New Challenge to the Constitutionality of the CFPB

Financial Services & E-Commerce Practice Group and Regulatory Transparency Project Teleforum

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Recently the State National Bank of Big Spring filed a petition for certiorari seeking Supreme Court review of the D.C. Circuit's decision in June that affirmed the constitutionality of the CFPB. The case had been held in aveyance on the district court level until the decision in PHH v. CFPB, in which an en banc panel for the D.C. Circuit held that the structure of the CFPB was indeed constitutional. The District Court subsequently ruled against Big Spring, and after an appeal, the district court's ruling was upheld by the D.C. Circuit in June. 

Big Spring is urging the Court to take the case due to a recent decision from the Fifth Circuit in Collins v. Mnuchinin which the circuit held that the structure of the Federal Housing Finance Agency is unconstitutionally insulated from Executive Branch oversight. Big Springs argues that the similar structures at the FHFA and CFPB, and the two conflicting decisions result in a circuit split that the Supreme Court should resolve. 

The Honorable C. Boyden Gray joins us to discuss various aspects of this latest challenge to the constitutionality of the CFPB. 


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Event Transcript

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Financial Services & E-Commerce Practice Group, was recorded on Monday, September 24, 2018, during a live teleforum conference call held exclusively for Federalist Society members.  


Dean Reuter:  Welcome to the Practice Group teleforum conference call as today we discuss ongoing litigation challenging the constitutionality of the CFPB, also now known as the BCFP. I'm Dean Reuter, Vice President, General Counsel, and Director of Practice Groups here at The Federalist Society. We're very pleased to welcome return guest Boyden Gray, that's the Honorable C. Boyden Gray. He's the founding partner of Boyden Gray & Associates here in Washington D.C., and among other things, a long list of former titles, Former White House Counsel. He's going to give us some background and then discuss one of these challenges, and maybe talk about a handful of others as well.


      Opening remarks of 15 minutes or so, but then, as always, we'll be looking to the audience for questions, so do have those in mind for when we get to that portion of the program. With that, Boyden Gray, the floor is yours.


Hon. Boyden Gray:  Okay. Well, thank you. It's always fun to do these podcasts as we get the reaction of the listeners to the issues that are presented. I'm going to talk about, narrowly talk about for narrow purposes, just CFPB case in which a cert petition has been filed, and we'll go into what's at issue there. But just let me frame this by saying that in the background is potential for quite a lot of activity in the courts, especially in the Supreme Court, around the question of agency independence for financial regulatory agencies, an issue we didn't get into back in the early Reagan years because the finance part of the economy was relatively small, and today it's huge, grown enormously.


      And so that's one set of issues is how do we regulate the financial sector going forward in the future. Do we do it with the kind of independence that it's always had in the past, given its now huge importance? And the second issue is familiar, I think, to a lot of people, certainly as an abstract problem. What do we do about the questions of Chevron deference, which effects all agencies, not just financial, but the FDA, EPA, you name it. That's also in the background of this one cert petition.


      So let me give a little more detail about the cert petition and what's going on. The Dodd-Frank Act, designed to correct states that arguably or allegedly lead to the recession in 2008, didn't actually deal with the cause of the recession, didn't actually deal with the mortgage problem, sort of ducked it, ducked Fannie Mae and Freddie Mac completely, but it did contain a lot of changes, and it had a section, Title 10, which created Elizabeth Warren's dream world of a consumer protection agency that had absolutely no separation of powers accountability at all. That is, it was not given proper oversight by the executive branch, only removal for cause, the director had a term longer than the President, no accountability to Congress because funding came from the Federal Reserve Board.


      One of the things that always amused me with the answer that the first director gave -- he was required to testify, even though he didn't have to do anything with respect to what Congress asked him, and he was asked, "Well, who is in charge of this very, very expensive $200 million plus renovation of their headquarters when they first set up shop?" And his answer to the chairman of the finance subcommittee, or the investigation subcommittee of the House Finance Committee was, "What does it matter to you?" That was his somewhat contemptuous answer to her perfectly legitimate question.


      And then when it comes to court review, Chevron comes into play to give CFPB the right to dictate the interpretation of 18 different statutes that it's given authority to take under its umbrella. And so that really gave it a sort of a difficult to understand, perhaps, difficult to accept, perhaps, but nevertheless, true ability to overrule the president of the United States. That is, if the President had told or directed an agency accountable to it, like the offices in control of the currency, for example, to come out in a certain way on a matter of consumer credit, the CFPB could overrule the OCC in a subsequent proceeding involving much the same issue, thereby, in effect, overruling the president of the United States.


