Kraninger’s stance on CFPB constitutionality puts rules in limbo

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By declaring that the Consumer Financial Protection Bureau is unconstitutional, CFPB Director Kathy Kraninger has potentially opened a floodgate of litigation against the agency.

Last month, Kraninger sided with the Department of Justice in urging the Supreme Court to accept a case challenging the CFPB’s constitutionality.

Kraninger's stance has led to confusion about the agency’s past and future actions. At least one federal judge so far has delayed pending litigation until the Supreme Court weighs in.

“Not only does this raise the validity of all enforcement actions, but all regulations that have been issued and all penalties assessed, perhaps with the exception of settlement agreements,” said Joe Lynyak, a partner at Dorsey & Whitney.

The Supreme Court could decide as early as this month — when it announces its docket for the upcoming term —whether to take a case in which Selia Law, a California law firm, claims it doesn't have to respond to a CFPB civil investigative demand because the bureau’s single-director structure is unconstitutional.

If the Supreme Court takes the case, a potential decision could come as early as next summer, before the presidential election. Meanwhile, the single-director structure of the Federal Housing Finance Agency is also being challenged by Fannie Mae and Freddie Mac shareholders, who want the high court to take their case.

Under current law, a CFPB director cannot be fired by a president unless it is "for cause." But critics of the agency say that provision is unconstitutional and gives a CFPB chief, who does not answer to a board or commission, too much power.

Kraninger wrote to congressional leaders last month that the agency "should adopt the Department of Justice’s view that the for-cause removal provision is unconstitutional."

“A Supreme Court decision holding that the for-cause removal provision is unconstitutional should not affect the Bureau’s ability to carry out its important mission,” she said.

But regulated companies have seen Kraninger’s latest response to the constitutionality question as an open invitation to challenge the bureau’s authority.

Less than a week after Kraninger's letter, which she echoed in a memo to CFPB staff, a judge for the U.S. District Court for the Eastern District of New York put on hold a lawsuit against a New York debt collection law firm until the Supreme Court decides whether to take the Selia case.

The judge agreed to hold off without hearing the merits of the underlying case, said Joann Needleman, a partner at Clark Hill PLC. She represents Forster & Garbus, the law firm being sued by the CFPB.

“If Kraninger signed off on a civil investigative demand or enforcement action, and she’s now saying the structure of the agency is unconstitutional, how can those actions be valid?" Needleman said. "The logical conclusion is, if the power vested in the director is unconstitutional, then anything that stems from those powers is null and void because that power was unchecked."

Republicans have long claimed that because the CFPB's director can only be fired “for cause,” the agency represents an infringement on the president’s executive authority. Under the Dodd-Frank Act, the CFPB’s director can only be fired for “inefficiency, neglect of duty, or malfeasance in office."

Kraninger told congressional leaders and CFPB staff Sept. 17 that a Supreme Court ruling resolving the question would help reduce litigation against the bureau.

“Litigation over this question has caused significant delays to some of our enforcement and regulatory actions,” Kraninger wrote in the internal email to staff. “I believe this dynamic will not change until the constitutional question is resolved either by Congress or the Supreme Court.”

She also sought to address what would happen with pending cases.

“I have also directed the Bureau’s attorneys to refrain from defending the for-cause removal provision in the lower courts, and I have notified Congress of my decision," she wrote. "Both today and in the years ahead, our attorneys will continue defending the rest of the [Consumer Financial Protection Act]—and defending the Bureau’s actions past, present and future.”

In the past few years, several agencies, including the National Labor Relations Board and the Public Accounting Oversight Board, have been on the receiving end of constitutional and statutory challenges to their structure and legality.

Yet the courts and federal agencies have been able to resolve the status of past rules in regards to those legal questions without major problems, meaning an agency’s past actions typically remain in place.

“This is potentially much ado about nothing here," said Joseph Reilly, a senior counsel at McGuireWoods LLP. "But what does happen is, in the interim, there’s a lot of uncertainty."

Supreme Court Justice Brett Kavanaugh was a judge on the U.S. Appeals Court for the D.C. Circuit when he ruled that the remedy for an unconstitutional provision should not be a major shock to an agency’s operations.

In the most famous case so far challenging the CFPB’s constitutionality, CFPB v. PHH Corp., Kavanaugh ruled that Dodd-Frank and its CFPB-related provisions would remain “fully operative as a law” if the for-cause provision were removed.

“Part of Kavanaugh’s opinion explains that when agencies have been found to be structured unconstitutionally, the impact on pending matters has been relatively light,” Reilly said.

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