Klander-ACA-CFPB-SCOTUS

The recent Supreme Court developments regarding the constitutionality of the Consumer Financial Protection Bureau's leadership structure are discussed in this episode of ACAcast. The case originated from a law firm called CELA Law, which challenged the CFPB's structure in 2017. The Supreme Court granted CELA Law's petition to review the constitutionality of the single director structure. The court is considering whether the CFPB's structure is unconstitutional as a whole and whether the "for cause" provision is severable. If found unconstitutional, potential remedies include dismantling the CFPB entirely or allowing the legislature to restructure it as an independent agency. The court's decision may be influenced by the conservative-leaning justices and the desire for a narrow remedy. Welcome back to another episode of ACAcast, with your host this week, my name is Alex Zito. ACAcast is the official podcast of ACA International. On today's episode we are going to discuss the recent Supreme Court developments about the constitutionality of the Consumer Financial Protection Bureau's leadership structure. Before we start today, the content presented in today's episode is for general references only. On with the show, today's conversation is with former ACA Corporate Counsel, Kerry Barber, and industry expert, Jessica Klander. Here is Kerry Barber. As you may know, the recent buzz is all about the Supreme Court's recent decision granting CELA law's petition, asking the high court to review the constitutionality of the CFPB single director structure. So I thought no better person to have a discussion with about this topic than Jessica Klander, a shareholder with Bafford Remily. Welcome, Jessica. Thanks for having me. Yeah, of course. So just some real quick background so our listeners can know and understand exactly how this case got before the Supreme Court. CELA law is a California-based law firm that offers a variety of legal services, including assistance in obtaining debt relief for consumers. The CFPB issued a civil investigative demand to CELA law asking for some information about its practices and that it might be in violation of the Consumer Financial Protection Act. CELA law did protest that CID and basically on the basis that it was unconstitutional, that the CFPB's structure was unconstitutional. This is in 2017 that these grumblings started to happen. So the CFPB denied CELA law's request to reconsider that CID, and CELA law then went to the district court and asked the district court to review it. During this time, Jessica, as you know, the PHH case was pending in the D.C. district court asking the same question about the constitutionality of the CFPB. Ultimately, the Ninth Circuit, once CELA law got up to the Ninth Circuit, the Ninth Circuit did determine that the CFPB's structure was constitutional, but then also mentioned that CELA law's argument wasn't without force. So then CELA law petitions the Supreme Court, and that's where we're at today. The Supreme Court granted that petition to review the single director constitutionality. So what are your thoughts on the issues that are before the Supreme Court at this point, and can you kind of discuss what those are? Sure. There's really two questions before the Supreme Court right now. One is, is the CFPB structure unconstitutional as a whole? And then there was a second question that the Supreme Court actually issued to the parties to brief, which is a little bit uncommon. Generally, the Supreme Court just sort of has a one sentence, this is granted, we'll review it. But in this case, the Supreme Court said, you know, we're going to grant this, but also can you brief the additional issue of whether or not this for cause clause in the provision is severable so that we can keep the CFPB structure in place? And so in plain English, what that means is the CELA law and others who have challenged the constitutionality of the CFPB have essentially made the argument that unlike other independent agencies like the FTC or the FCC, this CFPB is made up and structured differently. So independent agencies generally have a commission or a committee of people who have staggered terms so that they can't all be replaced when a new president comes in or a new legislature comes in. And they also have, they have to rule by consensus. So there has to be a meeting of the minds of those people. Well, the CFPB is led by a director. And so all of the force and power of that organization flows down from the single director structure, which is what makes it not really independent like the other ones. And the other thing that makes it even more interesting is that because it's not an independent agency, so it's under the executive or it should be at least under the executive committee branch under the president, generally that means that the president should be able to get rid of the director at will. It's there, it's within the president's power to do that. But in this case, there's actually a provision in the statute that says the president can only remove the director for cause. And so that means that for cause is a very high standard. It's basically if the director does something outside of the scope of their