Opinion analysis: Court strikes down restrictions on removal of CFPB director but leaves bureau in place

In response to the 2008 financial crisis, Congress created the Consumer Financial Protection Bureau, a federal agency with approximately 1,500 employees that tackles everything from payday loans to financial literacy programs and helping consumers navigate the COVID-19 pandemic. The director of the CFPB, Kathy Kraninger, was appointed by President Donald Trump and confirmed by the Senate in December 2018 to serve a five-year term. Under the law that created the CFPB, Kraninger can be removed from her position only for “inefficiency, neglect of duty, or malfeasance in office.”

Today, in Seila Law v. Consumer Financial Protection Bureau, a divided Supreme Court ruled that these restrictions on the removal of the CFPB director are unconstitutional. But the justices stopped there, rejecting a request by a California law firm to hold that, if the leadership structure is unconstitutional, the court should strike down the rest of the act creating the CFPB as well.

The dispute that was the subject of today’s decision began when Seila Law, 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 authority to request documents from the firm, arguing that the bureau’s structure is unconstitutional because it has just one director, who has substantial power but can only be removed “for cause.” Instead, Seila Law argued, the director should be removable “at will” – that is, for any reason.

The U.S. Court of Appeals for the 9th Circuit ruled that the removal restrictions do not violate the Constitution. It cited a 1935 decision by the Supreme Court called Humphrey’s Executor v. United States, in which the justices rejected the argument that the structure of the Federal Trade Commission – with five members who could only be removed “for cause” – violated Article II of the Constitution, which charges the president with ensuring that the laws “be faithfully executed.”

Seila Law appealed to the Supreme Court, asking the justices to weigh in. When the CFPB agreed with Seila Law that the removal restrictions violate the Constitution, the justices appointed Paul Clement, a former U.S. solicitor general, to defend the 9th Circuit’s ruling.

In an opinion by Chief Justice John Roberts, the court ruled that the removal restrictions violate the Constitution’s separation of powers. Article II of the Constitution, Roberts explained, gives executive power to the president and empowers him to “take Care that the Laws be faithfully executed.” History and precedent have long confirmed that such a power includes the power to remove executive officials.

The Supreme Court has recognized two limited exceptions to the president’s otherwise unlimited removal power. First, Roberts noted, in Humphrey’s Executor the justices acknowledged that Congress could create for-cause removal protections for “a multimember body of experts, balanced along partisan lines, that performed legislative and judicial functions and was said not to exercise any executive power.” Second, in two subsequent cases, the Supreme Court upheld exceptions for so-called “inferior” officers, who have limited duties and lack policymaking or administrative authority, such as an independent counsel.

The director of the CFPB, Roberts posited, does not fit neatly into either of these exceptions. Unlike the members of the Federal Trade Commission in Humphrey’s Executor, the director can issue binding rules and final decisions; she can also “seek daunting monetary penalties against private parties on behalf of the United States in federal court.” Nor is the CFPB director an “inferior” officer: She “has the authority to bring the coercive power of the state to bear on millions of private citizens and businesses, imposing even billion-dollar penalties.”

To uphold the removal restrictions, Roberts reasoned, the court would have to extend its prior precedents to what he described as a “new situation” – “an independent agency that wields significant executive power and is run by a single individual who cannot be removed by the President unless certain statutory criteria are met.” He declined to do so, concluding that an agency like the CFPB “has no basis in history and no place in our constitutional structure.”

The “most telling” sign that the CFPB’s structure is unconstitutional, Roberts explained, is that it “is almost wholly unprecedented.” There are only four comparable examples of similar positions in the history of the United States, Roberts noted. But with “the exception of the one-year blip for the Comptroller of the Currency” during the Civil War, all of “these isolated examples are modern and contested”; moreover, “they do not involve regulatory or enforcement authority remotely comparable to that exercised by the CFPB. The CFPB’s single-Director structure is an innovation with no foothold in history or tradition.”

The CFPB’s configuration, Roberts continued, is also “incompatible with our constitutional structure,” which “scrupulously avoids concentrating power in the hands of any single individual.” The only exception to that rule is the president, who is accountable to the public through the voters. But, unless she can be removed by the president at will, the CFPB director would wield significant power without being elected or “meaningfully controlled” by anyone; indeed, Roberts observed, the CFPB “does not even depend on Congress for annual appropriations,” getting its funding instead from the Federal Reserve.

