal Vacancies Reform Act (which I wrote about here) and was removable at will under that statute, he ratified the CID and remedied the Constitutional defect with the CID.  The Court remanded the case back to the Ninth Circuit to hear the factual and legal issues of whether former Director Cordray’s CID could be and, if so, was validly ratified. 

Potential Implications for the Industry

The immediate practical implications of this case for the industry may appear relatively minor compared to what they could have been if the Court had struck down the entire statute creating the CFPB.  The CFPB is allowed to continue with its vast powers in place.  While the CFPB’s Director will be removable by the President at will, it is uncertain how much of a check such a threat will be on the CFPB’s current Director Kraninger, because she was appointed by President Trump.  If Director Kraninger undertakes investigations, enforcement actions, or rulemakings with which the current administration disagrees, she could be removed by President Trump.  Considering the administration’s focus on deregulation, the administration’s own experience with investigations with which it disagreed, and a President who has fired high-level personnel in the past, the potential of removal could have some effect on the Director. But likely there won’t be much practical effect from this threat of removal.

But more significantly, the Seila Law opinion raises the significant question of whether actions by the current and former Directors of the agency before the Court severed the “for cause” provision are unconstitutional and invalid.  Director Kraninger may be able to ratify past actions, similar to Director Cordray’s Notice of Ratification after being confirmed by the Senate (78 Fed. Reg. 53734 (Aug. 30, 2013)), but the effect of such a ratification on certain agency actions may be an open question.  This may be an issue raised in pending CFPB investigations and enforcement actions, as well as in challenges to rulemakings.  It will be interesting to see how the Ninth Circuit case regarding ratification of the Seila Law CID plays out, whether Director Kraninger ratifies actions by former Director Cordray and Acting Director Mulvaney, and how much litigation ensues challenging those past agency actions. 

Another significant impact of this case for the industry is that it clears the path for a potential future President Joe Biden to remove Director Kraninger without cause and appoint his own, more aggressive agency head.  This would most certainly cause an increase in investigations and enforcement, and change the course of the agency’s rulemakings if they are not finalized before then.  In addition, that future Director could amend rules that have already been finalized.  There may be a number of pending early-stage rulemakings, proposed rules, and recently finalized rules that could be at issue, such as the ATR/QM proposed rule, the rulemaking to amend the discretionary data points under HMDA, and the Dodd-Frank Act section 1071 rulemaking (which I wrote about here).

Broader Implication

One final implication to consider is the effect of this opinion on other independent single-Director or multimember agencies that wield substantial executive authority.  The Court noted that one of the main cases that provides an exception from the President’s removal authority, Humphrey’s Executor v. United States (in which the U.S. Supreme Court in 1935 upheld a “for cause” provision for the Federal Trade Commission), only applied to “multimember expert agencies that do not wield substantial executive power.”  And then the Court distinguished the CFPB’s vast rulemaking and enforcement authority from the powers at issue in Humphrey’s.  For example, the Court stated that the CFPB’s enforcement powers are “a quintessentially executive power not considered in Humphrey’s Executor.”  There has been great controversy as of late about the power of the administrative state generally, and this case may signal the Court’s view that those powers should be reigned in.  It will be interesting to see if this opinion is relied on to challenge the constitutionality of the structures of other multimember agencies with substantial executive powers.  It will also be interesting to see if this case spurs Congress to act to change the structure of the agency to a commission or board, and how debate about the agency’s structure plays out.

If you have any questions about this case, would like to discuss any of these issues, or have any other questions, please email me at rich@garrishorn.com.