U.S. Supreme Court Case Demonstrates Trump Administration's CFPB Blessing

The true constitutional test of the Consumer Financial Protection Bureau (bureau) is upon us, with the bureau set to resolve its existential crisis in a manner of weeks in the long-awaited, now-pending U.S. Supreme Court case, Seila Law v. CFPB (Seila Law or case). The case reveals the Trump administration’s express recognition of the importance of the bureau’s work and highlights the declining ability of companies to challenge bureau investigations on constitutional grounds. A recent string of Bureau Director Kathy Kraninger’s decisions underlines this evolutionary precept, maintaining the bureau’s years-long position that challenges to its constitutionality are hollow shields that will not protect a business seeking to stop a bureau enforcement investigation to which it is subject. The bureau’s ultimate fate aside, the Trump administration’s positions as articulated in its Supreme Court briefing and at oral argument, coupled with the bureau’s recent petition denials, offer unexpected insight into the next era of consumer financial protection under the Trump administration.

• The Trump Administration Drives Straight Ahead Rather Than Take the Fork in Seila Law.

 The Trump administration’s positions were neither pro-bureau, nor pro-industry. 

Background as to Party Arguments. Seila Law LLC (Seila Law), a California law firm suspected of violating the Telemarketing Sales Rule, lodged its foundational argument that the Civil Investigative Demand (CID) the bureau issued to it (investigation) is invalid because the bureau’s structure of a single director, removable only for cause, violates the Constitution’s separation-of-powers doctrine. Article II vests in the president the obligation to “take care that the laws be faithfully executed,” U.S. Const. art. II, Sections 1, cl. 1; 3, cl. 1. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the bureau’s enabling statute, however, provides that: a single director, appointed by the president and confirmed by the Senate, shall lead the bureau for a five-year term; and once the director assumes office, the president may only remove her for cause, i.e., “for inefficiency, neglect of duty, or malfeasance in office” (for-cause removal provision).

Seila Law argued that Article II empowers the president to hold principal executive branch officers accountable by removing them at will, and, in turn, invalidates any provision that cabins the president’s ability to remove an officer only for “inefficiency, neglect of duty, or malfeasance.” In Seila Law’s view, the Constitution is flexible enough to allow the president to fire an executive agency head based only on “a disagreement on polices or priorities, a lack of trust in the officer, or the simple desire to install someone of the [p]resident’s own choosing.” In other words, Seila Law believes that the Dodd-Frank Act itself is at odds with Article II’s mandate precisely because it cabins the president’s ability to fire the bureau’s director.

The bureau, through the Trump administration, had similar views but sought an entirely different remedy after changing its position mid-stream, indeed while the case was pending certiorari, or a grant of review, from the Supreme Court. The investigation commenced under the Obama administration and continued under then-Director Richard Cordray into the Trump administration, during which time the bureau affirmed its constitutionality. The bureau changed course after Cordray resigned and President Donald Trump appointed Mick Mulvaney as acting director, however. While such a shift is by no means a normal occurrence, the Obama administration acted similarly in refusing to defend the Defense of Marriage Act in United States v. Windsor, 570 U.S. 744 (2013). This resulted in Solicitor General Noel J. Francisco (SG Francisco), who represented the bureau in the case, asserting that the bureau is unconstitutional because of its conflict with Article II, one of the arguments lodged by Seila Law.  With no one to argue in favor of the Bureau’s constitutionality, the Supreme Court invited Paul Clement, a former U.S. Solicitor General, to argue in support of the bureau’s structure as an amicus curiae (amicus).

A key distinction, however, lies in the remedies that SG Francisco and Seila Law proposed. Whereas Seila Law argued that the entire bureau should be struck down because the CID and enforcement action were “infected” by the for-cause removal provision’s unconstitutionality, the Trump administration advocated for a much milder remedy. Namely, that the antidote to the for-cause removal provision’s unconstitutionality is to “sever” it from the rest of the Dodd-Frank Act, leaving the bureau’s enforcement and other consumer financial protection activities to persist unscathed.

While these developments led to illuminating exchanges during oral argument before the Supreme Court on March 3, the greatest insights into the bureau’s pragmatic position as to the question of its constitutionality derives from a study of its petition denials in the preceding months.

• Kraninger Rules That Unconstitutionality Challenges Are an Insufficient Basis to Stop or Abrogate Investigations in String of Recent Petitions.

In petition rulings issued between December 2019 and February 2020, the bureau consistently rejected arguments that its alleged unconstitutionality is a sufficient basis to challenge bureau investigations. First, on Nov. 7, 2019, Equitable Acceptance Corp. (EAC) filed a petition to set aside or modify the bureau’s CID, which had been issued on Oct. 23, 2019. On Dec. 26, 2019, Kraninger denied the petition which sought to set aside its CID on constitutional grounds.

