As Supreme Court Debates CFPB Constitutionality, Agency Accountability Hangs in the Balance

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The Supreme Court heard oral arguments last week over the constitutionality of the Consumer Financial Protection Bureau (CFPB) and whether, as currently structured, it is too far removed from executive oversight. The plaintiff’s attorney in Seila Law LLC v. CFPB argued that “never before in American history has Congress given so much executive power to a single individual,” and that by significantly limiting the President’s ability to remove the CFPB’s director, “Congress violated the core presidential prerogatives to exercise the executive power and to take care that the laws be faithfully executed.”

The outcome of this case has become increasingly important given the Bureau’s continuous efforts to skirt legal accountability and harass businesses into near bankruptcy.

An especially moving example of this was recently highlighted at an event hosted by the New Civil Liberties Alliance (NCLA). The event, titled “CFPB’s Bureaucratic Lawlessness—Real Consequences for Real People,” featured Crystal Moroney, the owner of a small New York-based law firm, who is approaching her fourth year under a CFPB investigation that has already cost her thousands of dollars and forced her to lay off half of her staff.

Moroney’s plight began when the CFPB filed a criminal investigative demand (CID) against her firm. CIDs, also known as administrative subpoenas, force companies to produce documents or sworn testimony, often in the lead-up to formal litigation. While Moroney was eager to cooperate, she felt blindsided by the CID, since she had an A- rating from the Better Business Bureau and worked diligently to resolve all complaints filed against her firm through the CFPB database in under a week. Nevertheless, Moroney met with CFPB staff to get clarification as to what information they wanted. Yet, the CFPB staff refused to apprise her of the impetus for the CID, and informed her that she would have to produce a number of confidential documents.

This was no easy task, as the CFPB requires all documents to be formatted and filed in a special way—a process that would have forced Moroney to hire an IT team and spend $70,000. Moreover, some of the documents the CFPB requested were protected under attorney–client privilege, meaning she could not submit them without the client’s consent.

Despite Moroney’s best efforts to provide the documents that she could, the CFPB filed a lawsuit to have her turn over the privileged materials. After spending most of her weeks (and weekends) for over a year trying to comply with the CFPB’s demands, Moroney was pleasantly surprised when she realized that the suit would give her the opportunity to point out the Bureau’s ridiculous demands in front of an impartial judge.

However, just before the start of the trial, the CFPB called on the court to dismiss the case as moot since they withdrew their CID, and the judge agreed. Only four hours later, the CFPB issued another CID that was nearly identical to the first. This raises the question as to whether the CFPB manufactured mootness and committed a fraud against the court.

Upon hearing of this episode, the NCLA filed a lawsuit in the U.S. District Court for the Southern District of New York last December, challenging that the CFPB acted beyond its constitutional authority when it targeted Moroney’s law firm with the CID, withdrew the CID moments before her long-awaited day in court, and then promptly issued a new one that was almost identical to the first after the case was dismissed as moot. In Law Offices of Crystal Moroney v. CFPB, the NCLA contends that by never allowing Moroney to have her day in court, the CFPB’s actions in this case effectively denied Moroney’s Fifth Amendment right to due process.

Interestingly enough, the CFPB’s use of CIDs was also the genesis of the Seila Law case. The whole dispute arose when the Bureau issued a CID to Seila Law to determine whether or not the firm broke consumer protection laws by allegedly charging clients illegal upfront fees for their services. Seila Law refused to cooperate because they believed the agency’s unconstitutional structure made the investigative demand invalid. This prompted the Bureau to bring suit before the U.S. District Court for the Central District of California, which upheld the CID. Seila Law appealed to the Ninth Circuit Court of Appeals, which also affirmed the lower court’s decision. Consequently, Seila Law petitioned the Supreme Court to review the decision, bringing us to last week’s oral arguments. At the hearing, Seila Law’s counsel, Kannon Shanmugam, contended that if the CFPB’s structure were found to be unconstitutional, then the CID should be invalidated.

It is worth noting that although the NCLA’s lawsuit raises objections to the CFPB’s constitutionality that are similar to those of Seila Law, the NCLA’s lawsuit also challenges the Bureau’s funding mechanism. Specifically, NCLA argues that Congress unlawfully delegated appropriations power to the agency when it gave the CFPB the ability to draw funding directly from the Federal Reserve. In giving the power of the purse to an agency, the NCLA argues that Congress violated Article I of the Constitution, which vests all legislative power—including that of appropriations—in Congress. The NCLA further argues that Congress violated the non-delegation doctrine when it unlawfully gave appropriations power to the CFPB. The non-delegation doctrine holds that legislative bodies cannot delegate their legislative powers to executive agencies or private entities. Put another way, lawmakers cannot allow non-lawmakers to make laws.

Summing up their case, NCLA Executive Director and General Counsel Mark Chenoweth said:

Crystal Moroney and the law firm she has built are victims of the Administrative State. Her plight is all too familiar to those of us fighting to restore constitutional constraints on federal agencies. On the bright side, her case will afford an excellent opportunity to call into question the highly irregular—and almost certainly unconstitutional—way in which Congress has funded CFPB.

As CEI has long documented, poor structure leads to poor policy. The unusual power and unaccountable structure of the bureau has led it to reckless spending, flawed rulemaking, and aggressive enforcement actions. Moroney’s case is just one example of how overzealous bureaucrats can wreak havoc on both the constitutional rights and financial well-being of Americans. While former Acting Director Mick Mulvaney did much to reform CIDs, and current director Kathy Kraninger is taking steps to rein in the agency, abolishing the CFPB would still be the best possible outcome for consumers.

Short of outright repeal, requiring the Bureau to be subject to appropriations from Congress and making its director subject to at-will removal by the president are both practical measures that could provide safeguards against the more egregious abuses and foster some degree of agency accountability.