- The U.S. Supreme Court on June 29, 2020, issued its decision in Seila Law v. CFPB, a case in which the petitioner challenged the constitutionality of the Consumer Financial Protection Bureau (CFPB).
- While the Supreme Court agreed with the petitioner that the "for cause" restriction on the President's power to remove the CFPB Director violates the Constitution's separation of powers, the court concluded that the unconstitutional "for cause" removal restriction could be severed from the rest of the law that created the CFPB.
- The CFPB was permitted to stand, albeit now with a director subject to removal at the will of the President.
- Going forward, one should expect each new administration to directly influence the regulatory and enforcement focus of the CFPB by removing and replacing the CFPB Director at will.
The U.S. Supreme Court on June 29, 2020, issued its decision in Seila Law v. CFPB, a case in which the petitioner challenged the constitutionality of the Consumer Financial Protection Bureau (CFPB). While the Supreme Court agreed with the petitioner that the "for cause" restriction on the President's power to remove the CFPB Director violates the Constitution's separation of powers, the court concluded that the unconstitutional "for cause" removal restriction could be severed from the rest of the law that created the CFPB. As such, the CFPB was permitted to stand, albeit now with a director subject to removal at the will of the President.
The dispute before the Supreme Court in Seila Law v. CFPB, like almost all of the disputes with the CFPB, started when the CFPB issued a civil investigative demand (CID) to Seila Law asking for information and documents. Seila Law refused to fully comply with the CFPB's requests, lodging a number of objections, including that the CFPB lacked the authority to issue the CID because its director was unconstitutionally insulated from presidential control. The CFPB then filed suit in federal district court to compel compliance with the CID. The U.S. District Court for the Central District of California rejected Seila Law's constitutional challenge and ordered full compliance with the demands in the CID.1 When Seila Law appealed the Central District's order to the U.S. Court of Appeals for the Ninth Circuit, Seila Law was met with nothing less than a unanimous panel, which needed less than seven pages to again reject Seila Law's constitutional challenge.2 Seila Law, however, continued to press its constitutional objection to the validity of the CID filing a petition for a writ of certiorari on the question of "[w]hether the vesting of substantial executive authority in the Consumer Financial Protection Bureau, an independent agency led by a single director, violates the separation of powers." The Supreme Court granted Seila Law's petition on the question presented in the petition and directed the parties to brief and argue a second question: "If the Consumer Financial Protection Bureau is found unconstitutional on the basis of the separation of powers, can 12 U.S.C. §5491(c)(3) be severed from the Dodd-Frank Act?"
The Supreme Court's Decision
CFPB Director's Removal Protection Violates Constitution's Separation of Powers
In assessing whether protecting the CFPB Director from removal by the President for anything other than "inefficiency, neglect of duty, or malfeasance in office"3 violates the Constitution's separation of powers, the Supreme Court began with the general rule that "the President possesses the authority to remove those who assist him in carrying out his duties." The general rule, derived from Article II Section I,4 of course, comes with exceptions, but only two. The first exception was recognized by the Supreme Court in Humphrey's Executor v. United States, 295 U. S. 602 (1935), a case in which the court considered limitations on the President's power to remove Federal Trade Commission (FTC) commissioners and held that "Congress could create expert agencies led by a group of principal officers removable by the President only for good cause." The second exception was recognized in Morrison v. Olson, 487 U. S. 654 (1988), a case in which the court considered limitations on the President's power to remove an independent counsel and held that "Congress could provide tenure protections to certain inferior officers with narrowly defined duties."
The court found that the exception recognized in Humphrey's Executor, a case in which the court limited its holding to "officers of the kind here under consideration," 295 U.S. at 632, did not apply to the CFPB for three primary reasons. First, unlike the CFPB, the FTC is "composed of five members—no more than three from the same political party—the Board was designed to be 'non-partisan' and to 'act with entire impartiality.' " Second, and, again, unlike the CFPB, "the [FTC] Commissioners' staggered, seven-year terms enabled the agency to accumulate technical expertise and avoid a 'complete change' in leadership 'at any one time.' " Third, the Humphrey's Executor court viewed the 1935 FTC as "exercising 'no part of the executive power' " and nothing more than " 'an administrative body' that performed 'specified duties as a legislative or as a judicial aid.' " Justice John Roberts makes clear in his opinion that the 2020 CFPB is nothing like the 1935 FTC under consideration in Humphrey's Executor. The CFPB is led by a single director, who "cannot be considered 'non-partisan,' " whose five-year term "guarantee[s] abrupt shifts in agency leadership," and whose "enforcement authority includes the power to seek daunting monetary penalties against private parties on behalf of the United States in federal court—a quintessentially executive power."
The court also found that the exception recognized in Morrison did not apply to the CFPB for two primary reasons. The removal protections afforded to the independent counsel, which were found constitutionally permissible in Morrison, were upheld because "the independent counsel [was] an inferior officer under the Appointments Clause, with limited jurisdiction and tenure and lacking policymaking or significant administrative authority." The court was quick to observe that "the CFPB Director is not an inferior officer, and her duties are far from limited." Unlike an inferior officer, the CFPB Director "has sole responsibility to administer 19 separate consumer protection statutes." And unlike an officer with limited policymaking or administrative authority, the CFPB Director "has the authority to bring the coercive power of the state to bear on millions of private citizens and businesses, imposing even billion-dollar penalties through administrative adjudications and civil actions."