On Nov. 20, 2019, the bureau issued a CID seeking documents and written responses from a collection agency named FedChex Recovery LLC (FedChex). FedChex petitioned the bureau to set aside the CID for several reasons, the most significant of which was the bureau structure’s alleged unconstitutionality and the pendency of this question before the Supreme Court. Nevertheless, on Jan. 26, Kraninger denied the petition on the basis that the administrative process for petitioning to modify or set aside CIDs is not the proper forum for raising and adjudicating challenges to the bureau enabling statute’s constitutionality.

Third, on Dec. 5, 2019, the Law Offices of Crystal Moroney (Moroney) sought to set aside yet another CID, asserting that the same constitutional defect in the bureau’s structure deprived the bureau of the legal authority to issue and enforce the CID. Specifically, Moroney, like other entities before it, argued that the bureau’s structure violates Article II because the Dodd-Frank Act established the bureau as an “independent” agency, thereby insulating it from the requisite checks and balances between the executive and legislative branches. On Feb. 10, Kraninger denied the petition.

Fourth, on Nov. 18, 2019, several online lenders affiliated with Native American tribes sought to set aside yet another CID, asserting, among other things, that the CID should be withdrawn or stayed pending the court’s resolution of Seila Law v. CFPB. On Feb. 18, Kraninger denied the petition, reiterating that the administrative process was an improper forum to adjudicate challenges to the bureau’s constitutionality.

• Key Takeaways for Bureau-Regulated Businesses.

The Seila Law briefing and oral argument, combined with Kraninger’s decisions on the four highlighted petitions, offer three key takeaways for bureau-regulated entities. First, while the longevity of the Dodd-Frank Act’s for-cause removal provision remains to be seen, at the heart of Seila Law is a fundamental tension between two competing policy goals—each of which seems valid on its face. The key to a constitutional society (and market stability) includes government that respects both: the independence of agencies so that they may achieve the mandate given to them by Congress without political interference; and Article II, which delegates to the president the duty to “take care” that the agencies’ work faithfully executes the laws of the United States.

A colloquy during the oral arguments in Seila Law between Justice Sonia Sotomayor and the amicus illustrates why greater weight should be placed on independence in selected industries or topic areas. Sotomayor asked the amicus to answer whether the president must have the power equally to appoint and remove the bureau’s director so that she is aligned with the president’s consumer-financial-protection-policy views. In response, Mr. Clement made an extremely timely comparison, stating that “Congress has the power to say … we also want [a director] somewhat insulated from politics,” separate from the president’s power, and used the current COVID-19 pandemic as an example of why Congress could decide that “head of [the] CDC be protected by for-cause removal because that’ll make sure people get good advice and it doesn’t become political.” Mr. Clement further noted that Congress applied this rationale to the Board of Governors of the Federal Reserve.

In our view, the bureau has been a political creature by nature since its inception. Structuring an agency in accordance with a mission that requires it to be as apolitical, and therefore independent, as possible (whether with respect to pandemic prevention, whistleblowers in the executive branch, or financial crisis prevention) is critical to the agency’s ability to succeed in protecting the public. Notwithstanding the points above, Seila Law is unlikely realistically to move the needle towards the installation of a commission-based leadership structure at the bureau, which arguably was a missed opportunity to structurally insulate the bureau from the political whiplash that generally occurs when the presidency changes parties.

Second, despite years-long legal challenges to its constitutional authority, the bureau has persisted in continuing to conduct investigations and file enforcement actions, rejecting repeated petitions to set aside or modify civil investigative demands or invalidate enforcement investigations on constitutional grounds. Any decision by the court that leaves the bureau intact to continue its important public work, even one in which its director is found to be removable at the will of the president, will no doubt provide an intellectual sense of finality as to the bureau’s longevity but will not necessarily alter the bureau’s current trajectory, which remains active.

Third, Seila Law, considered in the context of the bureau’s string of petition denials, reveals that the bureau and the Trump administration are aligned in their understanding of the bureau’s overarching mission. Whereas Kraninger deflected repeated constitutional challenges and fought for the bureau’s continued legitimacy on a case-by-case basis, the SG Francisco explained in broad policy terms why the bureau must endure, arguing that its demise would be “severely disruptive” given that the bureau is the federal government’s only agency solely dedicated to consumer protection. According to SG Francisco, the bureau has issued numerous significant rules, obtained billions of dollars in relief through enforcement, and reached millions of consumers through its education functions. He further argued that invalidating the enabling statute would lead to grave doubt as to the validity of those rules and eliminate the safe harbors Congress established for regulated entities who relied in good faith on them and eliminate important new consumer protection authorities. It would undo substantive amendments to several consumer protection statutes. And it would require unwinding the transfer of functions and staff to the Bureau from seven transferor agencies, one of which, the Office of Thrift Supervision, no longer even exists.

Thus, while the mental gymnastics involved in debating the best way to fire the bureau’s director has proven to be a fascinating constitutional exercise, Seila Law as a practical matter has done more than any other case to reveal the Trump administration’s true colors in its defense of the legitimacy of the bureau’s work, despite the current political environment.

Reprinted with permission from the April 15 issue of American Lawyer © 2020 ALM Media Properties, LLC. Further duplication without permission is prohibited.  All rights reserved.