The Trump Administration’s Justice Department recently urged the U.S. Supreme Court to reject a case, State National Bank of Big Spring v. Mnuchin, challenging the Consumer Financial Protection Bureau’s (CFPB) independent powers, as Justice Brett Kavanaugh would be forced to recuse himself.
The Justice Department said it agrees with the bank’s argument that the restriction on the President’s power to remove the bureau’s director violates the Constitution’s separation of powers, writes National Law Journal’s Marcia Coyle.
However, that issue should be decided by the full court, and that is unlikely in the State National Bank case, as Kavanaugh—a zealous critic of the Bureau, established by the Dodd-Frank Act of 2010 to combat bank fraud—would have to recuse himself, wrote acting Solicitor General, Jeffrey Wall.
In September, 2018, a petition for certiorari was filed in the Supreme Court by State National Bank of Big Spring.
“Kavanaugh would have to recuse [himself] based on his earlier participation in the case in the U.S. Court of Appeals for the D.C. Circuit, where he wrote a panel opinion reviving the bank’s challenge to the consumer bureau,” Coyle reports.
“The case lost its constitutional challenge in August, when the D.C. Circuit applied its January en banc decision in the New Jersey mortgage company’s 2016 anti-kickback case, PHH v. Consumer Financial Protection Bureau, “Coyle writes.
PHH held that the Bureau’s structure is constitutional, overruling an earlier decision that would have permitted the President to replace the Bureau’s director.
“In PHH Corp. v. CFPB, decided en banc by the DC Circuit in January 2018, the court cited the 1935 case, Humphrey’s Executor v. United States, which allows the CFPB to draw funding from the Federal Reserve, to affirm the constitutionality of the Bureau’s independent structure,” Ballotpedia reports.
Specifically, Ballotpedia writes, the D.C. Circuit majority relied on history and precedent to uphold limits to the removal power the president wields over the head of the CFPB.
The 7-3 decision stated:
“We granted en banc review to consider whether the federal statute providing the Director of the Consumer Financial Protection Bureau (CFPB) with a five-year term in office, subject to removal by the President only for ‘inefficiency, neglect of duty, or malfeasance in office,’ is consistent with Article II of the Constitution, which vests executive power ‘in a President of the United States of America’ charged to ‘take Care that the Laws be faithfully executed’. “Congress established the independent CFPB to curb fraud and promote transparency in consumer loans, home mortgages, personal credit cards, and retail banking. “The Supreme Court eighty years ago sustained the constitutionality of the independent Federal Trade Commission, a consumer protection financial regulator with powers analogous to those of the CFPB. Humphrey’s Executor v. United States, 295 U.S. 602 (1935). In doing so, the Court approved the very means of independence Congress used here: protection of agency leadership from at-will removal by the President. “The Court has since reaffirmed and built on that precedent, and Congress has embraced and relied on it in designing independent agencies. “We follow that precedent here to hold that the parallel provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act shielding the Director of the CFPB from removal without cause is consistent with Article II,” the D.C. Circuit states.”
Circuit Judge Tatel, in concurrence, summarized the decision, Ballotpedia writes.
“PHH is free to ask the Supreme Court to revisit Humphrey’s Executor and Morrison, but that argument has no truck in a circuit court of appeals.”
Headless Fourth Branch of Government
Kavanaugh, in his dissent in PHH, called CFPB “a headless fourth branch of the U.S. Government.”
He wrote, the Bureau holds “enormous power over the economic and social life of the United States.
“Because of their massive power and the absence of presidential supervision and direction, independent agencies pose a significant threat to individual liberty and to the constitutional system of separation of powers and checks and balances.”
Kavanaugh and two other dissenters found the Bureau’s structure and power ‘novel’ even among independent agencies, arguing for striking the for-cause removal provision or even invalidating all of the Dodd-Frank Act, which created the Bureau.
Separation of Powers and Fixed Funding Stream
In the High Court, State National Bank poses three questions: whether the restriction on the president’s power to remove the CFPB director only for ‘inefficiency, neglect or duty, or malfeasance in office’ violates the separation of powers; whether [the 1935 case] Humphrey’s Executor v. United States, upholding removal for cause of heads of independent agencies should be overruled; and whether the constitution allows the CFPB to draw funding from other independent agencies, “The National Law Journal’s Marcia Coyle writes.
The CFPB is funded by the Federal Reserve, not by Congress. Kavanaugh has argued that the fixed funding stream for the CFPB violates the separation of powers.
A ruling striking down the Bureau might require major changes for the structure of the CFPB and other independent agencies that Congress might create. A ruling in favor of State National Bank of Big Spring might also strengthen the removal power of the President.
Three other challenges to the CFPB pending in Federal appeals courts make it likely that a challenge to the CFPB could be heard by the Court in the near future, Coyle reports.
Trump’s Solicitor General, Jeffrey Wall, urged the Supreme Court to consider: CFPB v. RD Legal Funding (Second Circuit); CFPB v. All American Cash Checking (Fifth Circuit) and CFPB v. Seila Law (Ninth Circuit).
Kraninger Replaces Mulvaney, Who Assumes Chief of Staff Position
Kathleen Kraninger confirmed by the Senate in December as the new CFPB director, replacing Mick Mulvaney, could decide to continue defending the Bureau. In that case, The Justice Department would file an amicus brief defending the D.C. Circuit’s decision, the National Law Journal’s Coyle writes.
After Obama appointee, Richard Cordray, left as CFPB Director in November, 2017, to run a losing battle for Ohio Governor, Trump installed OMB Director and former Congressman, Mick Mulvaney, who opposed the CFPB’s existence.
The major restrictions on the Bureau imposed by Mulvaney are challenges facing the CFPB’s new director, Kraninger, who on December 12, began her five-year term leading the agency, writes Barbara S. Mishkin in the National Law Review.