      And that's one of the things that Kavanaugh points out in his opinions in this case -- in a sister case, not our case, but a sister case, which I'll get to in a second. So the structure of the CFPB is, again, just to summarize, no removal except for cause, so the executive branch is compromised, the President's compromised in his ability to direct what it does. It's freed of any review by ONB and doesn't have to submit to its rules to ONB for clearance or its budget, which, of course, it gets from the feds. So Congress gets no oversight authority and the courts are directed to accept the CFPB determination if there's any ambiguity at all in the statue it is construing. That's a pretty independent agency, far more than Humphrey's Executor could contemplate it, I think, or even Morrison v. Olson, the famous independent counsel case.


      Our case got held up initially by the district court judge, being a Clinton appointee as I understand it, saying we had no standing. And who are we? We were National Bank of Big Springs, Texas. Now some in the audience may wonder who in the hell -- where in the hell is Big Springs? Well, it's a small community, and it's a small bank, 170, $200 million asset bank. And the complaint was that it couldn't afford legal help to help it understand exactly what the rules were that affected it coming out of the OCC and other agencies. And that was grounds for standing. We said, the district court said, "What's your problem? Just read the federal register, for heaven sakes." And, of course, that would mean no one would ever have standing to appeal any ruling of any federal agency. The D.C. Circuit made short shrift of that argument and sent it back to the district court, saying, "Please get to the merits as soon as you can. Stop fooling around."


      In the interim, another case had come up on direct appeal to the D.C. Circuit without having to go to district court because it was a ruling and not a pre-enforcement ruling the way ours was, but an appeal of a ruling of the CFPB called the PHH case. They've gotten their relief, but in the -- administrative relief, but in the litigation that ensued, the panel ruled in favor of PHH making the same arguments we were making in the district court, and Kavanaugh wrote an opinion, as did Judge Henderson. Kavanaugh wrote an opinion saying the removal for cause, given the power of this agency, was unconstitutional, and perhaps a different result if you have a multi-member agency, but to have just one man or one woman in charge was a bridge too far. Judge Henderson wrote a concurring opinion saying, "No, you have to take into account also the funding aspects. That's also at stake here." And so that's what stood.


      Then CFPB took the case to en banc review where Kavanaugh was reversed, giving PHH a loss on the constitutional arguments, but a win on their administrative law claim. Kavanaugh wrote a very well-reasoned dissent. So that's where PHH case stands, where the ruling stands. It's a ruling of the D.C. Circuit against opposition that the CFPB is unconstitutional or, to put it another way, it's a ruling that the CFPB is indeed constitutional; not surprising, I guess, with the current makeup of the D.C. Circuit.


      Meanwhile, there is in the Fifth Circuit a contrary decision involving another agency, the FHFA, Federal Housing Finance Agency, a different agency, but the same basic arguments about removability of congressional authority, or lack thereof. And there the Fifth Circuit ruled that the FHFA is unconstitutional for the various reasons that Kavanaugh himself argued in connection with the CFPB. So we are now seeking -- that case is on en banc review, and so not pending at the Supreme Court, but we in the CFPB case, having gotten the D.C. Circuit to say that -- to apply to its ruling -- in the en banc case involving PHH. In our case, we are now seeking cert to review these various questions, and we're sort of by ourselves. There's nobody else there with us.


      And one of the problems that we are facing is the fact that Kavanaugh has ruled on these issues, not the precise case, not the precise same issues, but very, very close, has already ruled or written two opinions, once at the panel level, once at the en banc review level. And so it's very likely he'll have to recuse himself. It's not certain. I don't think he has to, but I would bet that he would. And that may militate against getting cert. There is a possibility, more hope, I guess, than prediction on my part, that someone like Justice Breyer, maybe Justice Kagan, would realize that there are enough issues bouncing around here that this case ought to be heard, even if Kavanaugh is confirmed and a likely recusal on cert, or on the merits.


      And the reason why I mention Justice Breyer, is he dissented in the Peekaboo case, the PCAOB SEC case, he dissented and said removal protection was okay in that case, that was not unconstitutional, did not breach the President's authority because there were so many other ways in which the President could affect the outcome of a case coming out of PCAOB that this was not so serious a derogation of the President's authority since he had so much authority elsewhere in the statutes.


