Supreme Court Rules That the CFPB’s Structure Is Unconstitutional

The U.S. Supreme Court ruled that the Consumer Financial Protection Bureau’s (CFPB) single-director leadership structure violates the separation of powers clause in the U.S. Constitution.    

In Seila Law v. CFPB, a California-based law firm that provides debt-relief services to consumers, was under investigation by the CFPB for possible violations of telemarketing sales rules. Seila Law challenged the CFPB’s civil investigative demand, arguing that the Bureau’s structure is unconstitutional because its single director can only be removed by the President “for cause” instead of “at will” (for any reason).

The U.S. District Court ruled that the removal restriction of the CFPB director did not violate the Constitution, and the Ninth Circuit Court of Appeals affirmed the district court’s decision. Seila Law appealed to the Supreme Court.

The two questions before the Court were:

  • Whether the provision in Dodd-Frank that only allows the President to remove the CFPB director “for cause” (for inefficiency, neglect of duty or malfeasance) violates the separation of powers clause in the Constitution – in other words, whether it improperly impinges on the President’s authority to ensure that the laws of the United States are faithfully executed.
  • If the provision is unconstitutional, whether the entire CFPB structure is unconstitutional or whether the removal provision can be severed from the remainder of Dodd-Frank while leaving the CFPB in place.
The Decision

In a 5-4 decision written by Chief Justice John Roberts, the Court agreed with Seila Law and found that the CFPB’s leadership by a single individual removable only “for cause” violates the separation of powers clause of the Constitution. The Court stopped short of invalidating the entire Bureau but mandated that the President will be able to remove the director without cause.

“The CFPB’s single-director structure… [vests] significant governmental power in the hands of a single individual accountable to no one,” Roberts wrote. “The Director is neither elected by the people nor meaningfully controlled (through the threat of removal) by someone who is. The Director does not even depend on Congress for annual appropriations…Yet the Director may unilaterally, without meaningful supervision, issue final regulations, oversee adjudications, set enforcement priorities, initiate prosecutions, and determine what penalties to impose on private parties. With no colleagues to persuade, and no boss or electorate looking over her shoulder, the Director may dictate and enforce policy for a vital segment of the economy affecting millions of Americans.”

The Court’s conservative justices (Samuel Alito, Neil Gorsuch, Clarence Thomas, and Brett Kavanaugh) joined the opinion holding the removal provision to be unconstitutional, with all four liberal justices (Ruth Bader Ginsburg, Elena Kagan, Sonia Sotomayor, and Stephen Breyer) dissenting.

After finding the CFPB’s leadership structure to be unconstitutional, the Court decided that the removal provision could be severed from the rest of the statute without striking down the entire statutory framework governing the Bureau. The CFPB can continue to operate, Roberts concluded, “but its Director…must be removable by the President” for any reason. In this ruling on severability, Roberts lost two of the conservative justices (Thomas and Gorsuch), but prevailed because all four liberal justices concurred.

The Implications

Here are just some of the implications of the Court’s decision in Seila Law:

  • A new President can immediately replace the CFPB director: If President Trump wins re-election, current CFPB Director Kathy Kraninger can serve out her five-year term through 2023 unless Trump chooses to remove her. If Joe Biden is elected, he will not need to wait until the expiration of Kraninger’s current term to appoint his own director.
  • Impact on pending CFPB enforcement actions: One question raised by the ruling is whether companies can challenge pending enforcement actions brought under a director who was unconstitutionally insulated from removal, and, if so, whether a succeeding director ratified that action. While the CFPB announced on July 7 that it was ratifying “the large majority of its existing regulations” in light of the Seila Law decision, it said it “is considering whether ratifications of certain other legally significant actions by the Bureau, such as pending enforcement actions, are appropriate. Where that is the case, the Bureau is making such ratifications separately.”
  • Potential impact on the Federal Housing Finance Authority (FHFA): The FHFA (which oversees Fannie Mae and Freddie Mac) also is run by a single director (currently Trump nominee Mark Calabria) who is insulated from removal by the President except for “inefficiency, neglect of duty, or malfeasance in office”—the same standard that applied to the CFPB director.

Shortly after its Seila Law ruling, the Supreme Court agreed to hear the case of Collins v. Mnuchin, in which the FHFA structure was declared unconstitutional by the Fifth Circuit Court of Appeals because its single director may be removed only for cause. Chief Justice Roberts did not indicate how the Court would rule on FHFA constitutionality in his Seila Law opinion, but he did reference the dispute. The FHFA is “essentially a companion of the CFPB, established in response to the same financial crisis” and “a source of ongoing controversy”, he said. However, he also noted that it does not engage in regulatory or enforcement authority “remotely comparable” to that exercised by the CFPB. The Court likely will hear oral arguments in Collins v. Mnuchin as early as October and is expected to issue a ruling in early 2021.

Sue Johnson is the former executive director of RESPRO, the Real Estate Services Providers Council Inc. She retired in 2015 and is now a strategic alliance consultant.