Supreme Court to take up CFPB constitutional case

In October, the Supreme Court agreed to consider a constitutional challenge to the Consumer Financial Protection Bureau. In the California case of Seila Law LLC v. CFPB, the court will consider the constitutionality of an agency criticized by the banking community, limited government advocates and constitutional scholars.

The brainchild of now Sen. Elizabeth Warren, the CFPB was created in Title X of the 2010 Dodd-Frank Act. It has a presidentially appointed director who can only be removed for cause and a source of funding independent of Congress. The agency can tap up to 12% of the revenue of the Federal Reserve System, potentially more than $600 million a year.

Arguments about the separation of powers and the lack of congressional oversight loom large in the constitutional challenge. As it is structured, the CFPB is an immensely powerful agency. It is directed to redraft and enforce 18 consumer protection and fair lending laws. It has the power to dictate what financial products can and cannot be offered to consumers and small businesses. It can also control pricing.

There have been previous challenges to the CFPB. A mortgage servicer challenged its constitutionality in PHH Corp. v. CFPB. The State National Bank of Big Spring also joined other plaintiffs in another challenge. PHH lost in the federal district court in D.C. but prevailed in a three-judge appellate decision.

A subsequent decision by the whole court of appeals upheld the agency’s constitutionality. The State National Bank case, filed in 2012, was set aside in 2018 due to the PHH decision. (The bank is filing an amicus brief in the Seila Law case.)

It is worth noting that Brett Kavanaugh, when he was on that appellate court, wrote in the PHH case that “other than the president, the director of the CFPB is the single most powerful official in the entire United States government, at least when measured in terms of unilateral power.” Now that he is on the Supreme Court, it is highly unlikely that Kavanaugh will soften his tone.

The CFPB was designed by congressional Democrats to have an independent director subject to little scrutiny from the executive or legislative branches. Elizabeth Warren wanted to be the first director but, after objections from Senate Republicans, President Obama put Richard Cordray in the job.

Cordray fulfilled the dream of the progressive left and engaged in suing and threatening suits against real and perceived violators and getting large settlements. Worried about reputational risk and fighting armies of CFPB and Justice Department lawyers, most targets surrendered early.

The CFPB was created in the heady times of the Obama era when Democratic power and congressional supermajorities were expected to last forever. Someone like Cordray was expected to run the agency in perpetuity. That all changed with Republican House and Senate majorities and the Trump election of 2016.

Cordray left his term early to run for office again in Ohio and Trump appointed Mick Mulvaney as the acting head of the CFPB. Because of cash reserves, he turned off the money spigot from the Federal Reserve. He also changed a number of Cordray initiatives.

Congressional Democrats were fit to be tied. Their anger has not subsided with the confirmation of Kathy Kraninger as the new director. When Democrats regained control of the House in 2018, one of their first acts was to pass a bill to reverse the actions of Mulvaney at the CFPB. The Republican Senate will not consider the bill.

The Seila Law case is unique in that the Trump administration has decided not to argue that the agency is constitutionally valid. House Democrats had urged the court to reject the challenge and Speaker Pelosi said of the administration’s position, “by not defending the consumer bureau’s independence, the Trump Administration is choosing special interests over America’s consumers.”

The Supreme Court denied the House’s request to intervene and instead appointed a former solicitor general to argue for the agency’s constitutionality.

What can happen in this constitutional challenge? It will probably be a narrow majority to either uphold the structure or throw out all or just a part of the law. The majority could decide to just declare the “for cause” language invalid and have the director serve at the pleasure of the president. That would mean that consumer activists would demand the removal of Kraninger if a Democrat wins the presidency in 2020.

The court could also consider delegation of power arguments as well as the lack of congressional oversight as reasons to invalidate other parts of the law.

Whatever happens in this case is of importance to Texas community banks. One of the examples of how far-reaching the law is involves the imposition of fair lending standards on small business loans. The CFPB is currently holding symposia on Section 1071 of the law, which envisions a HMDA-like regime for small business lending.

A realistic assessment of this mandate would conclude that because of the great variation in small business lending, it is impossible to set a system akin to what exists for mortgage lending. The imposition of such a scheme would probably lead to less credit for the groups the law was intended to benefit.