The Big Bang Fizzles: CFPB Unconstitutional But Not Inoperable

Nearly ten years after passage of the Dodd-Frank Act, the Supreme Court has finally put to bed the raging argument about whether it was constitutional for Congress to establish the Consumer Financial Protection Bureau (CFPB or Bureau) as an independent agency with a single Director removable by the President only for cause. In an anti-climactic end to nearly a decade of heated rhetoric, political battle and costly litigation, the Court held that the Bureau’s structure is unconstitutional but that it can continue to operate as an Executive branch agency, with the Director subject to the President’s removal authority. While that will certainly have implications for the agency’s leadership—and policy—in the future, it does little to change the current legal landscape for regulated entities (with the possible exception, discussed below, of the need to ratify rules the agency has previously issued).

The Supreme Court’s decision broke along ideological lines, with a 5-justice conservative majority led by Chief Justice Roberts holding that the agency’s structure violates separation of powers. After first rejecting several arguments about why the Court should not decide the case at all, the majority went on to note that “[t]he President’s removal power has long been confirmed by history and precedent.” The Court noted that it has recognized two exceptions to this rule—in upholding for-cause removal protection of FTC Commissioners and the independent counsel. But the majority distinguished those cases from the one before it. The FTC’s structure was approved on the basis (“rightly or wrongly”) that the agency was a “multimember body of experts, balanced along partisan lines, that performed legislative and judicial functions and was said not to exercise any judicial power.” The independent counsel had limited jurisdiction and tenure and lacked “policymaking or significant administrative authority.” The CFPB, by contrast, has the “authority to promulgate binding rules fleshing out 19 federal statutes, including a broad prohibition on unfair and deceptive practices [oddly, the Court failed to reference the prohibition on abusive practices] in a major segment of the U.S. economy” and has the power to “seek daunting monetary penalties against private parties.” The Court went on to hold that the CFPB’s structure is “an innovation with no foothold in history or tradition,” rejecting the examples of the Office of Special Counsel, the Social Security Administration and the Federal Housing Finance Agency (FHFA) (all headed by single directors removable only for cause) as too “modern and contested” to provide a historical footing. After recounting the constitutional design that requires the President—who is accountable to the People through elections—to be responsible for executive functions, the Court held that the CFPB’s design leaves the CFPB Director “accountable to no one” and therefore unconstitutional.

A different majority of the Court—three conservative justices from the majority and the four liberal Justices who dissented from the constitutional holding—then held that the for-cause removal provision was severable from the rest of the statute. This severability holding is what leads to the anti-climactic result to this decades-long debate: “[t]he agency may therefore continue to operate, but its Director, in light of our decision, must be removable by the President at will.” Going forward, therefore, the CFPB retains all of its powers and authorities, though it will be subject to political oversight through the removal of its Director. That will, if nothing else, provide some certainty to both the agency and the industry it regulates after a decade of debate.

The one open issue left by the decision is what happens to the actions that the CFPB has taken to date. In the actual case before the Court, the issue was whether to enforce a Civil Investigative Demand (CID) issued by the CFPB when Richard Cordray was the agency’s Director. After the recipient, Seila Law, refused to comply with the CID, the CFPB filed suit to enforce the CID. It is that lawsuit that was on appeal to the Supreme Court. But the Supreme Court neither affirmed the lower court order enforcing the CID nor ruled for Seila Law. Instead, it sent the case back to the lower courts to determine whether then-Acting CFPB Director Mick Mulvaney (who, by virtue of his “Acting” role was subject to the President’s removal authority during his tenure) had in fact ratified the lawsuit against Seila Law and whether that ratification was legally sufficient. That outcome raises the question of what the CFPB must do to ratify its other prior actions, undertaken by Directors Cordray, Mulvaney and Kraninger. This issue seems most relevant to pending enforcement actions and previously promulgated regulations. Indeed, the defendants in at least two pending enforcement actions have already asked that the pending cases against them be dismissed based on the Supreme Court’s decision.

There is, surprisingly, CFPB precedent on this point, as this is not the first Director-focused controversy in the agency’s short history. When Richard Cordray was first appointed as Director of the CFPB, he was appointed by President Obama by recess appointment. Subsequently, his appointment was confirmed by the Senate. Because there were questions about the constitutionality of the recess appointment (and, indeed, the Supreme Court subsequently decided that similar recess appointments were unconstitutional), a similar question arose as to the validity of actions undertaken while Cordray served as Director prior to his confirmation by the Senate. To address these concerns, Cordray issued a short statement, published in the Federal Register, by which he purported to “affirm and ratify any and all actions” he had taken during the period of his recess appointment. The Ninth Circuit subsequently held that Cordray’s ratification statement was sufficient for purposes of enforcement cases that had been filed during his recess appointment. But questions exist as to whether such a ratification can serve to reinstate regulations promulgated pursuant to notice-and-comment rulemaking, or whether the agency needs to take additional actions consistent with the Administrative Procedure Act to re-promulgate such rules. That—and Congressional consideration of reformulating the agency as a multi-member Commission—may well be the next battleground in the seemingly never-ending CFPB wars.

One final point is worth noting. The Court’s decision raises serious questions as to the constitutionality of the FHFA, which, as noted above, is similarly led by a single director removable only for cause. An en banc Fifth Circuit recently held the FHFA’s structure to be unconstitutional, and while there are distinguishing features of the FHFA—as the Court noted, it “regulates primarily Government-sponsored enterprises, not purely private actors”—the Court’s reluctance to create additional exceptions to its removal jurisprudence suggests that if the Court were to consider the constitutionality of that agency’s structure, it would likely agree with the Fifth Circuit’s conclusion.