Supreme Court ruling could unleash new legal challenges to consumer bureau

The Supreme Court’s ruling on Monday that the structure of the Consumer Financial Protection Bureau (CFPB) is unconstitutional may spur a wave of new legal challenges to the agency’s previous regulations and enforcement actions.

In its 5-4 decision, the court held that the CFPB director must be fireable at will by the president to prevent the agency from infringing on the separation of powers between the legislative and executive branches.

The ruling does not dismantle the controversial financial regulator but it does settle some questions that had long cast a shadow over the Obama-era bureau. Progressives who opposed the legal challenge and conservatives who supported it largely agreed that the decision would do little to curb the CFPB’s immense power.

Even so, attorneys who represent financial firms facing probes by the consumer agency say Monday’s ruling in Seila Law vs. CFPB may have opened a pathway to challenging nearly a decade’s worth of sweeping rules and steep penalties.

“It certainly puts a lot of it into suspect and scrutiny,” said Joann Needleman, an attorney at law firm Clark Hill who represents clients under investigation by the CFPB. “Anybody who’s got an enforcement action now is going to consider what challenges that they will bring to the court.”

The Dodd-Frank Act of 2010 created the CFPB as an agency controlled by a single director with unilateral control over its regulatory and enforcement decisions. The director serves a five-year term and, until Monday, could only be fired for severe neglect or misconduct.

Seila Law argued that the CFPB director’s broad power and independence was unconstitutional, making a 2017 request for documents issued by then-director Richard Cordray (D) unenforceable. The court ruled Monday that the CFPB’s structure was unconstitutional but left the decision over the document request up to the 9th Circuit Court of Appeals, which had ruled in favor of the bureau.

“The agency may therefore continue to operate, but its Director, in light of our decision, must be removable by the President at will,” Chief Justice John Roberts wrote in the majority decision, joined by his conservative colleagues.

While the court’s ruling keeps the CFPB alive, legal experts say it could spur challenges to investigations ratified by a director who was not fireable at will.

“I would imagine that some parties would question whether something the CFPB has done as an official act that impacts them negatively (a) needs to be ratified and (b) whether ratification had taken place already in the action they are complaining about,” said Anthony Alexis, former CFPB enforcement chief and assistant director, in an email.

Needleman said she is discussing with a client who is subject to a CFPB enforcement action whether to challenge the agency’s charges under Monday’s ruling. She added that a partial dissent from Associate Justice Clarence Thomas “provided a roadmap” for potential challenges to past bureau actions.

Thomas argued that the court should have ruled illegal the CFPB’s document request, known as a “civil investigative demand,” since it held that the agency’s director did so while enjoying an unconstitutional amount of power.

“As the Court recognizes, the enforcement of a civil investigative demand by an official with unconstitutional removal protection injures Seila,” Thomas wrote. “Presented with an enforcement request from an unconstitutionally insulated Director, I would simply deny the CFPB’s petition for an order of enforcement.”

Cordray, the agency’s first director, and Kathy Kraninger, the current director and a Trump appointee, enjoyed the full legal protection afforded through Dodd-Frank as the only agency chiefs confirmed by the Senate for that role. But actions ratified by former Acting Director Mick Mulvaney, who was appointed to temporarily lead the bureau under a different law, may have been lawfully approved.

“If you’re a party that was subject to enforcement while he was acting director, I think your ratification argument may have some problems,” Needleman said.

But for some businesses, the costs of contesting the CFPB’s authority may not be worth it. 

Monday’s decision means Kraninger will likely be replaced by a new director if former Vice President Joe Biden defeats President Trump, likely bringing a stricter consumer watchdog to lead the agency.

Companies that have already settled or are negotiating with the CFPB might find the risks and costs of relitigating too high to pursue, said Courtney Dankworth, a litigation partner with Debevoise & Plimpton.

“It’s not clear that there’s a lot to gain from doing that because Kraninger can ratify those pending actions or—worst case scenario—she could just issue a new CID that postdates this opinion,” Dankworth said.

“Some companies may see an advantage in escalating and asking for that ratification now, but in all these scenarios they risk the ire of the line attorneys.”