Banking and Finance Law Daily CFPB's structure is constitutionally permissible
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Tuesday, May 7, 2019

CFPB's structure is constitutionally permissible

By Nicole D. Prysby, J.D.

The CFPB's structure is constitutionally permissible, because the CFPB exercises mostly quasi-legislative and quasi-judicial powers, rather than purely executive powers. Therefore Congress may include the for-cause removal restriction for the CFPB's sole director to ensure that the CFPB maintains independence from the President's control.

The structure of the Consumer Financial Protection Bureau is constitutionally permissible, held the Ninth Circuit Court of Appeals. The court rejected the argument from a law firm that the CFPB's structure violates the Constitution's separation of powers because the agency is headed by a single director who can be removed by the President only for cause. Looking to Supreme Court precedent regarding the constitutionality of the structure of similar entities such as the Federal Trade Commission, the court concluded that similar reasoning applies to the CFPB. It is permissible for Congress to include the for-cause removal restriction as a means of ensuring that the CFPB maintains independence from the President's control, because the CFPB exercises mostly quasi-legislative and quasi-judicial powers, rather than purely executive powers. The court also concluded that the CFPB had statutory authority to issue the CID. It did not violate the Consumer Financial Protection Act's practice of law exclusion because the investigation was pursuant to the Telemarketing Sales Rule, which does not exempt attorneys from its coverage even when they are engaged in providing legal services. The CID also had sufficient detail to put the law firm on notice of the nature of the conduct the CFPB is investigating (CFPB v. Seila Law LLC, May 6, 2019, Watford, P.).

Background. The CFPB issued a CID to Seila Law Firm during its investigation into whether the firm violated the Telemarketing Sales Rule in the course of providing debt-relief services to consumers. The law firm argued that the CFPB is unconstitutionally structured, thereby rendering the CID unlawful. The firm also argued that the CFPB lacked statutory authority to issue the CID.

CFPB's structure is not unconstitutional. The law firm argued that the CFPB's structure violates the Constitution's separation of powers because the agency is headed by a single director who exercises substantial executive power but can be removed by the President only for cause. But the court rejected that argument and concluded that under Supreme Court separation-of powers decisions, the CFPB's structure is constitutionally permissible. In Humphrey's Executor v. U.S., the Court rejected a separation of-powers challenge to the structure of the FTC, an agency similar in character to the CFPB. The Court found that the FTC exercised mostly quasi-legislative and quasi-judicial powers, rather than purely executive powers. Therefore, the for-cause removal restriction was a permissible means of ensuring that the FTC's Commissioners would “maintain an attitude of independence” from the President's control. This reasoning concluded the Ninth Circuit, applies equally to the CFPB. Like the FTC, the CFPB exercises quasi-legislative and quasi-judicial powers, and Congress could therefore seek to ensure that the agency discharges those responsibilities independently of the President's will. More recently, in Free Enterprise Fund v. Public Company Accounting Oversight Board, the Court left undisturbed a for cause removal restriction for Commissioners of the Securities and Exchange Commission. And the Court's decision in Morrison v. Olson seems to preclude drawing a constitutional distinction between multi-member and single-individual leadership structures, since the Court in Morrison upheld a for-cause removal restriction for a prosecutorial entity headed by a single independent counsel.

CFPB had statutory authority to issue CID. Seila Law argued that the CID violates the Consumer Financial Protection Act's practice-of-law exclusion because it requests information related to Seila Law's activities in providing legal services to its clients. But the court held that an exception to the practice of law exclusion applies, because the Telemarketing Sales Rule does not exempt attorneys from its coverage even when they are engaged in providing legal services. The firm also argued that the CID did not comply with requirements to identify the nature of the alleged unlawful conduct, but the court rejected that argument. The CID identifies the allegedly illegal conduct under investigation as follows: “whether debt relief providers, lead generators, or other unnamed persons are engaging in unlawful acts or practices in the advertising, marketing, or sale of debt relief services or products, including but not limited to debt negotiation, debt elimination, debt settlement, and credit counseling” and cited particular statutory and regulatory provisions. Seila Law was therefore on notice of the nature of the conduct the CFPB is investigating.

Reaction to decision from Consumer Bankers Association. Following the decision, the Consumer Bankers Association issued a statement urging Congress to create a bipartisan commission for the CFPB, rather than a sole director, “to ensure the agency is balanced, stable and best prepared to uphold the Bureau's consumer protection mandate for years and decades.”

The case Number is 17-56324.

Attorneys: Kevin E. Friedl for the CFPB. Anthony Bisconti (Bienert Miller & Katzman PLC) for Seila Law LLC.

Companies: Seila Law LLC

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