Supreme Court Holds That Part of CFPB’s Structure Is UnconstitutionalThis morning, the United States Supreme Court issued its decision in Seila Law v. CFPB. Authoring the opinion for a five-justice majority, Chief Justice John Roberts wrote that the Consumer Financial Protection Bureau’s (CFPB) single-director configuration, in which the CFPB’s director can only be removed for a specific list of reasons, was unconstitutional. However, the Supreme Court also found the removal provision severable from other parts of Dodd-Frank. This means that the CFPB survives, and that the CFPB director is now removable at will. Although this decision might be described as a victory for the financial services industry – it subjects the CFPB’s director to removal by the incumbent president – it did not go as far as some would have wished because the CFPB itself will survive. Moreover, this decision cuts both ways: Less business-friendly administrations may now elect to remove a CFPB director who takes a more reasonable approach to supervision and enforcement.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, created the CFPB to serve as an independent agency for the purpose of enforcing consumer protection laws in the financial services space. As part of the CFPB’s statutory structure, the bureau is led by a single director who serves for a five-year term and who may be removed only for inefficiency, malfeasance, or neglect of duty. Although this structure purports to safeguard the independence of the agency, it also vests an extraordinary amount of executive power in a single individual who can exercise that power with little to no oversight.

The structure of the CFPB was challenged relatively soon after Dodd-Frank’s enactment. However, many of these early challenges fell short for various reasons, including lack of standing. The Seila Law case, though, did not suffer from the same type of standing defects that plagued earlier efforts. Specifically, in 2017, the CFPB issued a civil investigative demand (CID) to Seila Law to determine whether it had engaged in unlawful debt collection practices. Seila Law elected to challenge the CFPB’s authority to issue the request, and ultimately filed a lawsuit in the U.S. District Court for the Central District of California. The district court rejected Seila Law’s arguments and ordered compliance with the CID, and the Ninth Circuit Court of Appeals affirmed the district court’s decision.

Seila Law successfully petitioned for certiorari in June 2019. Notably, the solicitor general elected not to defend the Ninth Circuit’s decision. Rather, the Trump administration agreed with Seila Law that the CFPB’s structure was unconstitutional. The administration also contended that the provision stating that the CFPB director was removable for cause was severable from the remainder of the statute, meaning that the CFPB could survive a holding that the removal provisions were unconstitutional.

Chief Justice Roberts, writing for the majority, agreed with the administration’s position. First, the Supreme Court considered whether the New Deal-era case of Humphrey’s Executor v. United States, which considered and affirmed the constitutionality of the FTC, counseled that the CFPB’s structure should be upheld. Ultimately, Chief Justice Roberts wrote that the FTC directorate, which consists of several members serving staggered terms and is bipartisan, was fundamentally different from the single-director CFPB. Likewise, the Supreme Court held that the decision in Morrison v. Olson, which approved the independent counsel statute, did not apply because the independent counsel has narrow authority to launch criminal investigations and prosecutions of government officials, unlike the broad investigative and prosecutorial authority vested in the CFPB director.

Ultimately, the Supreme Court determined that the provisions of the CFPB relating to the removal of the director were not rooted in constitutional history or tradition and were therefore not compatible with the structure of the Constitution. Critically, though, Chief Justice Roberts, as well as Justices Alito and Kavanaugh, held that the provisions related to removal of the director could be severed from the Dodd-Frank provisions that created the CFPB. According to  Chief Justice Roberts, Congress, in 12 U.S.C. § 5302, made it clear that “if any provision of [Dodd-Frank is] held to be unconstitutional . . . the remainder of this Act [should] not be affected.” Put differently, Chief Justice Roberts stated that “Congress would prefer that we use a scalpel rather than a bulldozer in curing the constitutional defect we identify today.” Justice Thomas, joined by Justice Gorsuch, concurred in part, but wrote separately to explain that he would not reach the severability question and, instead, would have denied the CFPB’s petition to enforce the CID. Justice Kagan, joined by Justices Ginsburg, Breyer, and Sotomayor, concurred with the opinion as it relates to severability, but dissented to the remainder of the decision.

Takeaways

Other than the remand of the decision to determine the effect of the decision on the specific CID issued to Selia Law, the immediate effect of this decision is not clear. We do not anticipate that the decision will have any discernable effect on any current CFPB enforcement actions or outstanding CIDs, however, we will be watching to see what happens on remand. Moreover, CFPB Director Kathy Kraninger will almost certainly remain in office in the near future. However, in the event of a change in presidential administration next year, this decision means that Director Kraninger could be removed before the end of her five-year term. Finally, there are several decisions pending in lower courts that may be affected by today’s decision. We will continue to monitor those cases and will report on any interesting developments.

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Photo of Jennifer L. Galloway Jennifer L. Galloway

Jennifer Galloway’s practice is dedicated to helping financial services clients successfully navigate increasingly complex regulatory and business environments. She is co-chair of Bradley’s Small Dollar and Unsecured Consumer Lending team and focuses on consumer financial services laws and regulations affecting banks, non-depository banks…

Jennifer Galloway’s practice is dedicated to helping financial services clients successfully navigate increasingly complex regulatory and business environments. She is co-chair of Bradley’s Small Dollar and Unsecured Consumer Lending team and focuses on consumer financial services laws and regulations affecting banks, non-depository banks and other financial institutions. Jennifer provides skilled regulatory guidance and detailed knowledge of the laws impacting both traditional and innovative lenders in the consumer financial services market, with considerable experience in online consumer lending. Her compliance work includes assisting clients with developing, implementing and maintaining compliance management systems, performing internal compliance audits for clients, preparing clients for outside audits, as well as preparing related lending documents and disclosures. She also counsels financial services companies regarding CFPB preparedness, implementation and operational strategies for complying with the CFPB’s regulations, and assists in defending regulatory enforcement actions.

Photo of Brian R. Epling Brian R. Epling

Brian Epling assists financial services clients, including small dollar lenders, auto finance companies, and mortgage servicers, with navigating regulatory compliance and litigation issues.

On the regulatory compliance side, Brian has assisted financial services clients with policies and procedures to comply with state and…

Brian Epling assists financial services clients, including small dollar lenders, auto finance companies, and mortgage servicers, with navigating regulatory compliance and litigation issues.

On the regulatory compliance side, Brian has assisted financial services clients with policies and procedures to comply with state and federal law and investor requirements. With respect to litigation, practicing in both Tennessee and Kentucky, Brian has successfully argued dispositive motions and appeals involving alleged violations of the Truth in Lending Act, Real Estate Procedures Act, and Fair Debt Collection Practices Act. Additionally, he has represented auto finance companies in administrative matters against the state. View articles by Brian.

Photo of Christopher K. Friedman Christopher K. Friedman

Chris Friedman is a regulatory compliance attorney and litigator who focuses on helping consumer finance companies and small business lenders, as well as banks, fintech companies, and other participants in the financial services industry, address the challenges of operating in a highly regulated…

Chris Friedman is a regulatory compliance attorney and litigator who focuses on helping consumer finance companies and small business lenders, as well as banks, fintech companies, and other participants in the financial services industry, address the challenges of operating in a highly regulated sector. Chris focuses on both small business lenders and alternative business finance products and has helped non-bank small business lenders, banks who make small business loans, commercial credit counselors, lead generators, and others in the industry. He helps clients launch new products, conduct due diligence, engage in compliance reviews, evaluate litigation risk, and solve some of the unique legal problems faced by companies who work with small businesses. In that vein, Chris has written extensively about the upcoming rulemaking related to Dodd-Frank 1071, which will require data collection and reporting by companies making loans to certain small businesses.