New plot twist: CFPB agrees its structure is unconstitutional

Ballard Spahr LLP

Ballard Spahr LLP

The long-running saga that is the litigation over whether the CFPB’s single-director-removable-only-for-cause structure is constitutional took a new twist on Tuesday with the CFPB’s announcement that it has determined that its structure is unconstitutional.

The announcement was made in identical letters sent by Director Kraninger to House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell.  In the letters, Director Kraninger advised the lawmakers that in response to Seila Law’s petition for a writ of certiorari seeking U.S. Supreme Court review of the Ninth Circuit’s ruling that the CFPB’s structure is constitutional, the DOJ, on the Bureau’s behalf, has taken the position that the Bureau’s structure violates the U.S. Constitution’s separation of powers.

In its response, the DOJ urges the Supreme Court to grant the petition and resolve the constitutional issue by finding that existing Supreme Court precedent does not require the Court to uphold the Bureau’s constitutionality because the Dodd-Frank removal provision is distinguishable from those previously upheld by the Court.  The DOJ argues (and Director Kraninger agrees in her letters) that the appropriate remedy is to sever the for-cause removal provision.  The DOJ suggests that because the CFPB now agrees that its structure is unconstitutional, the Supreme Court may “wish to consider appointing an amicus curiae to defend the judgment of the [Ninth Circuit]” if it grants review.  The briefs on Seila Law’s petition have been distributed for the Supreme Court’s October 11 conference.

While the constitutionality issue has loomed over the Bureau nearly since it opened its doors for business, it has now descended upon the Bureau as a very dark cloud.  Although Director Kraninger suggests in her letters to Ms. Pelosi and Mr. McConnell that it will be business as usual at the Bureau and states that she will continue “to defend the Bureau’s actions,” she also indicates that she has “directed the Bureau’s attorneys to refrain from defending the for-cause removal provision in the lower courts.”  At a minimum, her instructions are likely to cause the courts hearing pending cases (which are listed in Director Kraninger’s letters) to stay those cases until the Supreme Court rules on Seila Law’s petition for review and, if granted, its appeal.  But even more significantly, her instructions could effectively bring the CFPB’s enforcement activities to a halt. Companies that are recipients of CFPB CIDs or PARR letters or otherwise targeted by the CFPB in new or threatened enforcement actions can be expected to raise the constitutionality issue to challenge the CFPB’s actions and Director Kraninger’s instructions create uncertainty as to what position CFPB attorneys will take when faced with such challenges.

The CFPB’s change in position is also likely to result in stays from the Fifth and Second Circuits in, respectively, All American Check Cashing and RD Legal.  The CFPB has filed letters with the Fifth and Second Circuit indicating that it now agrees with the defendants in both cases that the Bureau’s structure is unconstitutional but does not agree that the entire CFPA should be struck down.  Instead, the CFPB believes severance of the for-cause removal provision is the appropriate remedy.

The Fifth Circuit heard oral argument in March 2019 and last week directed the parties to file letter briefs regarding what action the Fifth Circuit panel should take in light of the en banc Fifth Circuit’s decision in Collins v. Mnuchin.  Briefing has been completed in RD Legal and the Second Circuit has scheduled oral argument for November 21, 2019.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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