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Supreme Court to hear case over constitutionality of Consumer Financial Protection Bureau

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Key Points
  • The Supreme Court will hear arguments on Tuesday in a case over whether the Consumer Financial Protection Bureau, the regulatory agency established in the wake of the 2008 financial crisis, is constitutionally structured.
  • The case, key to the future of the CFPB, could also have broad implications on other independent federal agencies, according to experts.
Signage is displayed inside the Consumer Financial Protection Bureau (CFPB) headquarters in Washington, D.C., U.S., on Monday, March 4, 2019.
Andrew Harrer | Bloomberg | Getty Images

The Supreme Court will hear arguments on Tuesday in a case over whether the Consumer Financial Protection Bureau, the regulatory agency established in the wake of the 2008 financial crisis, is constitutionally structured.

The case, key to the future of the CFPB, could also have broad implications on other independent federal agencies, according to experts. A decision is expected by the end of June.

The dispute turns on whether the CFPB's director is given too much independence. Under the 2010 Dodd-Frank Act, which established the regulator, the agency is headed by a single director who may be removed by the president from his or her five-year term only for "inefficiency, neglect of duty, or malfeasance in office." 

The CFPB also sidesteps the traditional congressional appropriations process, instead getting most of its funding from the Federal Reserve system. The funding mechanism is similar to that of other financial regulators like the Comptroller of the Currency and the Federal Deposit Insurance Corp. 

The bureau, which was envisioned by Sen. Elizabeth Warren when she was a professor at Harvard Law School, is designed to rein in abusive practices in consumer credit markets such as home mortgages and credit cards. It returned $12 billion to consumers between 2011 and 2017, but largely stopped pursuing enforcement actions under President Donald Trump. 

The bureau has been the subject of a number of lawsuits but has so far proved to be resilient. The latest suit was brought by the California-based consumer law firm Seila Law, which alleged that the CFPB's insulation from presidential control is unconstitutional. Seila Law challenged the agency after the CFPB targeted the firm in 2017 in an investigation into the marketing and sales of consumer debt-relief services. 

The law firm is being supported by the Trump administration via the Department of Justice, which has submitted briefs to the top court supporting the theory that the for-cause removal provision is unconstitutional.

In a twist, the head of the CFPB has also weighed in to say the bureau is operating unlawfully. Kathleen Kraninger, the Trump-appointed CFPB director, told the court in September that the bureau would no longer defend its own constitutionality.

Because the Trump administration is not defending the Obama-era regulator, the Supreme Court appointed a lawyer to do so.

There is some intrigue in its choice. The lawyer, veteran Supreme Court attorney Paul Clement, is generally known for his advocacy of conservative positions, and served as solicitor general under President George W. Bush.

Clement will argue alongside Douglas Letter, an attorney representing the Democratic-led House of Representatives. Solicitor General Noel Francisco and an attorney representing Seila Law will present the other side. 

Clement and the House face an uphill battle. The Supreme Court's conservatives are generally wary of agency power, and its newest member, Justice Brett Kavanaugh, made clear while a federal appeals court judge in Washington that he believes the agency's director is too unrestrained. 

'A predictable five'

The Supreme Court held in a 1926 case that the president has the "exclusive power" to remove federal officers. But in 1935, the court approved a statute that allowed for Federal Trade Commission members to be removed only for "inefficiency, neglect of duty, or malfeasance." 

The U.S. Court of Appeals for the D.C. Circuit cited that 1935 case, known as Humphrey's Executor, to uphold the CFPB's constitutionality in 2018. Kavanaugh dissented from the decision. In its decision rejecting Seila Law's position, the 9th U.S. Circuit Court of Appeals largely relied on the decision handed down by the D.C. appeals court. 

"I think the betting is 5-4 to say this is no good with a predictable five and a predictable four," said Michael Herz, an administrative law professor at Cardozo Law in New York. 

The court could eliminate the entire CFPB or leave it standing but with a less powerful director. Kavanaugh advocated for the latter option as a federal appeals court judge, and that outcome seems more likely. 

The Roger Stone effect

Herz said the case took on a new significance because of the controversy over the sentencing last month of Republican operative Roger Stone, a friend of the president who was convicted crimes related to witness tampering and lying to Congress.

After Trump suggested on Twitter that the sentence sought by the Justice Department was too stiff, top DOJ officials overruled career prosecutors in order to seek a more lenient sentence. That move prompted all the Justice Department attorneys working on the case to remove themselves from it in a shocking mass exodus. 

The developments came as some scholars, including Harvard Law School professor Cass Sunstein, have proposed that Congress make the Justice Department an independent agency.

"The result of the CFPB case is likely to tell us whether the court thinks an independent Department of Justice would be constitutional," Herz said. 

The case is Seila Law v. Consumer Financial Protection Bureau, No. 19-7.