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Seila Law Leaves More Questions than Answers over the Constitutionality of Past CFPB Actions

On Monday, June 29, the Supreme Court ruled the structure of Consumer Financial Protection Bureau (CFPB) to be unconstitutional. In the 5-4 ruling, Chief Justice John Roberts delivered the majority opinion, arguing that “the structure of the CFPB violates the separation of powers,” but noting that “the CFPB Director’s removal protection is severable from the other statuary provisions bearing on the CFPB’s authority.” In non-legalese, this essentially means that the agency may continue to exist so long as the CFPB director is removable by the president at will.

While the ruling in Seila Law v. CFPB helps to clarify some of the legal questions that have surrounded the bureau since its founding in 2010, it also poses new queries over the validity of rulemaking and supervisory or enforcement actions carried out by the bureau while it was technically unconstitutional. The question now at hand is as follows: Are CFPB actions taken when the bureau was unconstitutionally structured also unconstitutional, and therefore void? While some have argued that a constitutionally fit, at-will CFPB director could simply “ratify” these past CFPB actions, the matter is not so clear cut.

In fact, another challenge to the constitutionally of the CFPB, All American Check Cashing v. CFPB, makes the argument that “actions taken by unconstitutionally structured agencies are nullities and cannot be ratified.” In this case, in March, a three-judge panel of the Firth Circuit ruled the structure of the CFPB to be constitutional, but that decision was vacated so the entire court hear rehear the case en banc in September. And just this week, in light of Seila Law, the Fifth Circuit asked the parties to file supplemental briefs by the end of July.  The final ruling in this case may settle some of the new questions over the constitutionality of past CFPB actions.

Nevertheless, this issue is further magnified by the fact that the justices remanded to the lower courts plaintiff Seila Law’s request that if the CFPB were found to be unconstitutional, that the Civil Investigative Demand (CID) leveled against the firm by the bureau be invalidated. CIDs are administrative subpoenas that force companies to produce documents or sworn testimony, often in the lead-up to formal litigation. In their remand, the Supreme Court leaves it to the Court of Appeals for the Ninth Circuit to figure out whether the CID, which served as the genesis for the CFPB case against Seila, was validly ratified. By punting the validity of the Seila CID to the Ninth Circuit, the Supreme Court leaves more questions than answers.

Realizing this problem, Justice Clarence Thomas wrote in his concurrence:

Consistent with the traditional understanding of the judicial power, I would deny CFPB’s petition to enforce the civil investigative demand that it issued to Seila. Seila “challenge[d] the validity of both the civil investigative demand and the ensuing enforcement action.” Seila has not countersued or sought affirmative relief preventing the CFPB from acting in the future; it simply asks us to “reverse the court of appeals’ judgment.” I would do just that. As the Court recognizes, the enforcement of a civil investigative demand by an official with unconstitutional removal protection injures Seila. Presented with an enforcement request from an unconstitutionally insulated Director, I would simply deny the CFPB’s petition for an order of enforcement.

Issues over the CFPB’s use of CIDs also led to a lawsuit against the bureau by the New Civil Liberties Alliance (NCLA) last December. In Moroney v. CFPB, the NCLA argued that the CFPB went beyond its constitutional authority when it went after the Law Offices of Crystal Moroney with a 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. 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.

Discussing the case this past March, I wrote:

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.

In Seila Law v. CFPB, the Supreme Court put a dent in the administrative state but stopped short of delivering a knockout blow. As CEI General Counsel Sam Kazman put it, the “ruling in Seila Law that Congress cannot shield the CFPB Director from being fired at will by the President is a much-needed win for political accountability,” but that “the Court should have gone further and ruled the CFPB itself unconstitutional.”

In the wake of Seila Law, with new questions surrounding the constitutionality of past agency actions and little done about bureau use and abuse of CIDs, it is paramount that the courts revisit these issues to truly bring about accountability and transparency at the CFPB. In the meantime, CFPB Director Kathy Kraninger should drop (or at least reconsider) the CIDs against Seila Law and the Law Offices of Crystal Moroney. She should also do what she can to change the institutional culture at the bureau, which has historically been all too eager to use CIDs to carry out political agendas.