A&B ABstract: On October 18, 2019, the Supreme Court granted certiorari in Seila Law v. CFPB to decide the constitutionality of the Consumer Financial Protection Bureau’s leadership structure.[1]  Significantly, the Court also ordered the parties to brief and argue a second question: “If the Consumer Financial Protection Bureau [“CFPB”] is found unconstitutional on the basis of the separation of powers, can 12 U.S.C. § 5491(c)(3) [which permits the President to remove the Director of the CFPB only for cause] be severed from the Dodd-Frank Act?”[2]

A decision on these two questions could significantly affect every financial institution or entity regulated by the CFPB.

The Constitutionality of the CFPB

In response to the 2008 financial crisis, Congress passed the Dodd-Frank Act, which included the Consumer Financial Protection Act (“CFPA”) and created, arguably, one of the most powerful federal agencies to have ever existed—the CFPB.[3]  This power emanates from the CFPB’s single director structure, the CFPB’s broad rulemaking and enforcement authority, and the fact that the CFPB’s Director is insulated from removal except for cause.  Since the CFPB’s inception, there have been numerous challenges to the constitutionality of what is known as the “for-cause” removal provision of the CFPA, which permits the President to remove the Director of the CFPB, not at will, but only “for inefficiency, neglect of duty, or malfeasance in office.”[4]  Challenges have been brought in courts in the Second, Third, Fifth, Ninth, Tenth, Eleventh, and D.C. Circuits.[5]

One of the most significant challenges to the CFPB’s constitutionality occurred before an en banc D.C. Circuit in PHH Corp. v. CFPB.  There, a majority of the D.C. Circuit held that the CFPB’s leadership structure was constitutional, reversing the three-judge-panel decision written by now-Justice Kavanaugh.[6]   Justice Kavanaugh then dissented from the en banc opinion that reversed the original decision. In his dissent, he again concluded that the CFPB’s leadership structure was unconstitutional because the Director’s power and authority were “massive in scope, concentrated in a single person, and unaccountable to the President.”[7]  It is unclear whether Justice Kavanaugh will choose to recuse himself in Seila Law, given that he has already ruled on the issue of the CFPB’s constitutionality in PHH Corp., though he is not required to do so.

One of the most recent challenges, and the one to be reviewed by the Supreme Court, was raised by the law firm Seila Law.  As explained in a previous post,[8] Seila Law involves Seila Law’s refusal to comply with a CFPB civil investigative demand (“CID”).  When the CFPB moved to enforce the CID in federal district court, Seila Law argued that the CFPB’s structure was unconstitutional and, as a result, the CID was unenforceable.  While the CFPB prevailed before the district court, and on appeal to the Ninth Circuit, with the argument that the CFPB’s leadership structure was constitutional, it has since asserted the new position that the for-cause removal provision is unconstitutional.[9]  The Supreme Court has now taken up Seila Law’s petition for certiorari.

The Severability Question

While Seila Law petitioned for certiorari on the issue of whether the CFPB’s leadership structure is unconstitutional, the obvious follow-up question is what happens as the remedy if it is.  That is, what happens if the Supreme Court strikes down the CFPA’s for-cause removal provision?  Recognizing this, when the Supreme Court granted certiorari in Seila Law, it sua sponte also ordered the parties to brief and argue the additional question of whether the for-cause removal provision is severable from the remainder of the CFPA, if the CFPB’s leadership structure is found unconstitutional on the basis of separation of powers.

This is significant because if the Court holds that the provision is not severable, it could strike down the entire CFPA, resulting in any number of drastic consequences.  For example, the Court could strip the CFPB of its enforcement powers or hold that all of the CFPB’s actions to date were ultra vires.  At least one amicus litigant in Seila Law has already made arguments to this end.  The State of Texas’s amicus brief on the certiorari issue took the position that the for-cause removal provision renders the CFPB unconstitutional and, as a result, there is no obligation for Seila Law to answer the CFPB’s CID.[10]

If the provision is found to be severable, then the CFPB likely would proceed with business as usual, even if its structure is held unconstitutional because the remedy would be to make the CFPB’s Director removable at the will of the President.  This is the position the CFPB has taken in recent statements agreeing that its leadership structure is unconstitutional.[11] The CFPB has largely relied on the fact that the Dodd-Frank Act contains a severability clause, which states that “[i]f any provision of this Act . . . is held to be unconstitutional, the remainder of this Act . . . shall not be affected thereby.”[12]  As such, the CFPB has stated that “a Supreme Court decision holding that the for-cause removal provision is unconstitutional should not affect the Bureau’s ability to carry out its important mission [of consumer protection],” because “if the Court holds the for-cause removal provision unconstitutional, the CFPA should remain ‘fully operative’ and the Bureau would ‘continue to function as before, just with a Director who ‘may be removed at will by the President.’”[13]

