Compliance Blog

Last Monday, the Supreme Court issued its highly-anticipated opinion regarding the constitutionality of the Consumer Financial Protection Bureau (CFPB or bureau) in Seila Law v. CFPB. The Court found that the structure of the bureau was unconstitutional and that the President may remove the single director at will, not just for cause. It also indicated that actions by previous directors who were inappropriately insulated from Presidential accountability may need to be ratified to be valid. Yesterday, Director Kathy Kathleen Kraninger ratified the vast majority of bureau actions.

A Structural Issue

In its opinion in Seila Law v. CFPB, after a lot of discussion regarding the separation of powers and the applicability of prior case law, the Court held that the structure of the CFPB as established by Dodd-Frank, is unconstitutional. Traditionally, independent agencies are headed by bipartisan multimember boards or commissions appointed by the President with the advice and consent of the Senate. This is how the NCUA is structured, as well as the Federal Reserve Board, the FDIC, the FTC, and the FCC. These board members or commissioners usually serve staggered terms and are removable only “for cause” – meaning for some “inefficiency, neglect of duty, or malfeasance in office.”

When the bureau was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), Congress put the CFPB under a single director appointed by the President with the advice and consent of the Senate who serves a term of five years during which the director can only be removed for cause. The Selia opinion points out that under this structure, because the terms are 5 years long, the President elected in 2028 may never get to appoint a Director of the CFPB, being left with one previously appointed by the prior President (who may have had a very different agenda for the bureau). The Court found that this leadership structure concentrates all the power of the bureau in a single unilateral actor insulated from Presidential control in an unconstitutional violation of the separation of powers.

To cure this violation, the Court severed the Dodd-Frank provision that the single Director can be fired only for cause. In other words, they rewrote the law so that the Director of the CFPB is now removable by the President at will. This leadership structure gives the sitting President the opportunity to somewhat shape and direct the activities of the agency. This type of structure can politicize an agency, making its activities and position change frequently, depending on who is in the White House. The Court seemed to recognize this potential problem, but stated that changing the leadership from a single director to a commission was outside of its powers – the Court could merely fix the constitutionality issue, it cannot improve the structure of the CFPB.  For this reason, NAFCU has advocated to Congress for legislation changing the bureau leadership to a bipartisan five-person commission of experts rather than a single director.

Ratifying Unconstitutional Actions by Prior Leadership

The Court does not directly address the legality or significance of the CFPB’s actions prior to the Court’s decision. The original action by the bureau which prompted this litigation was a civil investigative demand issued by the bureau to Seila Law. The civil investigative demand was issued by then-Director Cordray, but the CFPB claims that the demand was ratified by Acting Director Mulvaney (who was removable at will because he was only Acting Director). By alleging Acting Director Mulvaney ratified the civil investigative demand, the bureau is indicating he signed off on the demand, somehow giving it his consent and agreement. The Court indicated that whether the demand was ratified by a constitutionally-accountable director was a question of fact that the lower court should determine to see whether the civil investigative demand is enforceable. This indicates that only bureau actions and orders issued or ratified by a constitutionally-accountable director are valid. Obviously, this raised a lot of questions regarding the validity of prior bureau actions.

Yesterday, Director Kraninger ratified nearly all of the bureau’s prior actions. This is not surprising. Dodd-Frank statutorily required the CFPB to finalize many rules implementing its provisions within certain time frames. Further, credit unions and the wider consumer finance industry have expended huge sums of money since 2010 to achieve compliance with new regulations in the wake of Dodd-Frank. Removing significant swaths of regulation would likely be more expensive and destabilizing than helpful.

Two items were explicitly not included in yesterday’s ratification. First is the arbitration agreements final rule which was killed by a Congressional Review Act resolution in 2017. Second is the bureau’s payday final rule which was separately addressed in its own partial ratification  of the payment provisions. The bureau also released a new final rule that revoked the mandatory underwriting provisions. The payday rule is still being litigated and its compliance date is still stayed as a result. In the ratification, the CFPB stated that it is still considering whether other legally significant actions, such as pending enforcement actions, must be ratified. It also stated that it does not believe that CFPB actions with no legal consequences or fully resolved enforcement actions require ratification.