Banking Law News

Supreme Court to Have Last Word on CFPB’s Constitutionality (1)

Oct. 18, 2019, 7:37 PMUpdated: Oct. 18, 2019, 8:24 PM

The U.S. Supreme Court will determine whether the Consumer Financial Protection Bureau’s director can be fired by the president at any time.

The high court on Oct. 18 agreed to hear a case filed by a California debt collection law firm that says it should not have to comply with a CFPB civil investigative demand because the bureau’s single-director leadership structure, which only allows the director to be fired for cause, is unconstitutional.

The U.S. Court of Appeals for the Ninth Circuit in May rejected Seilla Law LLC’s constitutionality claims against the CFPB. But the law firm gained a powerful ally last month when the Trump administration joined its cause and urged the high court to give the president more control over the bureau.

The Supreme Court’s ruling could reverberate throughout the government and legal system. If the high court rules that the president is free to fire the CFPB’s director at will, current CFPB Director Kathleen Kraninger could be out of the job if a Democrat defeats President Donald Trump in next year’s election despite her five-year term being less than halfway done.

Alternatively, if the Supreme Court goes a different route in dealing with the CFPB’s constitutionality, the bureau could face other legal challenges to its actions. And directors of similarly structured agencies could also see leadership or other changes.

Unusual Path

Typically, the Supreme Court only takes on cases that have seen a circuit split. There isn’t one on the question of the CFPB’s constitutionality. But the battle over the CFPB, which began before it opened its doors in 2011, has been anything but typical.

The Obama administration defended the CFPB’s constitutionality every time it was challenged, beginning with a 2012 lawsuit by a Texas community bank.

That changed Sept. 17 when Solicitor General Noel Francisco filed a brief arguing that the for-cause termination provision was unconstitutional and urging the high court to take the Seila Law case

The Republican-led CFPB signed the brief and Director Kathy Kraninger also sent letters to Congress calling for the bureau’s single-director structure to be changed.

Because the Trump administration will not defend the CFPB’s structure, the Supreme Court will have to choose an outside lawyer to represent the position that the bureau is constitutional.

The Supreme Court’s decision to take on the Seila Law case is “concerning” because the justices could limit the bureau’s independence, according to Christopher Peterson, a former top CFPB official and now an attorney with the Consumer Federation of America.

“Hopefully, the court will put this issue to rest,” Peterson said.

Industry groups hoped that a Supreme Court fight could spur Congress to put a multi-member commission, similar to the structure at the U.S. Securities and Exchange Commission, atop the CFPB.

“A commission will ensure consumer protection laws are no longer a pendulum swinging with each new director,” Richard Hunt, the president and chief executive of the Consumer Bankers Association, said in a statement.

No Stranger to the Courts

The constitutionality battle has been active in a number of venues.

The Supreme Court in December 2018 declined to review a January 2018 decision by an en banc panel of the U.S. Court of Appeals for the D.C. Circuit that found the CFPB’s structure to be constitutional.

That decision overturned an earlier panel decision in the D.C. Circuit, written by then judge and current Supreme Court Justice Brett M. Kavanaugh, which found the CFPB unconstitutional. Kavanaugh’s fix was to eliminate for-cause removal and make the CFPB director fireable at will by the president.

In addition to the Ninth Circuit, there are still CFPB constitutionality cases pending in the U.S. Courts of Appeal for the Fifth and the Second Circuits.

The Fifth Circuit also recently found the leadership structure at the Federal Housing Finance Agency, which has a single director that can only be fired for cause, to be unconstitutional.

Unlike the CFPB, the FHFA still defends its constitutionality.

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

(Updates with comments from industry and consumer advocates)

To contact the reporter on this story: Evan Weinberger in New York at eweinberger@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

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