authority, which is very broad in the CFPB. So what the field law and others who are challenging it have said, that makes it unconstitutional because it interferes with the separation of powers. It undermines the president's ability to terminate and get rid of the director at will. So really what's at issue here is, is that for cause provision unconstitutional? And I would say that most people observing this case would say that that's probably going to be the outcome, that the Supreme Court will find that clause to be unconstitutional. But the big question is, if it is, then what happens? And I think there are people who would expect then that it would be dismantled entirely, the CFPB. I think my feelings on that are probably that's not what's going to happen. Certainly is one potential remedy that they dismantle the CFPB entirely and then kick it to the legislature to try and restructure it in a way that is constitutional. But there are certainly other remedies that we're going to talk about today that I think are on the table. And by the Supreme Court asking, can we just sever that provision that's unconstitutional and then keep the CFPB intact, sort of tips the hand that the Supreme Court thinks that might be what they're going to do. Yeah, that's exactly what I found really fascinating about the Supreme Court granting the petition for review was that additional issue that it asked the parties to brief and argue. And you know, from my review of the Dodd-Frank Act, I wonder if the Supreme Court isn't getting caught up with the fact that the severability provision is in the general provisions of that act versus actually within Chapter 5, the CFPB, the creation of the CFPB. So I think you're right. I think that the Supreme Court to some extent is tipping its hand. But I also think that the Supreme Court is having difficulties maybe with just severing it and then going about status quo, just as Kavanaugh did in the PHH decision in his dissent. Because my initial reaction was, well, that's the route that they're going to go. Kavanaugh is now on the Supreme Court. He's going to have a real big say. And so they're probably just going to fall in line with his dissent in the PHH corporation case. I'm second-guessing whether or not the Supreme Court believes that you can just sever that particular provision and then go about status quo. So it will be really interesting to see what sort of remedies that the Supreme Court either comes up with or at least bounces back to a lower court or perhaps Congress. So let's talk about those remedies. Let's talk about exactly what the Supreme Court may or may not do. And of course, this is all speculation. There could be things that the Supreme Court is going to come up with that we don't even touch on today. But what are your thoughts on the most likely remedy if the Supreme Court does actually give one? So I think you're right. I think that initially, most people thought because Justice Kavanaugh, who had been at the Ninth Circuit and wrote a pretty scathing dissent when the Ninth Circuit said that they were going to find the structure of the CFPB constitutional. So Kavanaugh wrote this scathing dissent basically saying, of course, this is unconstitutional. It is a violation of the separation of powers. And all we have to do is sever this for cause clause in order to make it constitutional. The problem with that from others who talk about it is that if you do that, then it essentially, when the CFPB was initially put into sort of initial creation of it by Elizabeth Warren, the idea was to make it an independent agency much like the FTC and FCC, so to have that committee of people that would be part of the structure. But then when it was ultimately passed, it was just the single director structure. And the reason they wanted it to be independent is so that it wouldn't change with every single president. Essentially, a new conservative president comes in, takes out the liberal CFPB director, puts in a new one, so it would change hands more often than what the intention was. So I think one drawback of the Kavanaugh way of doing it is that essentially, we're going to go to a structure where whomever is president is just going to replace the director and then probably the mission will change with every director that comes in. So there is definitely some concerns there with folks who see that as not an ideal remedy because of that changing. Another way would be to completely dismantle it and have the legislature restructure it so that it is more of an independent agency. I think why that is kind of perhaps in this case not a real likely scenario is that, one, the precedent that is set for the Supreme Court is that they're supposed to do the most narrow remedy. So the most narrow remedy would be to just strike the clause. And also, the makeup of the court itself. The Supreme Court justices right now are more conservative leaning than they've been in the past. And there are two or three that have really called out about independent agencies in general feeling that independent agencies in and of itself is violation of the separation of powers and is sort of unconstitutional blanket statement period stop. So if that's the case, they may not want