On June 29, 2020, in Seila Law v. Consumer Financial Protection Bureau (CFPB), a divided Supreme Court held that the statute that created the CFPB is unconstitutional because it did not vest enough powers with elected officials, and instead concentrated them in a single director, violating the Constitution’s separation of powers. 591 U.S. ---- (2020) (slip op.). This holding was predicted, as the CFPB did not defend its constitutionality in court. The potential remedy, however, could have been exciting. Over 30 amicus parties contributed to the court’s consideration of its options. In the end, however, the Supreme Court severed the “for cause” director removal language in CFPB’s implementing statute—the same remedy that Justice Kavanaugh ordered four years earlier in PHH Corp. v. CFPB, while he was a judge in the D.C. appellate court.
Many had hoped that the court would address Congress’ lack of authority over the agency, as well as the president’s. Others hoped that the decision would, at the very least, result in denying the CFPB’s bid to enforce its civil investigative demand. While a few people in the financial services industry had wished that this ruling would spell the agency’s demise, most firms desired a ruling that would lead to a stable, non-political regulator with a structure that is accountable and less insular. Finally, companies presently engaged with the CFPB want to know if the ruling relaxes any of their enforcement, supervision or regulatory implementation requirements.
In short, the Supreme Court’s Seila Law decision is unlikely to have any discernable impact on how the CFPB functions, or on outstanding CFPB matters, going forward.
In both the 2016 PHH v. CFPB case and the Supreme Court’s Seila Law decision, the courts ruled that the Consumer Financial Protection Act’s (CFPA) single-director administrative agency must have a director that serves at the will of the president. The statute’s text says that the president may only terminate the director for “inefficiency, neglect of duty, or malfeasance in office”—during the director’s fixed five-year term. Both the PHH and Seila Law courts elected to fix the CFPA’s constitutional flaw by severing that clause, which limited the president’s authority to remove the CFPB director at will. Severing will not cause the statute to be recodified; rather, it’s a stroke of magical red pen that rewrites existing copies of the CFPA to cross out that language and make the CFPA constitutional.
Though the Supreme Court ruled that the CFPB is unconstitutionally structured, the ruling does little to change how the agency must conduct business going forward. Various constitutional scholars argued in amicus briefs that even if the court severed the for-cause provision, the CFPB’s funding from the Federal Reserve, rather than Congress, results in an agency answerable to the president, but nevertheless unaccountable to Congress because the CFPB is not constrained by Congress’ power of the purse. In addition, a significant number of financial services firms are in favor of a commission structure. Indeed, a team of Brownstein attorneys filed an amicus brief on behalf of the Credit Union National Association arguing that the agency’s structure is so deficient in elected-official oversight that Congress ought to fix the issue by implementing a bipartisan multimember commission. While the Wall Street Journal Editorial Board agreed with us, the court did not.
Proponents of a bigger change at the CFPB note that Seila Law’s severance remedy does not fully address the CFPB’s concentration of power. Chief Justice Roberts, writing for the majority, explained that a single director who can only be removed under limited circumstances is “incompatible” with our constitutional structure, which “scrupulously avoids concentrating power in the hands of a single individual.” The court’s decision—while consistent with many prior cases—does not address the lack of presidential, legislative or judicial oversight over the agency’s funding, nor does it address other structural oddities that add to its independence. Consequently, the court’s solution effectively allows the continued concentration of all CFPB power into one person who may only be terminated if the White House took an interest in day-to-day CFPB operations among all other presidential priorities.
The court’s ruling is also unlikely to impact CFPB enforcement. Unlike at the Federal Trade Commission, once an enforcement investigation is opened at the CFPB, there are very few limits or controls governing the civil investigative demands (CIDs) issued by the agency. The CFPB’s rules impose few restraints on breadth or expense of investigations, which will continue as before with little oversight.
The Supreme Court refused Seila Law’s ultimate request—suppression of a CID that seeks documents and data from the firm. Rather, the court remanded the case back to the district court from which it arose to determine whether the court’s ruling permits the CFPB to enforce compliance with the civil investigative demand that it sent to Seila Law. As a practical matter, now that the CFPA statute’s constitutional defect has been remedied, the CFPB can simply reissue a new CID. Anyone else who tries to raise Seila Law as a defense is likely to face the same result.
In addition, as of July 7, 2020, the CFPB has ratified its “official actions” from Jan. 4, 2012, to June 30, 2020. Under established case law, any agency may, through ratification, “purge[] any residual taint or prejudice left over from” a potential defect in a prior governmental action. Ratification is fairly common within the administrative state, and there is little chance that this action will meet any serious challenge.
Only Justices Thomas and Gorsuch would have denied the CFPB’s request to enforce the CID against Seila Law. These justices believe that independent agencies have too much power and too little oversight from elected leaders. Justice Thomas wrote that the prior opinions upholding independent agencies, “create a serious, ongoing threat to our Government’s design.” Now that the Supreme Court has issued its limited remedy, it remains to be seen whether Congress revisits the concept of turning the CFPB into a commission or taking more control over its funding.
This document is intended to provide you with general information regarding the U.S. Supreme Court's decision in Selia Law v. CFPB. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions.
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