On June 29, 2020, the Supreme Court of the United States issued a long-awaited decision in Seila Law LLC v. CFPB concerning a constitutional challenge to the Consumer Financial Protection Bureau (CFPB). In a 5-4 decision, the Court held that the CFPB’s single-director structure was unconstitutional and violated separation of powers because the director could be removed only for inefficiency, neglect or malfeasance.

Background

• In 2017, the CFPB served Seila Law with a civil investigative demand (CID). Seila refused to comply on the grounds that the CFPB’s single-director structure was unconstitutional. The CFPB petitioned the district court to enforce compliance with the CID.
• The district court granted the CFPB’s petition.
• Seila appealed to the Ninth Circuit, which held that the single-director structure was constitutional.
• Seila appealed to the Supreme Court.
• This case was an anomaly in that the CFPB changed positions in the middle of litigation. In September 2019, the CFPB, under Director Kathy Kraninger, stated publicly that its single-director structure was unconstitutional. This meant that both the petitioner and the respondent agreed that the single-director structure was unconstitutional, although the parties differed on how the Court should proceed (i.e., dismantling the agency rather than removing the unconstitutional provision from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)). The Court appointed counsel to argue in favor of the CFPB’s single-director structure.

Summary of decision

• Dodd-Frank established the CFPB and vested the agency with the authority to regulate and enforce federal consumer financial laws. As opposed to a multimember board, Congress elected to place the CFPB under a single director insulated from presidential removal and therefore (to a point) control. The leading precedents used to justify these restrictions are Humphrey’s Executor v. United States, 295 U.S. 602 (1935), and Morrison v. Olson, 487 U.S. 654 (1988). Humphrey’s Executor permitted Congress to permit for-cause removal protections for a multimember body of bipartisan experts that performed legislative and judicial but not executive functions. And Morrison permitted removal of “inferior officers” (i.e., not agency heads) exercising only “limited” duties (i.e., no policymaking or administrative authority).
• The opinion, authored by Chief Justice Roberts, adopts a narrow view of these precedents. SCOTUS considered the CFPB’s single-director structure and five-year term to be a significant departure from the multimember agency leadership at issue in Humphrey’s Executor. The Court also determined that the CFPB’s single director wields significant authority beyond that of a mere legislative or judicial body because the director can unilaterally issue decisions awarding legal and equitable remedies in administrative actions.
• Morrison did not apply because the CFPB director is not an “inferior officer”. For instance, the director has the sole responsibility for administering 19 consumer-protection statutes that cover a wide range of products (e.g., credit cards, car payments, mortgages and student loans).
• In short, Roberts took issue with the fact that the CFPB’s single-director structure violates the separation of powers by vesting significant power in the hands of one individual who is accountable to no one.
• Importantly, Seila stops short of making any structural changes to the agency at large for the following reasons:
  • The “shift would trigger a major regulatory disruption and would leave appreciable damage to Congress’s work in the consumer-finance arena.” For instance, the CFPB employs a staff of 1,500 and operates a budget of $500 million.
  • One of the agencies (the Office of Thrift Supervision) whose regulatory authority was transferred to the CFPB no longer exists.
  • No agency currently exists to administer Dodd-Frank’s prohibition on unfair and deceptive practices relating to consumer finance.
  • The Court cannot legislate from the bench, however, Congress is free to pursue other alternatives, such as converting the agency to a multimember agency.
• In conclusion, the Court found the director’s removal protection severable from Dodd-Frank and remanded the case to the Court of Appeals for the Ninth Circuit.

What does this mean going forward?

• Legal challenges to other independent agencies. Any effort by the Court to build on this analysis will take time. For more on how the Court’s decision opens the door to challenges to other independent agencies see Baker’s Client Alert on the topic here.
• Legislative change to the CFPB structure. Various attempts have been made at the federal level to change the Dodd-Frank Act, which established the CFPB. It is possible that efforts to change the structure of the CFPB may be attempted at the congressional level – especially given Roberts’ opinion.