On The Case

CFPB just told SCOTUS it's unconstitutional. What does that mean for its mission?

(Reuters) - On Tuesday, the Consumer Financial Protection Bureau joined the Justice Department in a brief asking the U.S. Supreme Court to consider whether the CFPB’s structure is unconstitutional. DOJ and the CFPB told the Supreme Court that they believe the appointment provision of the Consumer Financial Protection Act is unconstitutional because it says the bureau’s lone director cannot be removed from office without good cause. The law, according to DOJ and the CFPB, violates separation of powers doctrine by interfering with the president’s executive authority.

DOJ, as I’ve reported, has previously espoused that position in filings before both the District of Columbia U.S. Circuit Court of Appeals and the Supreme Court. But the CFPB has never before argued that the statute creating the bureau is constitutionally flawed. In fact, CFPB lawyers have argued just the opposite in trial and appellate courts across the country, including at the 9th Circuit in the case that’s now awaiting the Supreme Court’s attention. Just last month, the same CFPB lawyers who signed the new brief at the Supreme Court filed a brief at the 2nd Circuit that defends the constitutionality of the agency’s structure.

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CFPB Director Kathy Kraninger acknowledged in a pair of letters sent Tuesday to Senate Majority Leader Mitch McConnell and House Speaker Nancy Pelosi that the bureau can no longer argue in the lower courts that its structure is constitutional. And on Wednesday, the bureau’s lawyers sent letters to the 5th Circuit and the 2nd Circuit, which are both in the midst of appeals in which the CFPB’s constitutionality is at issue, informing the circuits that the bureau now agrees its appointments provision cannot survive.

The Justice Department and the CFPB told the Supreme Court that the CFPB’s constitutional problem is easily solved. The justices, they said, need only sever and strike the provision under which the director is insulated from accountability to the president, just as the Supreme Court did in 2010’s Free Enterprise Fund v. Public Corporation Accounting Oversight Board.

The CFPB director similarly assured Senator McConnell and Speaker Pelosi that the bureau’s new determination that its structure is unconstitutional will not affect its ability to function - now or in the future. “I will continue to carry out the bureau’s duties under the CFPA and to defend the bureau’s actions,” she wrote, adding that even if the Supreme Court agrees with her and the Justice Department that her appointment was unconstitutional, “the CFPA should remain ‘fully operative.’”

I don’t think things are going to be quite as simple as the CFPB director’s letter suggests, based on arguments CFPB challengers have already asserted and those you can expect to see from anyone who’s on the other side of a CFPB action going forward.

There are two separate issues in play for the CFPB: Can the bureau really act as an enforcer when its lone director – who is ultimately responsible for all of the bureau’s decisions – has acknowledged that she believes she was appointed under an unconstitutional provision? And if the Supreme Court ultimately agrees with DOJ and the CFPB that Congress stepped on the president’s toes by insulating the CFPB director, what’s the proper remedy?

It seems clear that the Supreme Court will eventually have to decide whether the bureau’s structure is constitutional. Both the 9th Circuit and the D.C. Circuit have said the director’s appointment does not violate separation of powers doctrine, but the en banc 5th Circuit held (2019 WL 4233612) earlier this month that the nearly identical structure of the Federal Housing Finance Agency is unconstitutional. So there is, in effect, a circuit split on the constitutionality of a federal bureau headed by a lone director who can only be removed for good cause.

The CFPB’s new posture on its constitutionality places the bureau under a cloud of doubt that will linger until the Supreme Court resolves the question. The CFPB director, remember, is vested with more power than the chairs of most executive agencies because she has no fellow commissioners to back her decisions. If you’re a lawyer representing a business that has received a subpoena or investigative demand letter from the CFPB, you’re going to argue that the agency’s unconstitutionally appointed director can’t oversee investigations. If you represent the defendant in an enforcement action, you’re going to contend that the director can’t order a resolution because she was appointed improperly.

Even the Justice Department and the CFPB have tacitly admitted that their position on the bureau’s constitutionality is going to complicate the CFPB’s mission. In their Supreme Court brief, they said that uncertainty about the agency means that “those subject to the agency’s regulation or enforcement can (and often will) raise the issue as a defense to the bureau’s efforts to implement and enforce federal consumer financial law.” DOJ and the CFPB are attempting to use uncertainty as a lever to persuade the Supreme Court to resolve the agency’s constitutionality as soon as possible, but it’s hard to see how the bureau can regulate effectively in the meantime.

And then there’s the question of what happens to all of the CFPB’s work if the Supreme Court determines that the appointment provision is unconstitutional. (I should point out that it’s far from certain that the justices will reach that conclusion. As I mentioned, the D.C. and 9th Circuits have held the bureau’s structure to be constitutional, and even though the government is no longer willing to defend that position, the justices will doubtless appoint an amicus to argue that the law is just fine.)

But if the court sides with DOJ and the CFPB and finds the appointments provision unconstitutional, will it also agree that the proper remedy is merely to fix the provision? Or will it strike down the bureau?

It’s true that when Justice Brett Kavanaugh was on the D.C. Circuit, he said in a dissent in PHH Corporation v. CFPB that the appointment provision could be severed, leaving the bureau otherwise intact. That’s not necessarily a guarantee that he’ll reach the same conclusion now that he is on the Supreme Court.

CFPB challengers have argued quite vigorously in the lower courts that the entire bureau must fall if its structure is unconstitutional. That’s the position of CFPB opponents at the 5th and 2nd Circuits. It’s also the conclusion that U.S. District Judge Loretta Preska of Manhattan reached last year in CFPB v. RD Legal, the case now before the 2nd Circuit. Judge Preska said severability clauses don’t permit courts to rewrite statutes. It’s a good bet that if the Supreme Court takes up the CFPB constitutionality issue, you will hear a lot more about Judge Preska’s ruling.

Helgi Walker of Gibson Dunn & Crutcher – who represents the Mississippi check cashing business challenging the CFPB’s constitutionality at the 5th Circuit - told me that the CFPB’s concession on its constitutionality leaves plenty of questions unanswered. “We remain very interested in the question of remedy,” she said. In its letter to the court on Wednesday, the CFPB suggested that if the 5th Circuit agrees that the appointment clause is unconstitutional, it should sever the provision and remand the underlying case against All American to the trial court. All American, which has said the clause can’t be severed, contends that at the very least, the bureau’s case against it must be dismissed if the director who authorized the litigation was unconstitutionally appointed.

The Justice Department and the CFPB will doubtless argue that if the Supreme Court solves its constitutional problem by revising the offending provision, a properly appointed CFPB director can simply ratify all of the bureau’s previous actions, cutting off any additional constitutional challenges. You can be sure that if the government attempts an after-the-fact ratification, litigation will ensue.

The CFPB’s press office did not respond to my questions about how the bureau’s new position on the constitutionality of its structure will affect its mission.

The new brief from the DOJ and the CFPB probably brings us closer to a Supreme Court reckoning for the CFPB, but the road to a final destination is likely to be strewn with potholes.