Supreme Court could leave consumer protection mess for Congress
Ruling could affect other agencies with similar structure, like the Federal Housing Finance Agency
The Supreme Court will hear oral arguments Tuesday in a case about the Consumer Financial Protection Bureau that could leave Congress with a big mess to clean up with the agency that was a key response to the 2008 financial crisis.
Just how much Congress might have to do depends not only on whether the Supreme Court rules that the structure of the CFPB is unconstitutional but also how far the justices go with such a ruling.
The basic question in the case, Seila Law v. CFPB, is whether Congress violated the separation of powers when it put a single director in charge of enforcing consumer protection laws while the president could only fire that director for cause. A company that the CFPB seeks to investigate, Seila Law, filed the lawsuit to challenge a civil investigative demand.
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Congress implemented that for-cause, single-director structure, and gave up a powerful oversight tool by putting the agency outside the appropriations process, to make sure the CFPB would be independent.
If the Supreme Court finds that structure infringes on the president’s duties to execute the nation’s laws, the justices have a wide array of options for the scope of that ruling, which could also affect other agencies with a similar structure, such as the Federal Housing Finance Agency.
Congressional Republicans and the Trump administration are split on what they think the Supreme Court should do.
House Republicans, including Minority Leader Kevin McCarthy, told the Supreme Court in a brief that the whole CFPB section of the 2010 financial regulation overhaul should be dismantled if the for-cause removal language is unconstitutional.
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Such a ruling would upend the world of consumer finance regulations and raise questions about everything the bureau has done for the past nine years, said Alan Kaplinsky, co-leader of the Consumer Financial Services Group at Ballard Spahr LLP.
“It would create so much havoc that I can’t imagine the Supreme Court would go down that route,” Kaplinsky said.
The justices could instead just invalidate the for-cause provision from the rest of the statute if they find the CFPB structure unconstitutional. That would allow the bureau to stay open while giving Congress the opportunity to fix whatever it needs to fix, such as whether to ratify previous decisions of the CFPB.
The justices asked the parties to address this specific question in the case. Three Senate Republicans — Mike Lee of Utah, James Lankford of Oklahoma and Mike Rounds of Indiana — urged the justices to take such a narrower path and leave the rest for Congress.
“The Court should craft a remedy that is narrow enough to resolve the controversy between the parties in this case, and leave the broader remedial questions to Congress, at least in the first instance,” the senators wrote in a brief in the case.
The Department of Justice and the CFPB itself — under President Donald Trump’s appointed director, Kathy Kraninger — want a similar outcome. House Democrats, although they say the CFPB’s structure is valid, also argued that the justices can sever any unconstitutional provision and leave the rest of the law in place.
The DOJ’s and CFPB’s position, and the Democrats’ fallback position, is how now-Justice Brett M. Kavanaugh ruled on a similar challenge when he was on the U.S. Court of Appeals for the D.C. Circuit.
Kavanaugh called the CFPB’s for-cause provision unconstitutional and simply crossed it out, which would have made the director accountable to the president. That decision was overruled when the full D.C. Circuit ruled on the case.
Seila Law argued that the justices should limit their ruling to just this particular case but that if the justices want to make a broader decision they should invalidate the entire CFPB section of the law. The firm argued that in part because Congress would not have wanted to give a president control over an agency when lawmakers had given up their own control by freeing it from the appropriations process, with automatic funding from the Federal Reserve.
“If Congress had known that the President would retain his principal means of control over the CFPB, it is highly unlikely that Congress would have given up its own, creating an agency that is perversely more insulated from Congress than it is the President,” Seila Law told the justices.
McCarthy and other House Republicans similarly told the court in a brief that the justices would “usurp the legislative role” if they struck the for-cause firing provision but left the agency in place since the law took consumer protection from the president and gave it to an independent agency.
“That would give the President not only the new powers that Congress deliberately denied him, but also the old powers that Congress affirmatively took away from him,” the Republican lawmakers’ brief states. “Whether to create these powers under the President’s control presents a novel issue that must be addressed by Congress, not this Court.”
Republican lawmakers have pushed for restructuring the CFPB since it was created. But a bipartisan measure introduced in the last Congress, when Republicans controlled both chambers, never advanced and was not included with a series of other Dodd-Frank rollbacks enacted in 2018.
The Democrat-controlled House, which will get a chance to address the justices directly at oral arguments, disagrees that Congress needs to fix the CFPB if its single-director structure is found unconstitutional.
The text of the law shows that Congress “deemed it more important to unite the CFPB’s regulatory authorities in a single agency than to have them be exercised by officers protected from removal,” the House brief states.
Congress created the CFPB precisely because it had deemed existing regulators “too fragmented to be effective” and led directly to the 2008 recession because of “spectacular failure” to address consumer financial protection issues, the House told the justices in a brief.
The agencies previously responsible for consumer financial protection could not simply pick back up where they left off in 2010, the House argued.
“In fact, any attempt to unwind Title X would raise a host of thorny questions about whether and how the CFPB’s various authorities revert to their prior homes,” the House brief states. “It would also severely disrupt the enforcement of the consumer financial protection laws by suddenly forcing other agencies to locate the funding, personnel, and expertise required to fulfill statutory duties they last held a decade ago.”
The Trump administration agrees with the House Democrats. Congress’ primary goal was to consolidate the administration and enforcement of federal consumer financial law, but Congress did not view the removal restriction as essential to the agency’s success, the Trump administration points out.
The Trump administration also highlights how other non-independent executive agencies have similar funding mechanisms, such as the Office of the Comptroller of the Currency.
Striking down the CFPB would be “severely disruptive,” the Trump administration told the justices. It would lead to “grave doubt” about the validity of numerous significant rules and billions of dollars in relief through enforcement, as well as eliminate the safe harbors that Congress established for regulated entities that relied on them in good faith.
It would eliminate important new consumer protection authorities, undo substantive amendments to several consumer protection statutes and require the unwinding of functions and staff from the bureau to seven agencies, including one that no longer exists, the Office of Thrift Supervision, the Trump administration argues.
The Supreme Court could also punt on the central constitutionality issue, ruling instead that Seila Law lacks standing to bring the lawsuit, Kaplinsky said.
“The Supreme Court, in general, is always looking for a narrow way out,” Kaplinsky said. “They don’t like broad rulings, and if they see a path that makes sense to them, I think even the conservative judges might very well go along with it.”
If the justices are unwilling to invalidate the entire agency’s existence, though, Kaplinsky said he doubts the justices will kick the question of the right remedy to a bitterly divided Congress.
“I don't think they'll do that,” Kaplinsky said. “I think they will recognize that this Congress will never get anything done ... until after the election.”