Thursday, December 13, 2018

Justice Department tells Supreme Court CFPB organization is unconstitutional

A Justice Department brief filed in response to the petition for certiorari in a case addressing the constitutionality of the Consumer Financial Protection Bureau concedes that the Justice Department and the Bureau still have different points of view on the issue. The CFPB, to date, maintains that its organization under the Dodd-Frank Act is constitutionally valid, the Justice Department says. However, according to the Justice Department brief, the Bureau’s organization is unconstitutional because an independent agency led by a single director who can be removed by the president only for cause infringes on the president’s power to ensure that federal laws are faithfully executed. The petition for certiorari is State National Bank of Big Spring v. Mnuchin (No. 18-307).

State National Bank of Big Spring was an early challenger to the CFPB’s organization, filing suit in 2012. By early 2018, the issues in the bank’s suit had been narrowed to the constitutionality question. When the U.S. Court of Appeals for the District of Columbia Circuit, in an en banc opinion in PHH Corp. v. CFPB, resolved that question in favor of the CFPB, the parties to the bank’s suit agreed the U.S. district judge hearing the suit could not reach a contrary opinion and agreed to an order of dismissal.

The bank’s subsequent appeal to the D.C. circuit appellate court was rejected, setting the stage for the bank’s Supreme Court petition.

Effect of PHH Corp. The D.C. Circuit three-judge panel that initially decided PHH Corp. v. CFPB determined that the single-director organization was unconstitutional. However, rather than completely striking down the Bureau as the company asked, the panel decided to sever the Dodd-Frank Act section that provided the director could be discharged only for cause. The constitutionality problem would be solved by treating the Bureau as an executive branch agency whose director could be discharged at the president’s discretion.

However, the full circuit overturned that result. According to the en banc majority opinion, the Dodd-Frank Act did not violate constitutional separation of powers principles.

The PHH Corp. decision was not appealed to the Supreme Court.

Justice Department argument. The Justice Department prefers the result reached in PHH Corp. v. Corp. by the three-judge panel and the opinion written by Judge, and now Associate Justice, Kavanaugh. This approach, essentially a middle ground between eliminating the Bureau and continuing it as it currently is constituted, would allow the CFPB to function under the president’s control.

According to the brief, the separation of powers issue is important and deserves Supreme Court review, but in a different case. One problem is that Justice Kavanaugh probably would not participate in the decision due to his earlier involvement as an appellate court judge. Having the full court participate would be preferable, the Justice Department says.

Additionally, the nature of the challengers raises a jurisdictional problem. Two petitioners are associations that are not regulated by the CFPB. The bank, due to its size, is supervised by the Office of the Comptroller of the Currency, not the Bureau, and the Bureau apparently has never tried to assert any supervisory authority over the bank. The petitioners’ standing to sue "is sufficiently questionable to present a significant vehicle problem," the brief says.

 The Justice Department maintains that the Dodd-Frank Act, as written, violates the Constitution, and the brief relies heavily on the points made by Justice Kavanaugh in his appellate court opinion—the for-cause removal clause restricts the president’s powers; the single-director organization lacks the advantages of a multi-member commission that would justify the removal restriction; the single-director organization is "a relatively novel innovation"; and there would be no limit on other, future single-director agencies that could infringe further on presidential removal authority.

Severing the for-cause restriction would resolve the problem while doing the least violence to the Dodd-Frank Act, the Justice Department continues. The Act includes a severability clause, and there is no indication that Congress would have wanted the Bureau to disappear without the removal restriction.

Representation complication. The brief also directs the Court’s attention to the question of who would present the argument in favor of the CFPB’s constitutionality. The Justice Department disagrees with the result of the PHH Corp. suit and thus will not argue in favor of constitutionality. In such a case, the Supreme Court could appoint an amicus curiae; however, there is another available route. Under the Dodd-Frank Act, the CFPB can—with Justice Department consent—represent itself before the Court.

As a result, the Justice Department is recommending that if the Court grants certiorari, it should delay appointing an amicus curiae until newly approved CFPB Director Kathy Kraninger has an opportunity to decide whether the Bureaus intends to defend the D.C. Circuit judgment and the Acting Solicitor General can decide whether to permit the Bureau to do so.
This story previously appeared in the Banking and Finance Law Daily.