Banking and Finance Law Daily CFPB organization doesn’t violate Constitution
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Wednesday, March 4, 2020

CFPB organization doesn’t violate Constitution

By Richard A. Roth, J.D.

The CFPB’s structure, featuring a single director who can be removed by the president only for cause, does not unconstitutionally interfere with the president’s responsibility for ensuring that federal laws are "faithfully executed," a majority of a three-judge panel has decided.

On the same day the Supreme Court heard arguments on the constitutionality of the Consumer Financial Protection Bureau (see Banking and Finance Law Daily, March 3, 2020), two of the three judges on a U.S. Court of Appeals for the Fifth Circuit panel decided there was no constitutional defect. The president’s ability to remove the CFPB director in the case of "inefficiency, neglect of duty, or malfeasance in office," combined with the oversight of the Financial Stability Oversight Council—all the members of which are appointed by the president and subject to removal at his discretion—made clear that the Dodd-Frank Act does not unduly infringe on presidential power, the majority opinion said (CFPB v. All American Check Cashing, Inc., March 3, 2020, Higginson, S.).

The suit arose from a CFPB enforcement suit alleging that Mississippi-based payday loan and check-cashing companies, and their owner, had violated federal consumer financial protection laws. The companies responded by, in part, asserting that the CFPB was organized in an unconstitutional manner, which rendered it unable to act.

Previous decision. As outlined by the opinion written by Judge Higginbotham, the companies relied heavily on a previous Fifth Circuit opinion, Collins v. Mnuchin, which said that the Federal Housing Finance Agency’s organization was unconstitutional because the agency was led by a single director who could only be removed for cause (see Banking and Finance Law Daily, Sept. 9, 2019).

However, he and Judge Higginson rejected the relevance of the Collins decision. Judge Higginbotham noted that the en banc court in Collins had said explicitly that the FHFA and CFPB were sufficiently different that the Bureau was not affected by its Collins ruling. The ability of the FSOC to block regulations adopted by the CFPB restrained the Bureau’s powers in a way that effectively distinguished the Bureau from the FHFA, the Collins opinion said.

Constitutionality. Judge Higginbotham focused on the arguments in favor of the Bureau’s constitutionality. He noted that, under the Constitution, Congress is "the chief architect" of the federal government’s executive branch. Under the Constitution, executive branch officers are established "by Law," which requires an act of Congress. While the president has the power to appoint and remove executive branch officers, it is Congress that creates the offices.

The congressional power to create offices is more clearly defined than the presidential power to remove officers, according to the judge. The removal power either is created by the law that creates an office or is implicit in the president’s power to see that the laws are executed faithfully, while the congressional power to create offices is explicit in the Constitution.

For this reason, "the Supreme Court has, without exception, upheld for-cause protection for officers so long as removal authority remains in the hands of the President or his at-will agents," Judge Higginbotham wrote. Only when Congress attempted to retain removal authority or grant that authority to someone other than the president has the Supreme Court voided a law. In the case of the CFPB director, the president, and only the president, has removal authority.

Limits on judicial activity. Judge Higginbotham also noted that the "inefficiency, neglect of duty, or malfeasance in office" standard is capable of being interpreted broadly. It is possible to consider that "inefficiency" could include a policy disagreement, which would allow the president to remove a CFPB director for implementing or enforcing a policy with which he disagreed. That being the case, it would be better to avoid the constitutional quandary now and wait until an argument over the removal power was more clearly presented, the judge suggested.

Concurring opinion. A brief opinion by Judge Higginson argued that the Fifth Circuit in Collins, as well as other appellate courts, had rejected the constitutional arguments about the Bureau that were being raised by the companies. While the constitutional issue is "both fundamental and contestable," the Collins decision did not require the Bureau to be invalidated.

He added that it would have been preferable to hold the case in abeyance until the Supreme Court reached a decision in Seila Law.

Dissenting opinion. The dissenting opinion by Judge Smith barely avoided crossing the line to becoming a personal attack on the two judges in the majority. He began by asserting that the case had started as a test of the CFPB’s organization but "has deteriorated into a regrettable commentary on another form of power: the asserted prerogative of two judges to abandon en banc precedent they dislike." These judges have decided that "stare decisis is for suckers," he charged.

According to Judge Smith, the effect of the Fifth Circuit’s earlier opinion in Collins was controlling. The discussion of the opinion’s applicability to the CFPB was not relevant, he continued, because the analysis of the Dodd-Frank Act was unnecessary to the required analysis of the Housing and Economic Recovery Act, which created the FHFA. It was dictum.

Even assuming that Collins was not controlling, Judge Smith said the CFPB was unconstitutional. The president’s removal power was too constrained by the Dodd-Frank Act, and FSOC’s oversight power—which applied only to regulations and not enforcement actions or other activities—was not enough to matter, he said.

Judges’ backgrounds. Judge Higginson, who was appointed by President Barack Obama, had dissented from the Collins decision that the FHFA was unconstitutional. Judge Smith, who was appointed by President Ronald Reagan, joined the judges who concluded the FHFA was unconstitutional. Judge Higginbotham did not participate in Collins but decided in favor of the Bureau in this case; like Judge Smith, he was a Reagan appointee.

The case is No. 18-60302.

Attorneys: Lawrence W. Demille-Wagman for the CFPB. Theodore Olson (Gibson, Dunn & Crutcher, L.L.P.) and Michael Verdier Cory, Jr. (Danks, Miller & Cory) for All American Check Cashing, Inc. and Mid-State Finance, Inc.

Companies: All American Check Cashing, Inc.; Mid-State Finance, Inc.

MainStory: TopStory CFPB LouisianaNews MississippiNews TexasNews

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