CFPB Structure Could See Supreme Court Challenge as Enforcement Actions Rise

The Trump Administration in concert with the Consumer Financial Protection Bureau (CFPB) has asked the United States Supreme Court to take on a case challenging the Bureau’s constitutionality, in a move endorsed by Bureau Director Kathleen L. Kraninger based on a brief obtained by RMD.

However, the Bureau’s recorded enforcement actions have increased under Director Kraninger when directly compared with her Trump Administration predecessor based on CFPB data, a move more reminiscent of Obama-era Director Richard Cordray when compared with former Acting Director Mick Mulvaney.

Constitutional challenge

According to a brief filed with the Supreme Court on Tuesday, counsel for the Administration contends that the structure that disallows the president from removing the CFPB director and more directly influencing the activity at the CFPB is a violation of the president’s executive authority and the U.S. Constitution’s separation of powers doctrine under the government’s system of checks and balances.

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“The structure of the Bureau, including the for-cause restriction on the removal of its single director, violates the Constitution’s separation of powers,” the brief reads in part. “The United States previously informed this Court that it has also concluded the statutory restriction on the President’s authority to remove the Director violates the Constitution’s separation of powers, and that the question would warrant this Court’s review in an appropriate case.”

Under the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act that helped establish the CFPB, the President of the United States is not permitted to dismiss an appointed and confirmed CFPB Director except for “inefficiency, neglect of duty, or malfeasance in office,” the law says.

Administration officials go on to recommend that the highest court in the country take on the case of Selia Law v. CFPB. The suit was brought by a law firm which provides a number of legal services to clients including debt relief, which is under CFPB investigation. The Bureau is attempting to determine if Selia Law has violated the Telemarketing Sales Rule in accordance with its debt-related services.

Interestingly, moving forward on the case challenging the Bureau’s constitutionality is endorsed by Director Kraninger, according to the brief, who is effectively agreeing with the contention that her own job security is unconstitutional.

“In the court of appeals, the Bureau defended the constitutionality of the statutory removal restriction,” the brief reads. “Since the court of appeals issued its decision, however, the Director has reconsidered that position and now agrees that the removal restriction is unconstitutional.”

Insulation from politics

If the case is ultimately taken up by the Supreme Court and is decided in favor of Selia Law, it could have major repercussions on the enforcement authority of the Bureau in the financial business sector, which Republicans have long criticized as having too much authority with too little oversight.

Democrats, however, fashioned the Bureau to be a powerful and independent financial regulator in the wake of the 2008 financial crisis, insulated from political headwinds that are prone to rapid change based on electoral outcomes.

Changing the structure of the CFPB could make the agency more malleable to those political headwinds, according to Mark Dabertin, an attorney in law firm Pepper Hamilton’s Financial Services Practice Group.

“This structure allows the incumbent Director to exercise a degree of independence that would be lost if the president could replace the Director at will,” says Dabertin in an email to RMD. “If the latter were to occur, the CFPB would likely be viewed as purely political and its actions would constantly be at risk of being undone.”

The more the CFPB is viewed as a political entity, the greater the likelihood is that it can be dissolved, Dabertin explains. However, if the CFPB disappeared, its overlap of responsibilities with another federal agency could allow some responsibilities transferred to the CFPB to revert to the agency they rested with prior to Dodd-Frank’s passage.

“Significant overlap exists between the enforcement responsibilities of the CFPB and those of the Federal Trade Commission (FTC), with both agencies at times targeting the same industries,” Dabertin says. “Rulemaking responsibility for the 14 consumer laws and regulations for which rulemaking was transferred to the CFPB under the Dodd-Frank Act would revert back to the agencies from which they were transferred.”

This is not the first time that the constitutionality of the CFPB’s structure has been an issue for a federal court. A previous ruling in 2016, made by a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit (which included future Supreme Court Justice Brett Kavanaugh) ruled that the structure of the Bureau was unconstitutional. That decision was ultimately overturned by the full court in early 2018.

Enforcement actions rise under Kraninger

After initial statements following shortly after her confirmation where she indicated that the CFPB would be more supervisory in its role as opposed to focusing on the Bureau’s enforcement authority, data from the agency has indicated that Kraninger is far more willing to issue enforcement actions when compared with her Trump Administration predecessor.

According to CFPB data on enforcement actions, 36 were issued in 2017 under original Director Richard Cordray. That November, Cordray stepped down to begin a political campaign for Governor of Ohio. After a legal dispute, White House Office of Management and Budget (OMB) Director Mick Mulvaney was installed as Acting CFPB Director while a more permanent replacement for Cordray was being considered.

Mulvaney, who was an outspoken opponent of the CFPB during his time in Congress, severely decreased the number of enforcement actions and sought to limit the Bureau’s capabilities from within, while also seeking to change the Bureau’s name to reportedly put greater emphasis on its bureaucratic origins. Enforcement actions dropped to an all-time low under his tenure, where only 11 were issued in 2018 based on the CFPB data. Kathleen Kraninger was confirmed and sworn in as Mulvaney’s permanent replacement that December, with Mulvaney himself becoming Acting White House Chief of Staff.

One of Kraninger’s first acts as director was to halt Mulvaney’s name change initiative. More importantly, when considering some of Director Kraninger’s previous statements hinting at a more supervisory role for the Bureau under her leadership, enforcement actions for 2019 have already well-exceeded Mulvaney’s figure. Currently, enforcement actions sit at 18 so far in 2019, a rise of nearly 40% when compared with the figure exhibited under her direct predecessor’s single full year of leadership in 2018.

Kraninger’s focus

In terms of where Kraninger has focused the bulk of her directed enforcement actions, Dabertin attributes most of them to businesses focused on debt-collection. While she has taken more actions overall, this indicates some alignment with Mulvaney’s philosophy.

“Director Kraninger’s focus on debt collection-related activities, which accounts for a significant percentage of the enforcement actions taken under her tenure, is very consistent with the initial public statements made by Mick Mulvaney regarding the then-future direction of the CFPB,” Dabertin says. “Enforcement under Kraninger has focused on debt collection/debt relief organizations, and preventing consumers – particularly the economically disadvantaged, veterans, and others who are vulnerable to abuse – from being unduly taken advantage of.”

While this emphasis is also consistent with the Bureau’s path as charted by Cordray, there is one critical exception, according to Dabertin.

“Namely, [that exception is that] the CFPB is longer engaged in rulemaking primarily through high-profile enforcement actions,” Dabertin says. “To this end, a review of the CFPB’s current website evidences strong ongoing public outreach regarding what ‘abusive’ should mean for purposes of unfair, deceptive, or abusive acts or practices (UDAAP). This distinction is a ‘pro-business’ difference because it allows financial service providers to both know and have a voice in weighing-in on the applicable rules.”

The enforcement actions are nowhere near approaching the number of actions taken by Director Cordray, but the actions undertaken at Kraninger’s direction appear to be taking a proactive approach, particularly when it comes to financial scams.

“It really is a ‘buyer beware’ situation from the front-end of things,” Kraninger said on CNBC TV earlier this month when asked about what most concerns her about consumers. “We can’t be there with consumers all the time. There is a lot of fraud, a lot of scams […] and we’re there. We’re taking enforcement actions and we’re vigilant, but we can’t be everywhere with everyone.”

While in one respect Kraninger appears to agree with the idea that the CFPB maintains too much autonomy from the rest of the executive branch as evidenced by her recommendation to the Supreme Court, her actions also indicate that she does see a place for a more active role for regulation of the financial sector by the Bureau if her enforcement actions are any indication.

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