Supreme Court Preserves CFPB Through Severance

The U.S. Supreme Court on Monday issued its long-awaited opinion in Seila Law LLC v. Consumer Financial Protection Bureau, with a 5-4 split along ideological lines holding that the structure of the CFPB is unconstitutional. Specifically, the clause in the underlying statute that requires cause to remove the director of the CFPB violates the constitutional separation of powers. In a plurality opinion representing three of the justices in the majority, the court further held that the removal provision could — and should — be severed from the statute establishing the CFPB, rather than invalidating the entire statute. While various aspects of the decision could lead to further constitutional challenges, the reasoning of the opinion was based in large part on the preservation of a regulatory framework that is now almost a decade old.

Chief Justice Roberts issued an opinion holding the removal provision unconstitutional but finding that it could be severed from the remainder of the statute. The first portion of the opinion was joined by Justices Thomas, Alito, Gorsuch, and Kavanaugh, and therefore is the opinion of the court. The severance analysis, however, was joined only by Justices Alito and Kavanaugh. Justice Thomas, in a separate opinion joined by Justice Gorsuch, concurred on the constitutional question but dissented on severance. Justice Kagan, joined by Justices Ginsburg, Breyer, and Sotomayor, issued a third opinion dissenting from the court’s opinion on the constitutional question but concurring in the judgment that “if the agency’s removal provision is unconstitutional, it should be severed.” (Kagan Dissent, at 37). Justice Kagan’s opinion did not offer any further analysis of the severance issue, nor did she state that she concurred in Chief Justice Roberts’s opinion on that issue. Therefore, none of the three opinions commanded a majority of the court on the severance issue.

This case arises out of a constitutional challenge to a CFPB civil investigative demand asserted by Seila Law LLC, a California-based debt collection law firm. The District Court and Ninth Circuit both rejected the firm’s claim that the CFPB was unconstitutionally structured. The court held that the CFPB’s statutory structure violates the constitutional separation of powers by restricting the president’s ability to remove its single director, who is appointed for a five-year term and may only be removed by the president for cause (i.e., for “inefficiency, neglect of duty, or malfeasance in office,” 12 U.S.C. § 5491(c)(3)). For cause removal is a very high bar, and effectively prevents sitting presidents from removing the director based on ideological or policy differences. While much attention to the case focused on whether a holding that the single-director structure is unconstitutional could result in a dismantling of the CFPB, the plurality opinion held that a severability clause in the legislation permitted the court to sever the “for cause” removal language without affecting the remainder of the statute.  

What does this mean for the Seila Law CID?

The decision did not resolve the validity of the CID at issue in the underlying case, instead remanding the case back to the Ninth Circuit to make that determination. (Op. at 31, 36). Seila therefore must return to the lower court and litigate the question of ratification: whether a constitutionally sound agency head can — and did — declare that enforcement actions taken under an unconstitutional director remain valid despite the structural deficiency.

What does this mean for entities regulated by the CFPB?

The immediate question hinges on the 2020 election, but going forward, the decision is likely to make for a more politically responsive CFPB.

A new president will have the authority to remove the current director and nominate one more closely aligned with the incoming administration’s policy goals. Over time, the increased volatility in leadership and regulatory philosophy could add an obstacle to rulemakings and enforcement actions as the agency reverses or modifies its policy positions. Recognizing this, future agency leadership may also become more focused on achievable, near-term goals. Another framing, however, is that the ruling leaves the agency as a whole essentially unchanged, and certainly will cause far less disruption than advocates of abolishing the agency were seeking.

It does not appear that past CFPB actions are in immediate danger from this ruling. The actual disposition of the case was to remand it to the lower courts to assess whether the CID was properly ratified by subsequent CFPB directors who were not improperly insulated from removal. Courts evaluating ratification are likely to be guided by the caution in the plurality opinion noting that eliminating the CFPB “would trigger a major regulatory disruption and would leave appreciable damage to Congress’s work in the consumer-finance arena.” (Op. at 35).

Still, it is possible that we will continue to see parties facing CFPB CIDs and/or enforcement actions argue that such actions were invalid because they were initiated by a director appointed in violation of the Constitution, because they were not ratified, or because they were not ratified properly — particularly given the court’s indication that this is in part a fact question.

What about entities regulated by the Federal Housing Finance Agency?

The court’s opinion noted that the FHFA is structured in a similar manner to the CFPB, calling it a “companion” of the CFPB and pointing out that both agencies grew out of the same financial crisis. (Op. at 20). While the ruling did not address the constitutionality of the statute establishing the FHFA, it is hard to imagine that review of the FHFA’s single director structure would result in a different outcome. Indeed, the Fifth Circuit recently held exactly that in Collins v. Mnuchin, 938 F. 3d 553, 587-88 (5th Cir. 2019) (en banc). Thus, if there is a Democratic president in 2021, it is likely that such president will be able to fire the current director of the FHFA and install his or her own director, with the same consequences as those discussed above. FHFA’s regulatory ambit is much smaller, consisting of Fannie Mae, Freddie Mac and the Federal Home Loan Banks, but it plays a central role in the nation’s mortgage finance system and the ability of a new administration to replace the director of FHFA could disrupt current efforts to release Fannie Mae and Freddie Mac from their conservatorships or any other efforts to reform the nation’s housing finance system.

If you have any questions about the ruling or other related issues, please visit our Financial & Fintech Advisory practice page or contact an Orrick attorney with whom you have worked in the past.