The Consumer Financial Protection Bureau’s structure is unconstitutional. The agency’s leadership should recognize it as such.
First, the bureau does not receive its funding through congressional appropriations, but via a guaranteed fund from the Federal Reserve. This violates Article I, Section 9 of the United States Constitution which states that “No money shall be drawn from the treasury, but in consequence of appropriations made by law.”
Second, its sole director cannot be removed by the president other than for “cause,” such as dereliction of duty or malfeasance. This violates Article II, Section 3 of the Constitution; in particular, that the president “shall take care that the laws be faithfully executed.”
Lastly, the bureau is afforded judicial deference in its interpretation of statutes, at 12 U.S. Code § 5512 (b)(4)(B), similar to that of the Chevron doctrine. This violates Article III of the constitution, which, as the Supreme Court wrote in Marbury v. Madison, places the power to say what the law is solely in the hands of the judicial department.
While a number of high-profile court cases challenging the constitutionality of the bureau have failed to reach the Supreme Court, such as PHH Corp. v. CFPB and State National Bank of Big Spring v. Mnuchin, there are a number of other pending cases challenging the constitutionality of the bureau. It is only a matter of time before one makes it to the Supreme Court.
Despite these facts, newly-appointed Director Kathy Kraninger has so far refused to acknowledge that the bureau’s structure is unconstitutional, defending the structure in cases such as CFPB v. Seila Law.
The bureau should reverse course and instead argue that its unconstitutional structure is in need of remedy. This should be done not only as a matter of law, but also as a matter of policy. It is precisely this unusually powerful and unaccountable structure that has led to so many problems, whether it be reckless spending, aggressive enforcement actions, or flawed rulemakings. Poor structure leads to poor policy.
One such example where the bureau could acknowledge so is in the Fifth Circuit Court of Appeals case, Collins v. Mnuchin. This case does not directly involve the bureau, but instead an eerily similar agency, the Federal Housing Finance Authority (FHFA).
In Collins, the court was posed the question of whether FHFA’s leadership structure, which is almost identical to the bureau’s, violated the Take Care clause of Article II. The Fifth Circuit found that it did. The case is now being reheard en banc, and is widely expected to be headed to the Supreme Court.
In Collins, the panel opinion found that the FHFA’s structure violates the constitution’s separation-of-powers principles in the following way:
… Congress insulated the FHFA to the point where the Executive Branch cannot control the FHFA or hold it accountable. We reach this conclusion after assessing the combined effect of the:
(1) for-cause removal restriction;
(2) single-Director leadership structure;
(3) lack of a bipartisan leadership composition requirement;
(4) funding stream outside the normal appropriations process; and
(5) Federal Housing Finance Oversight Board’s purely advisory oversight role.
The bureau fits this same criteria almost perfectly. However, the Fifth Circuit was careful to draw a distinction between the two regulators. In particular, the court highlighted that the president can influence the bureau’s activities through the Financial Stability Oversight Council (FSOC), a council of ten regulators that hold broad authorities to identify and monitor excessive risks to the financial system, whereas the FHFA’s Oversight Board is purely advisory.
This distinction, however, is fatally flawed. FSOC is for all practical purposes a toothless check on the bureau. The FSOC is only able to vote to overturn a CFPB regulation or action if it threatens the entire “safety and soundness” of the U.S. financial system—an almost insurmountable task for a consumer protection regulation. Indeed, the Fifth Circuit rightly recognized the limits of FSOC’s influence over the Bureau in footnote 233, citing Judge Henderson’s dissenting opinion in PHH, but neglects to address these limits.
The Trump administration is a clear example of why the president does not control the bureau through FSOC. It is certain that the administration did not agree with a number of rules promulgated during its tenure by an Obama-appointed director, going so far as to sign a Congressional Review Act resolution to block the bureau’s arbitration rule. Nevertheless, regulating arbitration agreements does not come close to endangering the entire financial system, and so it was not eligible to be overturned by FSOC veto. The president simply lacked control of his branch of government.
The Fifth Circuit’s approach in distinguishing the two agencies is wholly unsatisfactory. Congress cannot isolate an independent agency from meaningful executive oversight, or else the president could not fulfill his responsibility to ensure the faithful execution of the nation’s laws. But a toothless FSOC does not render the bureau meaningfully accountable to the president.
If Collins or a similar case reaches the Supreme Court, the bureau should brief the court on the unconstitutionality of its structure, and, in particular, the lack of distinguishing features between FHFA and the bureau. While it may appear awkward for the bureau to openly advocate that their own agency’s structure is unconstitutional, it is a legal and political necessity.