Notably, though it is unclear what position the Justices will take on the severability issue, Justice Kavanaugh’s original decision in PHH Corp., and his dissent in the en banc review, also touched on severability, finding that “[a]s to remedy . . . [t]he Supreme Court’s Free Enterprise Fund decision and the Court’s other severability precedents require that we sever the CFPB’s for-cause provision, so that the Director of the CFPB is supervised, directed, and removable at will by the President.”[14]

Takeaway

After years of litigation, and conflicting court decisions, the Supreme Court has finally agreed to take on the question of whether the CFPB’s leadership structure is unconstitutional and, if so, what the remedy should be.  That said, even if the CFPB’s leadership structure is found to be unconstitutional, at least one conservative Justice is already on record with the conclusion that the for-cause provision is severable (though Justice Kavanaugh could elect to recuse himself).  While the ultimate outcome is unclear, this case promises to be a major development in the arena of consumer finance and administrative law.

Seila Law will likely be scheduled for oral argument in early 2020, with a decision following in the coming summer.  For now, we will be monitoring the case for developments, including what arguments rise to the top during the briefing process.

[1] https://www.supremecourt.gov/search.aspx?filename=/docket/docketfiles/html/public/19-7.html (Oct. 18, 2019).
[2] Id.
[3] See 12 U.S.C. § 5491.
[4] See 12 U.S.C. § 5491(c)(3); see e.g., CFPB v. Nationwide Biweekly Admin., No. 18-15431 (9th Cir.); CFPB v. CashCall, Inc., No. 18-55479 (9th Cir.); CFPB v. All Am. Check Cashing, Inc., No. 18-90015 (5th Cir.); CFPB v. RD Legal Funding, LLC, No.18-2860 (2d Cir.); Community Fin. Servs. Assoc. v. CFPB, No. 1:18-cv-0295 (W.D. Tex.); CFPB v. Ocwen Fin. Corp., No. 9:17-cv-80495 (S.D. Fla.); BCFP v. Progrexion Mktg., Inc., 2:19-cv-00298 (D. Utah); CFPB v. Navient Corp., 3:17-cv-101 (M.D. Pa.).
[5] See CFPB v. Nationwide Biweekly Admin., No. 18-15431 (9th Cir.); CFPB v. CashCall, Inc., No. 18-55479 (9th Cir.); CFPB v. All Am. Check Cashing, Inc., No. 18-90015 (5th Cir.); CFPB v. RD Legal Funding, LLC, No.18-2860 (2d Cir.); Community Fin. Servs. Assoc. v. CFPB, No. 1:18-cv-0295 (W.D. Tex.); CFPB u. Ocwen Fin. Corp., No. 9:17-cv-80495 (S.D. Fla.); BCFP v. Progrexion Mktg., Inc., 2:19-cv-00298 (D. Utah); CFPB v. Navient Corp., 3:17-cv-101 (M.D. Pa.).
[6] PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75 (D.C. Cir. 2018) (en banc).
[7] PHH Corp., 881 F.3d 75, 166 (Kavanaugh, J., dissenting).
[8] https://www.alstonconsumerfinance.com/cfpb-changes-tack-on-for-cause-removal-provision/.
[9] See CFPB v. Seila Law, No. 19-7 (S. Ct. ), CFPB Br. on Pet. for Cert. (filed Sept. 17, 2019).
[10] See CFPB v. Seila Law, No. 19-7 (S. Ct.), Texas Amicus Br. on Pet. for Cert. at 16.
[11] See September 17, 2019 Letters from Director Kraninger to Speaker Pelosi and Majority Leader McConnell (quoting Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477, 508 (2010)).
[12] See 12 USCS § 5302 (“If any provision of this Act, an amendment made by this Act, or the application of such provision or amendment to any person or circumstance is held to be unconstitutional, the remainder of this Act, the amendments made by this Act, and the application of the provisions of such to any person or circumstance shall not be affected thereby.”).
[13] See September 17, 2019 Letters from Director Kraninger to Speaker Pelosi and Majority Leader McConnell (quoting Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477, 508 (2010)).
[14] PHH Corp., 881 F.3d 75, 167 (Kavanaugh, J., dissenting).

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