to basically hand it back to the legislature to make it an independent agency. So that's why I think there's some balls up in the air and some questions about what the court will do given the current sort of climate of the justices. And of course, another option is that they could kick it back to the lower courts and say, you know, in light of the fact that we find this provision is unconstitutional, you have to review this case again. With that in mind, I imagine that would create an enormous amount of chaos. I certainly hope that's not what they do, because that then lends too much to one judge feels one way, another judge feel the other way. And I think in this case, the Supreme Court pretty much has to make some kind of determination about how the structure is going to be going forward. And the cleanest option is for them to just sever that clause and make it at will. And I read this really interesting article from a more plaintiff's bar side of things. And so they're looking at this case, and actually, at least from this particular opinion piece, and looking at as a great step that the Supreme Court is looking to make this, the sever the for cause clause, because they see it as, you know, we just have to suffer through a couple more years. And of course, their feeling is 2020 is going to be Democrat. And so once we get a Democrat in, then we just kick this person out and get someone in who's going to go back to the corduroy way of things. So it was just interesting reading that because their take was, great, this is a great step for us. Let's make it be unconstitutional. And that way, we can have control once we're in power again. Well, historically, it has been the CFPB has been very favorable to plaintiff's bar. I guess I can see both sides. I'm kind of surprised by that angle. Because historically, it's been so favorable to them, as you just explained. The other side of it is that, yeah, you get maybe a Democratic leader in the White House, and things could change very much for our industry, and not necessarily in a pleasant way. So let's talk about enforcement action. So, you know, as of late, we know a district court in New York recently stayed a case that the CFPB filed against Forster and Garbus, saying that, you know, pending the outcome of the Supreme Court, I'm not going to touch this case until we know. And then also, recently, the CFPB filed an action against student loan debt relief companies, along with several AG offices, including Minnesota. What do you think parties should be doing in these enforcement actions? Should they all be asking for a stay pending the outcome of this particular review? Or what sort of strategy might you employ for this to come across your desk? So I think it depends on, you know, and a good lawyer speak. It depends. Well done. But for the most part, yes. For the most part, yes. I think that asking for a stay is reasonable and something that should be asked for if it's a big enforcement action. One thing to consider, though, is that if you get a CID or some other communication from the CFPB, and you just want to get out from under this, this gives agencies and law firms on the receiving end of a CID some negotiating power. So it can be a great negotiating tactic, because from the CFPB's perspective, their future is unknown. And so they're going to, rather than have a bunch of matters stayed, they're going to want to resolve as much as they can. And perhaps that gives you on the receiving end sort of a leg up on the negotiation piece. The other thing to note here is that even though there is maybe a tip of balance of power to the receiving end of a CID, so the folks who are receiving them are a little bit in a power position because they can try and stay the action or negotiate a smaller settlement, you still don't want to burn a bridge. Because one of the very likely scenarios here is that the CFPB structure will stay intact. And so just be mindful of the fact that this is an opportunity to have a little more power in that, seemingly before you had no power. But keep in mind that you don't want to burn a bridge, because going forward, they could still be knocking on your door after this is all resolved and settled, and you don't want them to have a bad taste in their mouth. So I think you still need to have those savvy negotiations, but there is certainly an incentive for them to settle at a lower amount just to get it resolved and move on. Absolutely. So, you know, relatedly, I'm thinking about, and I have my own thoughts on this too, but I'm thinking about the rulemaking, the current rulemaking, and what does it mean for that, as well as maybe you mentioned settlements. What happens when the Supreme Court strikes this down as unconstitutional if it does that? In fact, to prior enforcement settlements, you know, millions of dollars have been collected against agencies and law firms alike. Does that unravel to the decision by the Supreme Court finding that this is violating the Separation of Powers Clause of the Constitution, does that then unravel everything the CFPB has done? What do you think that looks like? You know, I thought a lot about this, because certainly from a theoretical standpoint, that is what the potential