After deciding that the restriction on the President's power to remove the CFPB Director did not fit within any of the previously recognized exceptions to the general rule that the President possesses the power to remove those who assist him in carrying out his duties, the court considered whether to extend its exception-recognizing precedents to this new situation. The court declined to do so. In declining to extend its prior precedents to the CFPB, the court observed that "the CFPB's single-Director configuration is incompatible with our constitutional structure" — a structure that, "[a]side from the sole exception of the Presidency, . . . scrupulously avoids concentrating power in the hands of any single individual." With the removal protection in place, the CFPB's single-Director structure contravenes our constitutional system in that "[t]he Director is neither elected by the people [(like the President)] nor meaningfully controlled (through the threat of removal) by someone who is." The lack of direct presidential control over the CFPB Director was enough, in and of itself, to render the CFPB's structure unconstitutional, but the court went on to highlight certain additional aspects of the agency's unique structure that foreclose typically available methods of indirect presidential control and make the removal protection "even more problematic." Because of the CFPB Director's five-year term, the court wrote, "some Presidents may not have any opportunity to shape [the CFPB's] leadership and thereby influence its activities." Indeed, if the Supreme Court refused to intervene, "[a] President elected in 2020 would likely not appoint a CFPB Director until 2023, and a President elected in 2028 may never appoint one." The CFPB is further insulated from indirect presidential control in that it is not funded through the typical appropriation process, but rather through the Federal Reserve, which simply grants the CFPB Director's annual request for funds so long as the request does not exceed 12 percent of the total operating expenses of the Federal Reserve. The President's ability to influence administrative agencies by recommending or vetoing spending bills affecting agency operations simply does not extend to an agency whose funding requests are submitted and approved outside of the legislative process. In the end, the unprecedented lack of direct and indirect presidential control over the CFPB Director left the court confident in its decision.
Provision Providing Protection from Removal Can Be Severed from the Law Creating the CFPB Thereby Allowing Agency to Stand
Having decided that the CFPB's leadership by a single independent director violates the Constitution's separation of powers, the court turned to the issue of severability — whether the removal protection could be disregarded as an unconstitutional enactment and severed from the remainder of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) leaving all other aspects of the CFPB in place. The general rule that "when confronting a constitutional flaw in a statute, [courts] try to limit the solution to the problem, severing any problematic portions while leaving the remainder intact" and Dodd-Frank's clear severability clause made the severability question an easy one. The court simply gave affect to Congress' clearly expressed desire that "[i]f any provision of this Act . . . is held to be unconstitutional, the remainder of this Act, . . . shall not be affected thereby" and left the remaining portions of Dodd-Frank intact.
What Is the Practical Impact?
Because the Supreme Court did not eliminate the CFPB, the question still remains as to whether the CID issued by an unconstitutionally insulated prior CFPB Director (Richard Cordray) is now enforceable after being ratified by a removable Acting Director (John Mulvaney) and a now removable current Director (Kathleen Kraninger). That inquiry turns on case-specific factual and legal questions that were not addressed in the lower courts or in the Supreme Court and, therefore, the Supreme Court remanded the question for the lower courts to consider in the first instance.
The factual record for those eventual decisions on the ratification question has already begun to form. On July 7, 2020, the CFPB ratified "a number of official actions from January 4, 2012 to June 30, 2020." And while pending enforcement actions were not among the actions ratified, the CFPB made clear that it "is considering whether ratifications of certain other legally significant actions by the Bureau, such as certain pending enforcement actions, are appropriate. Where that is the case, the Bureau is making such ratifications separately." (Emphasis added.)
Holland & Knight will monitor litigation concerning the ratification question on remand as it could have considerable consequences for other litigants still subject to CIDs issued under the authority of unconstitutionally protected CFPB Directors.
Regardless of how the ratification issue plays out, going forward, one should expect each new administration to directly influence the regulatory and enforcement focus of the CFPB by removing and replacing the CFPB Director at will.
About Our Teams
If you have questions about the implications of the Supreme Court's decision in Seila Law v. CFPB, Holland & Knight's Consumer Protection Defense and Compliance Team and Financial Services Regulatory Team can provide additional information. The teams are comprised of individuals with extensive experience handling CFPB, Federal Trade Commission (FTC) and state attorneys general investigations, and can provide advice on how to best navigate those investigations in an ever-evolving regulatory environment. Please contact the authors with any questions.
1 The decision of the U.S. District Court for the Central District of California in CFPB v. Seila Law
2 The decision of the U.S. Court of Appeals for the Ninth Circuit in CFPB v. Seila Law
3 12 U.S.C. § 5491(c)(3).
4 Article II Section I of the U.S. Constitution provides that "[t]he executive Power shall be vested in a President of the United States of America."