Although the removal restrictions are unconstitutional, Roberts explained, they can be separated from the rest of the Dodd-Frank Act, the statute that gives the CFPB its authority. The remaining provisions of the Dodd-Frank Act dealing with the powers and structure of the CFPB can operate without the removal restrictions, “and there is nothing in the text or history of the Dodd-Frank Act that demonstrates Congress would have preferred no CFPB to a CFPB supervised by the President.” In fact, Roberts pointed out, the Dodd-Frank Act contains a provision that specifically provides that if any part of the law is struck down as unconstitutional, the rest of the law should survive. The CFPB can therefore continue to operate, Roberts concluded, “but its Director, in light of our decision, must be removable by the President” for any reason.

Justice Clarence Thomas filed an opinion, joined by Justice Neil Gorsuch, concurring in part and dissenting in part. He agreed with Roberts that Humphrey’s Executor should be cabined to “multimember expert agencies that do not wield substantial executive power.” But Thomas argued that the “foundation for Humphrey’s Executor is not just shaky” but in fact “nonexistent,” and he urged the court to revisit the case in the future: “Continued reliance” on that ruling “to justify the existence of independent agencies creates a serious, ongoing threat to our Government’s design.”

Thomas disagreed with the decision to separate the removal restrictions from the rest of the Dodd-Frank Act. Although expressing “concerns about our modern severability doctrine,” he would have simply denied the CFPB’s request to enforce the demand for documents from Seila Law.

Justice Elena Kagan, in an opinion joined by Justices Ruth Bader Ginsburg, Stephen Breyer and Sonia Sotomayor, agreed that the CFPB should be allowed to continue operating. But she took a sharply different view of the removal restrictions themselves. In her view, the majority’s conclusion that the removal restrictions are unconstitutional is inconsistent with the Constitution, which doesn’t address the president’s removal authority at all, and with U.S. history – which, she wrote, reflects that Congress has had “wide latitude” to create independent agencies like the CFPB. And despite the majority’s suggestion that the president has nearly unrestricted removal powers, subject only to two narrow exceptions, the Supreme Court has “repeatedly upheld provisions that prevent the President from firing regulatory officials except for such matters as neglect or malfeasance.” Such an approach, she contended, allows Congress to create the administrative agency that it believes is best suited for a particular scenario. “Rather than impose rigid rules like the majority’s,” Kagan suggested, courts “should let Congress and the President figure out what blend of independence and political control will best enable an agency to perform its intended functions.”

The removal restrictions at the heart of this case should be upheld, Kagan argued, because the CFPB’s powers are fairly ordinary when compared to those of other independent agencies like the Federal Trade Commission and the Securities and Exchange Commission. The removal restrictions are similarly “standard fare,” and the president still has “ample authority” to make sure that the director is doing her job properly. “The analysis is as simple as simple can be. The CFPB Director exercises the same powers, and receives the same removal protections, as the heads of other, constitutionally permissible independent agencies.”

The fact that there is only one CFPB director should not matter, Kagan maintained. Indeed, she noted, the Supreme Court’s cases – including Humphrey’s Executor – did not hinge on the number of people in charge of the agency. And Kagan pushed back against the majority’s assertion that the CFPB’s single-director structure is anomalous, describing the four examples of agencies headed by a single director as “hardly nothing”: The Social Security Administration, she noted, “runs the Nation’s largest government program,” while the Federal Housing Finance Agency “plays a crucial role in overseeing the mortgage market.” And if anything, she asserted, an individual director will be easier for the president to control than a multimember agency.

Kagan finished her dissent with a reminder of “how this dispute got started.” After the recession of 2008, she recounted, “Congress and the President came together to create an agency with important mission. It would protect consumers from the reckless financial practices that caused the then-ongoing collapse.” They believed that the head of that agency also “needed a measure of independence,” leading to the for-cause removal restrictions. However, Kagan complained, with today’s decision “five unelected judges” have rejected “the result of that democratic process” and instead sent “Congress back to the drawing board.”

This post was originally published at Howe on the Court.