outcome is. So even if they just strike the four cause provision, that means that when Trump came into presidency, he would have gotten rid of Cordray immediately. Obviously, they did not see eye to eye. So the argument being, it was unconstitutional, it stripped the president of his power to remove the sitting director at will. And so anything that Cordray did going forward, you know, was unconstitutional under an unconstitutional structure, or even if you go further, everything they've ever done is unconstitutional because the structure is unconstitutional. I think theoretically that is true. I don't really believe that that will be the outcome. I'd be shocked if that's what came about from this. I think more likely is it will be a kind of argument about why, even though this portion of it was unconstitutional, it doesn't render all of the enforcement actions unconstitutional. So going forward, we'll go forward under a more constitutional structure, but all the past enforcement actions will stay in force. That would be, you know, if I'm reading tea leaves, that would be my guess. But certainly there's a good argument on the other side for why that's not truly the way it should go. So the current rulemaking, what does the current director do about that? Does she still have the authority to issue a final rule? If she were to issue a final rule and say the Supreme Court's decision comes out after that, I know timing is a big part here. Perhaps maybe if the Supreme Court says, as of the date of this decision, it's unconstitutional. So going forward, we're not going to apply this retroactively, essentially. And let's say the final rule is in place, I mean, is that rule still final? Can we still plan on that rule coming into play? Or do you think it's best that the director, acting director, just delays that as well, depending on the outcome? There's probably two different strategies. One is if it's found to be unconstitutional and the director is replaced, you know, once the new term, whenever the Democrats get back into power. If I were on the other side of that, I'd say, well, then let's redo the rules because those were done under an unconstitutional structure. Let's reopen it. I mean, that could be one thing that could happen. Otherwise they could say, we don't want to deal with it, it's done, let's move on to something else. So the sort of one strategy would be hurry up and get it done on the off chance that they don't go back and try and redo it. But of course, given that it could change the way that it, you know, essentially could be considered invalid because of the current structure, the director could say, let's just wait this out and wait to see what the Supreme Court does with this, which it's going to come down. I mean, I think the hearing on these papers is probably going to be early 2020 for the Supreme Court. And then the decision, I would think that they wouldn't wait as long as they would for other decisions, given the fact that it puts this huge entity sort of at a standstill will probably come within the next, you know, six to nine months. And so we will have an answer relatively soon. And so I don't know, you know, how fast track this rulemaking process really is anyway. So I'm guessing it's probably going to be after the Supreme Court's decision anyway. Yeah, that's what my guess would be, especially knowing that they're just pouring over 9,000 comments to the proposed rule. I imagine that's going to take a substantial amount of time and probably more time than what's going to take for the Supreme Court to review this particular decision. This is a constitutional challenge and the CFPB has, you know, such a broad swath across the country over so many people, daily lives, how they interact with each other, you know, the financial perspective. So on both sides, I think this case, there's a lot riding on this particular case. And when there's liberties involved, constitutional challenges involved, I think they should be taken very seriously. Amicus briefs right now are due on December 16th. You know, what sort of response do you think the Supreme Court should anticipate as far as Amicus counsel or Amicus CRI is concerned? I think what's really interesting about the briefing that's been done already is that for the most part, the folks who have written, and of course, most of them have been in, they were for the petition's sake. So saying that petition was warranted, so that sort of leans towards the petitioner's cause, which is that it's unconstitutional. But the parties agree that this structure is unconstitutional. And what's even more interesting is that the CFPB, the Department of Justice, agreed with the CELA law that, yes, this is unconstitutional, which is a 180-degree turn from where they were only a few months ago. And so the position has changed under the current director about the current director has come out and said this structure is unconstitutional. So everybody agrees that the structure is unconstitutional, where the difference in, I think, is going to come is going to be, you know, in what the remedy is, whether it's to just sever that clause and keep the structure in place and have the director be terminable at will, which is what