Seila Law to seek U.S. Supreme Court review of Ninth Circuit ruling that CFPB’s structure is constitutional
Appellant Seila Law has filed a motion for a stay of the Ninth Circuit’s mandate in its decision ruling that the CFPB’s single-director-removable-only-for-cause structure is constitutional pending the filing by Seila Law of a petition for a writ of certiorari with the U.S. Supreme Court. Seila Law has not sought a rehearing en banc by the Ninth Circuit.
Appellant Seila Law had asked the Ninth Circuit to overturn the district court’s refusal to set aside a Bureau civil investigative demand, arguing that the CID was invalid because the CFPB’s structure is unconstitutional. In rejecting the constitutional challenge, the Ninth Circuit relied on U.S. Supreme Court precedent, which in the Ninth Circuit’s view, “indicate that the for-cause removal restriction protecting the CFPB’s Director does not ‘impede the President’s ability to perform his constitutional duty’ to ensure that the laws are faithfully executed.” The Ninth Circuit commented that “the Supreme Court is of course free to revisit those precedents, but we are not.”
In support of its motion, Seila Law argues that there is a reasonable chance the Supreme Court will grant the petition because “the question of whether the CFPB’s structure violates the constitution’s separation of powers is ‘substantial’ under any sense of the term” and because the question “has engendered serious debate among federal judges.” It also argues that there is good cause for the stay because, in the absence of the stay, Seila Law would have to decide whether to comply with the CFPB’s CID, thereby potentially mooting the case.
There is currently no circuit split regarding the CFPB’s constitutionality, with both the Ninth Circuit and the en banc D.C. Circuit having ruled that the CFPB’s structure is constitutional. Two other cases involving a challenge to the CFPB’s constitutionality are currently pending in the circuit courts, either of which could create a circuit split. On March 12, the Fifth Circuit heard oral argument in All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality. The other case is RD Legal Funding, which is pending in the Second Circuit but in which briefing has not yet been completed. The district court in RD Legal Funding held that the CFPB’s structure is unconstitutional and struck the CFPA (Title X of Dodd-Frank) in its entirety.
While the CFPB has defended its constitutionality to do date, it may be unable to oppose Seila Law’s petition for certiorari. Dodd-Frank Section 1054(e) provides:
The Bureau may represent itself in its own name before the Supreme Court of the United States, provided that the Bureau makes a written request to the Attorney General within the 10-day period which begins on the date of entry of the judgment which would permit any party to file a petition for writ of certiorari, and the Attorney General concurs with such request or fails to take action within 60 days of the request of the Bureau.
The Ninth Circuit’s judgment was entered on May 6 and we are not aware of a request by the CFPB to the Attorney General to represent itself before the Supreme Court. Thus, assuming the CFPB has not made such a request, only the Department of Justice could respond on behalf of the CFPB to Seila Law’s petition for a writ of certiorari. The DOJ, however, has previously taken the position that the CFPB’s structure is unconstitutional and that the proper remedy is to sever the Dodd-Frank Act’s for-cause removal provision.
More specifically, the DOJ took that position in opposing the petition for a writ of certiorari filed in September 2018 by State National Bank of Big Spring and two D.C. area non-profit organizations that sought Supreme Court review of a D.C. Circuit decision upholding the CFPB’s constitutionality. Despite agreeing on the merits with SNB and the other petitioners that the CFPB’s structure is unconstitutional, the DOJ filed a brief in which it argued that the Supreme Court should nevertheless deny the petition because the SNB case was a poor vehicle for consideration of the constitutionality question. The DOJ pointed to other cases then pending in the courts of appeal that raised a similar constitutional challenge but would be a better vehicle. In addition to All American Check Cashing and RD Legal Funding, the DOJ pointed to the Seila Law case which was then still pending in the Ninth Circuit. SNB’s petition was denied by the Supreme Court.
Thus, the DOJ might not oppose Seila Law’s petition for a writ of certiorari and instead agree with Seila Law that the CFPB’s structure is unconstitutional. It is also possible that given the importance of the issue, the Supreme Court would grant Seila Law’s petition even in the absence of a circuit split. Should it do so, it could be necessary for the Supreme Court to appoint an amicus curiae to defend the Ninth Circuit’s judgment, an action that is part of the Supreme Court’s usual practice when no party is defending the circuit court’s judgment.
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