John Heasley

John Heasley
TBA General Counsel

U.S. Supreme Court

SCOTUS rules against CFPB’s leadership structure

The ruling allows Trump or any future president to remove the director for any reason.

On June 29, the Supreme Court ruled in the Seila Law decision that the structure of the Consumer Financial Protection Bureau violated the separation of powers doctrine in that the Dodd-Frank Act only allowed its director to be fired for cause due to “inefficiency, neglect of duty or malfeasance in office.”

Chief Justice Roberts’ opinion held that this was unconstitutional because it removed the agency from the control of the executive branch. The ruling allows Trump or any future president to remove the director for any reason. The court also severed this provision from the rest of DFA’s Title X, immunizing the rest of the CFPB from being held unconstitutional.

Many conservatives believe the court should have gone further by invalidating the entire agency because of separation of powers. A Wall Street Journal editorial calls it a “constitutional monstrosity.” Justices Thomas and Gorsuch indicated that they are in that camp.

What we now know as the CFPB started out as an idea of then-law professor Elizabeth Warren, who wrote an article in 2007 in Democracy magazine entitled, “Unsafe at Any Rate,” an allusion to Ralph Nader’s book about the Corvair automobile “Unsafe at Any Speed.”

After the financial crash the following year, the newly elected Obama administration embraced the idea and placed it in what would become DFA. Interestingly, neither Warren nor the Obama crowd called for a single director. Both envisioned an agency ruled by a bipartisan, multi-membered board.

That was changed by House Chairman Barney Frank, who wanted an independent director as well as an agency that did not have to rely on congressional appropriations. The CFPB has the power to ask for and receive 12% of the revenue of the Federal Reserve System. In 2106, this amounted to more than $500 million.

After the CFPB was up and running, its new director, Richard Cordray, the former Ohio attorney general, pursued the powers vested in the CFPB with a vengeance. The CFPB has the power to enforce 18 consumer protection and fair lending laws and a new prohibition on “any unfair, deceptive or abusive act or practice.” The agency also has the power to remedy violations of federal law, obtain civil and injunctive relief and levy fines of up to $1 million per day. The CFPB is given special deference to its authority in federal court.

During Cordray’s tenure, the agency collected $11 billion in fines, although most of that was due to actions from entities that had already admitted their wrongs to their primary federal regulators. In other cases, rather than fight an army of CFPB lawyers, most financial companies surrendered to the agency, paid fines and agreed to CFPB MOUs and orders. These orders served as notices to every other financial player and conveniently allowed the agency to avoid publishing regulations for notice and comment.

The Obama crowd and the congressional Democratic majorities in both houses at that time designed the CFPB to be run by someone like Cordray, a progressive hostile to the financial sector who could operate without the constraints that limited other federal officers. They never expected a Trump presidency or a Republican like Mick Mulvaney to become the acting director or conservative attorney like Kathy Kraninger to be confirmed as the director. These Trump appointees declined to accept Federal Reserve funds and operated the agency in a more restrained manner. (The Seila Law case was based on regulatory action taken by Cordray.)

What are the practical and political effects of the Supreme Court decision? If Trump is reelected, Kraninger will most likely finish out her five-year term. Because Sen. Warren is a close advisor of Biden, expect a new director to be named early in a Biden administration. If Biden has Democratic majorities in the House and Senate to work with, we should also anticipate a law to be passed to limit the discretion of any future Republican that may become director.

In a broader context, progressive Democrats now have a blueprint for how to create a powerful, independent agency that can survive constitutional challenge. Imagine an agency created to implement the Green New Deal. As long as the tsar can be replaced by a new president and is not subject to a bipartisan commission he or she can exercise extraordinary powers.