Burr & Forman

11.8.2019   |   Blog Articles, CFPB, Consumer Finance Litigation, Dodd-Frank Act

Supreme Court to Decide Whether Structure of the Consumer Finance Protection Bureau is Constitutional

On October 18, 2019, the Supreme Court granted the petition for a writ of certiorari filed in Seila Law LLC v. Consumer Financial Protection Bureau. In granting the petition, the Court agreed to take up two distinct issues. First, whether the vesting of substantial executive authority in the Consumer Financial Protection Bureau (“CFPB”), an independent agency led by a single director, violates the separation of powers clause of the Constitution. Second, if the Consumer Financial Protection Bureau is found unconstitutional on the basis of the separation of powers, whether 12 U.S.C. §5491(c)(3) can be severed from the Dodd-Frank Act.

The case arises from a procedure regularly conducted by the CFPB. In early 2017, the CFPB issued what is known as a Civil Investigative Demand (“CID”) to the Appellant, Seila Law, LLC. The CID formally began the CFPB’s process of looking into whether Seila Law was in violation of the Consumer Financial Protection Act of 2010—particularly the Telemarketing Sales Rule. CIDs are executive actions the CFPB routinely issues in order to investigate whether the policies set forth in the Consumer Financial Protection Act or other Rules are being violated. In this case, Seila Law responded to the CID with general denials and claims of privilege. When Seila Law refused to cooperate further, the CFPB filed a Petition to Enforce Civil Investigative Demand in the District Court for the Central District of California.

Seila Law challenged the petition by asserting four challenges. They included assertions that: (1) the CFPB is unconstitutionally structured, (2) the notification of purpose was inadequate, (3) the CFPB’s practice of law exclusion would preclude any enforcement action, and (4) the CID was overly broad and sought privileged information. In its opinion, the District Court dismissed each of Seila Law’s assertions, and granted the CFPB’s petition with a minor, insignificant change in language.[1]

On appeal before the Ninth Circuit, the primary issue was whether the structure of the CFPB, which is headed by a single director who can be removed by the President only for cause, is constitutionally permissible.[2] The Ninth Circuit also looked into whether the CID was proper under the Consumer Financial Protection Act. The court dismissed the challenge regarding the CID relatively quickly. It examined the constitutionality of the CFPB much more thoroughly and held that the CFPB’s structure is constitutional. The Court explained its reasoning based on two factors. First, the court was persuaded by the discussion of the D.C. Circuit when it evaluated the same issue.[3] Next, the court found dispositive Supreme Court case law that discussed separation of powers.

The two Supreme Court cases that convinced the Ninth Circuit the CFPB’s structure is constitutional were Humphrey’s Executor v. United States and Morrison v. Olson. In Humphrey’s Executor, the Supreme Court rejected the separation-of-powers argument challenging the structure of the Federal Trade Commission, an agency similar to the CFPB. In rendering its decision, the Court determined that the agency exercised mostly quasi-legislative and quasi-judicial powers, rather than purely executive powers. The Court further found that the for-cause removal language was permissible because it helped to keep the commissioners independent from the President’s control.[4] Similarly, in Morrison, the Supreme Court found that a for-cause removal restriction for an official exercising a heavily executive power—a key challenge upon which Seila Law relied—was nonetheless constitutional.[5]

By granting certiorari, the Court can revisit its previous decisions such as Humphrey’s Executor and Morrison, or carve out an exception regarding the finding the large executive function of the CFPB. Further, the Court asked for briefing on a question that was not yet at issue:  If the Court agrees that the provision limiting the president’s ability to remove the CFPB director is unconstitutional, can that provision be separated from the rest of the Dodd-Frank Act? An affirmative finding in that regard would allow the Court to strike down the “for cause” provision without invalidating the entire CFPB.

While the Court will not hear arguments until early 2020, one justice’s opinion appears to already be known. While still a judge on the U.S. Court of Appeals for the District of Columbia Circuit, Justice Brett Kavanaugh dissented from the full court of appeals in the PHH Corp. decision. Kavanaugh was persuaded that the “novel structure” of the CFPB, which granted “power that is massive in scope” to one person who is not accountable to the President, violated the Constitution.

Finally, the case will have a unique twist before the Supreme Court. In defending the first issue, whether statutory restrictions regarding the President’s ability to remove the CFPB director from office, the CFPB will not defend itself. The CFPB agreed with Seila Law that the structure is unconstitutional. Rather than conceding the point, the Supreme Court appointed Paul Clement, a former U.S. solicitor general who has an extensive history in front of the Court, to argue in support of the CFPB’s structure. While lawyers for the House of Representatives requested that the House be appointed to defend the structure, Clement was selected.

This case could have wide-reaching implications across the financial sector. It will be important for banks, lenders, and all financial companies to monitor this development as it progresses through the Supreme Court.

[1] See generally Consumer Fin. Prot. Bureau v. Seila Law, LLC, No. 817CV01081JLSJEM, 2017 WL 6536586 (C.D. Cal. Aug. 25, 2017), aff’d, 923 F.3d 680 (9th Cir. 2019), cert. granted sub nom. Seila Law LLC v. Consumer Prot. Bureau, No. 19-7, 2019 WL 5281290 (U.S. Oct. 18, 2019).

[2] 923 F.3d 680 (9th Cir. 2019), cert. granted sub nom. Seila Law LLC v. Consumer Prot. Bureau, No. 19-7, 2019 WL 5281290 (U.S. Oct. 18, 2019).

[3] See generally PHH Corp. v. CFPB, 881 F.3d 75 (D.C. Cir. 2018) (en banc).

[4] See generally Humphrey’s Executor v. United States, 295 U.S. 602 (1935).

[5] See generally Morrison v. Olson, 487 U.S. 654 (1988).

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