Supreme Court Review Could Undercut CFPB Enforcement

The Consumer Financial Protection Bureau could lose leverage in enforcement negotiations as the Supreme Court considers whether its leadership structure is unconstitutional.

The CFPB has said it will be business as usual as the U.S. Supreme Court considers a challenge to the independent agency’s single-director, whom the president can only fire for cause, rather than at will.

But federal judges have already put stays on the bureau’s enforcement litigation or closed cases altogether pending a Supreme Court decision in Seila Law LLC v. Consumer Financial Protection Bureau— which hasn’t been scheduled for oral arguments yet.

That delay could give companies a leg up when negotiating the terms of CFPB civil investigative demands or even proposed settlements for alleged consumer law violations, regardless of how the Supreme Court eventually rules.

“The CFPB is likely going to try to settle things to avoid court. There could be a discount on a settlement given that they want to avoid court in the short run,” said Eric Goldberg, a former CFPB managing director for regulations who is now a partner at Akerman LLP.

The CFPB did not respond to a request for comment on this story.

Red Lights

In announcing her decision Sept. 17 to sign on to the Trump administration’s position that the CFPB is unconstitutional, the agency’s director, Kathy Kraninger, said the case would not “affect my commitment to fulfilling the bureau’s statutory obligations.”

But federal courts have reacted differently since the Supreme Court’s Oct. 18 decision to take on the case

The U.S. Court of Appeals for the Ninth Circuit on Oct. 22 stayed an appeal the CFPB filed over a $0 restitution order that a federal district court handed down to online lender CashCall Inc.

The litigation halts are not just coming at the appellate court level.

On Oct. 15, three days before the Supreme Court granted Seila Law’s petition, Judge Sandra J. Feuerstein of the U.S. District Court for the Eastern District of New York closed the CFPB’s case against debt collection law firm Forster & Garbus LLP.

The case had originally been stayed in September as the Supreme Court weighed whether to take the case, and Feuerstein’s order closed the case until at least April 2020.

“Her position is, ‘I’m not touching this case until the Supreme Court figures out what happens, but also what the remedy is going to be,’” said Joann Needleman, an attorney representing Forster & Garbus.

‘Not Responding to Anything’

CFPB investigations are also likely to be impacted, with financial companies more likely to challenge the bureau’s civil investigative demands (CIDs) in court, according to Needleman, the head of Clark Hill PLC’s consumer financial services regulatory & compliance practice group.

Needleman said she’d advise clients to hold tight if they receive a CID, essentially a civil subpoena, to hand over documents or materials to the CFPB.

“My response to that would be, ‘I’m not responding to anything.’ We don’t know whether this agency is unconstitutional” and if they have the authority to issue a CID, she said.

That may not be the answer for every company, though.

Big banks and other companies may elect to enter into settlement negotiations in order to get any penalty out of the way. But with the CFPB’s ability to get a case before a judge curtailed until next year, those companies may be able to get a lighter penalty, Goldberg said.

Companies could be a bit tougher than normal in negotiations with the bureau, said Lucy Morris, a former deputy CFPB enforcement director who is now a Hudson Cook LLP partner.

“I would imagine the bureau would want to settle cases rather than putting everything on hold or go to litigation,” she said.

Another Factor

Those considerations are unlikely to stop the CFPB from bringing cases. They will just be added to the usual considerations that enforcement attorneys weigh before bringing a case, according to Arent Fox LLP partner Jenny Lee.

“It would slow things down and be an additional hurdle, just as any other factor would be,” Lee, a former CFPB enforcement attorney, said.

Companies will also have to weigh how aggressive they get in negotiations while the Supreme Court case is pending.

The CFPB isn’t going anywhere regardless of how the justices rule. Most observers predict the Supreme Court would simply eliminates the for-cause removal provision included in the Dodd-Frank Act to remedy any constitutional issues.

“Since the likelihood is that they will continue in business after the opinion in the Supreme Court comes down, it’s probably not a good idea to burn any bridges with the agency right now,” said Alan Kaplinsky, the co-leader of Ballard Spahr LLP’s consumer financial services group.

Seila Law LLC v. Consumer Financial Protection Bureau, U.S., 19-7, 10/18/19