United States: CFPB Decides Not To Defend Constitutionality Of Its Leadership Structure

On September 17, 2019, two developments took place with respect to the constitutionality of the structure of the Consumer Financial Protection Bureau (CFPB or Bureau), an issue that has been litigated for several years.  First, the CFPB and the Department of Justice (DOJ) filed a brief in the U.S. Supreme Court, urging the Court in the case of Seila Law LLC v. CFPB to review the constitutionality of the Bureau's leadership structure.  Second, CFPB Director Kathy Kraninger wrote letters to Senate Majority Leader Mitch McConnell (R-Ky.) and House Speaker Nancy Pelosi (D-Cal.) to advise them of the Bureau's determination that the Dodd-Frank Act provision stating that the Bureau director may only be removed "for cause" is unconstitutional.


In 2017, the CFPB issued a Civil Investigative Demand (CID) to Seila Law LLC, a debt-relief services law firm.  Seila Law filed a petition to modify, or set aside, the CID, which the Bureau denied.  Seila Law responded to the CID, but the Bureau found the response to be "inadequate."  Seila Law declined to modify its response, and the Bureau filed suit to enforce the CID in the U.S. District Court for the Central District of California.  Seila Law argued that the structure of the Bureau violates the separation of powers provision of the U.S. Constitution; specifically, the firm argued that Dodd-Frank Act Section 1011(c)(3) (12 U.S.C. § 5491(c)(3)), under which the Bureau's single director can only be removed "for cause," is unconstitutional.  The statutory provision states that the President may remove the Director only for "inefficiency, neglect of duty, or malfeasance in office."  The CFPB won in the district court in 2017, and again in 2019 on appeal to the U.S. Court of Appeals for Ninth Circuit.

Supreme Court Brief

The CFPB and the DOJ filed a brief in the Supreme Court in support of a June 28, 2019, petition for certiorari by Seila Law.  In the brief, the agencies noted that subsequent to the issuance of the opinion by the Ninth Circuit, Director Kraninger has reconsidered the Bureau's position and decided that the removal restriction is unconstitutional.  The agencies said, "[T]he Court should hold that the [for-cause removal provision] impermissibly infringes the separation of powers fundamental to our constitutional structure."  The agencies added that, "[t]he proper remedy for the constitutional violation is to sever the provision" even though Congress has not enacted a severability clause, and that without the provision, "the Dodd-Frank Act and its Bureau-related provisions will remain 'fully operative.'"  In addition to emphasizing the importance of the question presented, the agencies expressed concern that the issue "creates uncertainty that undermines the Bureau's ability to fulfill its mission."  On September 18, 2019, the case was distributed for consideration at the Court's Conference of October 11, 2019.

Letters to the Hill

In her September 17, 2019, letters to Majority Leader McConnell and Speaker Pelosi, Director Kraninger stated that while "[t]he Bureau defended the constitutionality of [Section 1011] before both the district court and the court of appeals, and prevailed in both courts," the DOJ in a 2017 amicus brief in PHH Corporation v. CFPB "determined . . . that the for-cause removal provision . . . unduly interferes with the President's Executive authority under Article II of the Constitution."  Director Kraninger informed the Congressional leaders that, "[m]indful of the Bureau's role as an Executive agency within the Executive Branch, I have decided that the Bureau should adopt the Department of Justice's view that the for-cause removal provision is unconstitutional."  She added that she has "directed the Bureau's attorneys to refrain from defending" this provision in cases pending at the district court and appeals court levels.

*          *          *

If the Supreme Court were to sever the for-cause provision, it would mean that Director Kraninger could be removed, at will, at any point in her five-year term, which started in December 2018 and will extend past the 2020 presidential election.  Ultimately, however, if the Court were to grant certiorari and determine that the for-cause provision is unconstitutional, it would resolve a question that has plagued Bureau litigation since its inception.  The Court could issue an order granting or denying the petition as early October 15, 2019.

Given the importance of the issue and the fact that both sides in the case support certiorari, there is a good chance the Court will grant the petition.  If it does so, the Court will likely appoint an amicus to defend the constitutionality of the CFPB's structure given that the CFPB will no longer do so.  A decision on the merits would issue by July 2020.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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