the Department of Justice said in their briefing, that they want it to happen. CELA law wants it completely dismantled. That's that position. We had sort of a group of professors who sent in a brief on separation of powers, so they were just really focused on the fact that the current structure undermines the president's branch, you know, the executive branch, the president's power. And they seem to say, agree with the Department of Justice that you could sever the clause and it would be constitutional. Now I think something that was interesting that came out of this is that the Department of Justice said, so we've changed our position on this. We think you need to, Supreme Court, point someone to take on the Ninth Circuit's ruling. So they're actually going to have, I think there's already someone from the Senate who's going to take up the clause of the Ninth Circuit to say that it is constitutional. And so there's going to be some briefing that comes from that as well, an independent party that will argue that point. I don't know as far as what the other briefing will be. I imagine that there's going to be some briefing on this sort of remedy of an independent agency in and of itself is unconstitutional, so the only answer is to dismantle it entirely or to set it up under the president's power, under the executive branch. So it'll be interesting what we all hear from these briefings, but certainly having the Department of Justice and the CFPB do a 180 turn kind of shifted the focus of what the Supreme Court's going to be analyzing. Gut check. You've kind of alluded to it throughout this conversation, but what does your gut tell you that the Supreme Court's going to do and where are we going to be 12 months from now? My guess is it's going to be along the lines of a PHH decision. I think this is unconstitutional. We're going to sever this clause and make it the director terminable at will by the president, and it'll be status quo for now as Trump's in the presidency, and then, you know, once we get a Democrat in, it could change. That's my guess, unless the legislature decides to take it up. Yeah, I'm similar along those lines. I think that that particular provision will be found unconstitutional. I think it will be severed, but I think the Supreme Court's going to say, hey, Congress, you created this. Now you got to fix it, and they'll kick it back to Congress, and I think that Congress then would, in turn, probably make up the structure or change the structure to be more like the FCC or FTC where they have that commission in place, but that, I mean, getting that confirmed to the Senate, I mean, that could be years in the making, especially the political climate right now. Not going to be a priority. I wouldn't think right now there's a lot of other things that are going to get stacked in front of it. I agree. This has been a great conversation, Jessica. Is there anything else that was on your radar that our listeners should take heed to? You know, there's one more thing to put on people's radar, and this is a little bit beyond the scope of this conversation, but something that some pundits who are looking into this have talked about is that given the makeup of the Supreme Court right now, which is more conservative than it's been in the past, there is a group of justices who really take issue with the independent agencies, just to blink it entirely, the FTC, the FCC, and have hinted that they think this case that was back in 1935, it was a U.S. Supreme Court case, Humphreys, that essentially found that the FTC and FCC structures were constitutional because of their makeup of being a committee of people, staggered terms, you know, things that I've alluded to before said that under that narrow exception, that makes it constitutional and doesn't have to be a terminable at will by the president. Well, some of the justices have hinted that they believe that that case is wrong. So pundits are guessing that potentially they could try and get Kavanaugh onto their side to say, let's not only find the CFPB unconstitutional, but let's go a step further and overrule Humphreys and also dismantle these independent agencies entirely. So something to think about, again, that's a step further than what most people think will happen here, but it's definitely, you know, should be on your radar to think about. Well, I think that that is a good way to make people's heads explode. That is very interesting. And, yeah, it's going to be incredible to see what sort of impact even on the other agencies that decision might have, if anything, that's a really good thing to point out. And on that note, I think that we'll go ahead and end this particular discussion. Thank you, Jessica, for your insight. That was awesome. I really appreciate that discussion. Some really good details. And I know that our listeners will appreciate this as well. Thank you, Terry and Jessica, for the wonderful conversation. You can subscribe to ACA Cast on iTunes, or if you download your podcast, you'll never miss the show. While you're at it, we find value in the show. Give us a review on iTunes, we'll really appreciate that. Or simply tell a coworker about the show. Thank you, and we'll see you next time on ACA Cast.