Republicans have long tried to defang the Consumer Financial Protection Bureau, but a Democratic victor in the presidential race could actually be the first to mount a constitutional challenge to the agency's leadership.
Some lawyers think the Supreme Court will soon hear one of three cases challenging the bureau's constitutionality, all dealing with a president's ability to fire a CFPB director.
Yet even though those cases had initially targeted former Obama-appointed CFPB Director Richard Cordray, a high court ruling making it easier to unseat a CFPB chief could be used to fire current Trump-appointed Director Kathy Kraninger, whose policies are opposed by many Democrats.
“The early attack by Republicans on the agency could lead to the early removal of their first director,” said Joe Lynyak, a partner at Dorsey & Whitney.
Republicans have claimed for years that the CFPB is unconstitutional because it has a single director who does not answer to a board and who can only be fired "for cause," not at will, restricting the president's removal powers.
Many had speculated that President Trump would try to fire Cordray, who still had a year and a half on his term when Trump took office, but the for-cause provision gave the then-CFPB chief job security.
The three cases essentially argue that that provision is unconstitutional. Up to now, no court ruling has eliminated the for-cause standard, and Cordray resigned of his own volition in late 2017 to run for governor in Ohio. But legal observers see signs that the high court is ready to take on the issue.
A Supreme Court ruling that the CFPB's single-director structure is unconstitutional would put Kraninger on shaky ground if Trump loses to the Democratic nominee next year. Former Vice President Joe Biden, Massachusetts Sen. Elizabeth Warren and Vermont Sen. Bernie Sanders currently lead the primary polls.
“It might now come back to bite the Republicans if a Democrat gets elected president,” said Alan Kaplinsky, a partner at Ballard Spahr.
Even if the Supreme Court does not act, a Democratic president could still consider forcing a court challenge by trying to cut short Kraninger's tenure.
As it now stands, an appeals court
In that case, which stemmed from a CFPB enforcement action against the mortgage servicer PHH, the judges said a single director “with a five-year term, subject to removal by the president only for ‘inefficiency, neglect of duty or malfeasance in office,’ is consistent with the president’s constitutional authority.”
PHH did not appeal that ruling and the CFPB ultimately withdrew the enforcement action, but three other cases are moving through the legal system.
A case pending before the 9th U.S. Circuit Court of Appeals involves a California law firm that refused to comply with a CFPB investigative demand. The 5th Circuit appeals court is reviewing a case in which the CFPB alleged All American Check Cashing, a Mississippi payday lender, engaged in abusive and deceptive conduct.
A case in the 2nd Circuit involves CFPB a suit against a New Jersey cash advance firm accused of making high-cost loans to 9/11 first responders and pro football players diagnosed with brain injuries.
Legal observers have also speculated that a fourth case not involving the CFPB could have some bearing on the agency's director. Last week, the 5th Circuit ruled that the single-director structure of the Federal Housing Finance Agency was unconstitutional, which could further compel the Supreme Court to look at the issue.
Even though Biden currently leads the Democratic field, some view Warren and Sanders, representing the party's progressive flank, as more likely to use a high court ruling to target Kraninger if they were to become president.
“If [the Supreme Court] concludes that the president can remove the [CFPB] director without cause, why would Warren or Sanders take the more controversial position of removing her for cause?” said Christopher Willis, a partner and practice leader at Ballard Spahr.
Yet complicating the issue is that Democrats, especially Warren as the architect of the agency, have long supported the bureau's independence, and so may be less likely to intervene. They may ultimately want the for-cause provision to be preserved.
A Democratic president could also view a benefit in allowing Kraninger to complete her five-year term, ending in 2023. If elected, that president could nominate a successor to remain in place even after a Republican won the White House in 2024.
Currently, there is somewhat of a divide in the Trump administration about the for-cause provision. The CFPB has argued in court that the bureau is constitutional, but the Department of Justice has taken the opposite view. Dodd-Frank provides that the Justice Department gets to represent the CFPB before the Supreme Court.
The Justice Department has sought a Supreme Court review of the 9th Circuit ruling that the CFPB’s “for cause” provision is constitutional. There has been no request from the CFPB to represent itself in the case.
Some lawyers believe a Democratic administration could end up arguing on the same side as the Trump administration, or even try to fire Kraninger immediately on the basis that there is cause.
A Democratic president “would not need a Supreme Court decision for that to happen,” Willis said.
But if Warren became president, a decision to fire Kraninger might be tough to defend. As the CFPB's original architect, the Massachusetts senator has always advocated for the bureau's independence.
“The Democrats have shown themselves to be remarkably attached to the ‘for cause’ provision," said Willis. "They have been insistent to not undo it.”
In fact, the CFPB director’s five-year term was intentionally staggered to not coincide with presidential terms and thereby ensure the agency was divorced from executive control. The bureau also is funded from the Treasury Department, rather than through appropriations, to make it independent of the White House, another long-time complaint of Republicans.
“Who gets to sit in this job is important,” said Jeff Naimon, a partner at the law firm Buckley. “When Trump got into office everyone thought he would try to fire Cordray. And then he didn’t and he didn’t and he didn’t. Even Elizabeth Warren, who was the driving force behind the agency’s creation, might think the smart thing to do would be to wait out Kraninger’s term, depending on her administration’s priorities.”
Others believe partisan politics will simply motivate a more forceful action by a Democratic administration.
“If a Democrat wins, they are going to say we need to take this agency back immediately — and they will,” said Lynyak. “Unfortunately, then we’re going to have this pendulum swinging radically again, instead of having some stability.”
Scott Pearson, a partner at the law firm Manatt, agreed that "there could be the potential for pretty wide swings in policy from administration to administration.”
“That is one of the reasons why people said there should be a [CFPB] commission,” he said.
