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INSIGHT: Supreme Court Ruling Does Not End the Fight Over the CFPB

July 30, 2020, 8:01 AM

The U.S. Supreme Court’s ruling in Seila Law v. CFPB allows the president to fire at will the head of the Consumer Financial Protection Bureau, an independent federal agency. The court held that removal protections found in the Dodd-Frank Act were unconstitutional and violated separation of powers.

Although the ruling left the CFPB otherwise intact, it left open an important question: Can the CFPB proceed with its pending enforcement actions by having its current director “ratify” the agency’s decision to initiate those actions?

Within days of the decision, the CFPB rushed to courthouses across the country to submit declarations of ratification, while its litigation opponents asserted that any attempt at ratification was legally insufficient. Targets of CFPB enforcement should familiarize themselves with the current legal landscape around ratification, as the success of any purported ratification may turn on case-specific facts.

Supreme Court Leaves Open Question

In Seila Law, the CFPB issued a civil investigative demand to a California-based law firm that provided consumer debt-relief services. The law firm challenged the demand on the ground that the law establishing the agency violated the Constitution’s separation of powers by improperly insulating the CFPB director from removal by the president.

The court agreed, holding that Congress’s investment of “significant executive power” in a single, unelected officer—while cabining the president’s ability to remove that officer only for “inefficiency, neglect of duty, or malfeasance in office”—unconstitutionally infringed upon the president’s power.

The court stopped short, however, of holding that the entire agency was unconstitutional, instead determining that the director’s removal protection could be severed from the law establishing the CFPB.

While the CFPB as an institution survived, the court left open the question of what effect the decision had on actions taken by the CFPB while it was headed by a constitutionally defective director.

The CFPB’s Response

The CFPB soon rushed to fill the gap. On July 7, the CFPB announced that it was ratifying a “number of official actions from Jan. 4, 2012, to June 30, 2020,” including various published rules and regulations. However, the CFPB declined to issue a blanket ratification for enforcement actions initiated pre-Seila Law, stating that it would make such ratifications separately.

This ad hoc approach has been confirmed by recent filings made by the CFPB in a number of active enforcement actions. For example, on July 9, 2020, the CFPB filed a notice in its action against Ocwen Financial Corp. and related entities pending in the Southern District of Florida attaching the director’s declaration of ratification. A day later, on July 10, the CFPB filed a similar notice in its action against RD Legal Funding LLC currently on appeal to the Second Circuit.

The Law of Agency Ratification

The CFPB’s argument for ratification relies on a line of cases allowing properly-constituted agencies to ratify rules or enforcement actions initiated when the agency (or its officers) lacked proper legal authority.

The rationale underlying these decisions typically emerges from agency law principles. If a principal (here, the CFPB itself) always had the authority to initiate an enforcement action, then it can wield that authority to ratify decisions made by its agent (here, the director)—even if that agent lacked authority when they took the action.

In fairly recent examples, the D.C. Circuit relied on that framework to allow an official at the National Labor Relations Board to ratify his own past actions, finding that the official’s “ratification of his own action remedied the defect in his original issuance of the complaint.”

The Third Circuit is no different, upholding a “barebones” ratification order at the NLRB, noting that ratification is effective when the ratifying party “still ha[s] the authority to take the action to be ratified,” so long as the ratifying party has “full knowledge of the decision” and makes “a detached and considered affirmation of the earlier decision.”

The Ninth Circuit reached the same conclusion in the context of the CFPB. In that case, CFPB Director Richard Cordray ratified the actions he took during his almost certainly unconstitutional recess appointment by simply signing a paragraph statement affirming his previous decisions.

Ongoing Litigation and Open Issues

Despite frequently upholding ratification orders, these cases leave some room for litigants to challenge purported ratifications. For starters, courts generally acknowledge caveats for instances of “actual bias” or “continuing prejudice” against parties that lingers from the initial unauthorized action. Courts, however, demand actual evidence in support of these allegations.

Perhaps out of a concern for prejudice against litigants, the Supreme Court has also suggested that adjudications might warrant a new proceeding, although it has not conclusively analyzed the issue.

The statute of limitations may provide another avenue to challenge purported ratification orders. The Supreme Court has noted that ratification may be impossible if the statute of limitations would bar bringing a new action at the time of ratification. The court has never clearly addressed the subject, however, so the lack of analysis and muddled posture of its precedents leaves this as an open issue.

In sum, as CFPB litigation moves from broad collateral attacks on the bureau’s constitutionality to narrow challenges against its ratification order, courts will need to confront fresh issues. These decisions not only address critical questions for the CFPB’s litigation opponents in the aftermath of Seila Law, they set the stage for administrative law challenges in years to come.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Rachel Rodman is a partner in Cadwalader’s White Collar Defense and Investigations Group and is based in the firm’s Washington, D.C., office. She is a former senior counsel and enforcement attorney for the CFPB. She focuses her practice on defending financial services companies in government investigations and litigation involving consumer financial products and services.

Keith Gerver, a former Department of Defense intelligence analyst, is an associate in Cadwalader’s White Collar Defense and Investigations Group and is based in the firm’s Washington, D.C., office. He advises individual and corporate clients on a broad array of criminal, civil, and regulatory matters, including representing clients before federal agencies and in administrative enforcement actions.

William Simpson is an associate in Cadwalader’s White Collar Defense and Investigations Group and is based in the firm’s Washington, D.C., office. His practice encompasses civil litigation and criminal proceedings, often involving constitutional and administrative law issues, in administrative enforcement actions, federal courts, and internal investigations.

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