      And one of the things that one realizes is that it is accounting of all of the other constraints that the President can bring to bear in this so-called independent agency context are simply wiped out in the structure of the CFPB. It's as though the authors of Dodd-Frank in writing the statute, Elizabeth Warren in writing Title 10, took his dissent in the Peekaboo case and took all of the presidential possibilities of intervention or having effect and eliminated them. So there's an argument that finding a way to bless the removal for cause restriction, he has boxed himself in, Breyer has, as to an understanding that all of the other things, all of the other protections that he recognizes in PCAOB are missing, completely wiped out in the CFPB structure. That’s sort of a difficult argument maybe to make, but it's a glimmer of hope because he's not an unsophisticated regulatory expert, and I think we'd see how loaded this particular case is.


      That's where our case stands. Will it get cert? Really hard to believe it will get cert because it depends on, of course, what happens later this week, and next week, and beyond with Judge Kavanaugh, but it's likely not to get cert, or to be held for the arrival of one of these other cases that are bubbling up from beneath. There's also a case in the Southern District of New York still further back, not yet, I think, not yet appealed to the Second Circuit ruling the same way as the Fifth Circuit. That is to say, the same way we would seek, which is to say that this combination of presidential exclusion, congressional exclusion, court direction is in combination unconstitutional, and there's no way to save it. You have to send it back -- you have to wipe the whole thing out and send it back to Congress to start all over again. Now that's a district court ruling in New York, and it's years away, I guess, possibly, from Supreme Court review, but I do believe that sooner or later the Supreme Court is going to take these issues and is going to decide them.


      We can get into a discussion if you want -- if the questioners want -- about the two issues I mentioned at the very beginning, whether financial agencies should have this kind of freedom from oversight and whether Chevron deference should be maintained because it gives the executive branch agency so much -- and independent agency -- so much authority to the point where Congress is now decidedly playing a second fiddle role, and that's got to stop. And I think it's because Congress had abdicated its role on a lot of things, not just I, a lot of people think.


      There may need to be a revival, not having to reverse anything, but a revival of the nondelegation doctrine, not necessarily to knock out statutes, but to have a stronger emphasis on the so-called nondelegation cannon of construction where the Court construes the language very, very narrowly so as to limit the breadth of the delegation to the executive branch. And the Court has taken one case already called Grundy. This is going to be one of the first cases argued this term having to do with sex offender legislation. It's actually not a regulatory case of the kind people are normally accustomed to when they think of Chevron, or they think of nondelegation, but it is a good case to start with. This is not -- in that case, if the case there does not present a nondelegation issue, you begin to wonder what could in today's world.


      So I think the Court will get into these issues, the larger issues, just not limited to the CFPB. They will begin to get into these broader issues and I think it's going to be a new frontier in the law. It's going to be a new wave of creativity. I don't know that you would call it activist because many of these issues have been bouncing around for years, just not completely resolved, and I don't think lawmaking, necessarily. It's law-clarifying though, for certain. So I've talked longer than I meant to, but not over the 20-minute limit anyway, so I'd be happy to answer questions if people have any.


Dean Reuter:  Terrific. Thank you so much. We're speaking with Boyden Gray. Let's open the floor to questions. I will get things started. There are no questions pending just yet, but I understand, I guess today is the long conference of the Court, so was your -- if you know, was your cert petition submitted in a time that it would be considered for the first time today?


Hon. Boyden Gray:  Not today, no.


Dean Reuter:  Okay. So some time in the future.


Hon. Boyden Gray:  That was a little bit deliberate, I think, on our part, I think, because we didn't want it in the long conference. We thought we'd have a better chance in a less crowded field, but we'll see.


Dean Reuter:  Yeah, interesting. I've got just one question pending, so let's check in with our first caller of the day.


Warren Belmar:  Good morning, Boyden. It's Warren Belmar calling, and thank you for all you're doing in this area and every area. I had a question concerning legislative involvement. Is any of the legislation pending right now out of the Financial Services Committee in the House going to moot out any of these issues, or was Congress unable to reach them in trying to reach a compromise on legislation?


Hon. Boyden Gray:  I don't think there'll be legislation here for a while, I really don't, either specific to the -- or generally with respect to a broad look at reg reform like the REINS Act which would require congressional approval of rules before they became effective, or other Acts that would extend cost benefit analysis, for example, to independent agencies. I think -- I just don't think those things are going to happen unless and until the courts begin to sort of chastise Congress, if you will, in a polite way. And I think it will take the courts to stir the Congress into taking over the responsibility for saying what the law, depending on what the law is, rather than simply leaving ambiguities for the federal agencies to clarify.


Warren Belmar:  Thank you.


Dean Reuter:  Let me ask you a question about the way the cert petition is sort of couched and really what sort of work we're asking the Supreme Court to do here. How difficult is it to make sort of a totality of the circumstances argument where you're -- it feels to me like a kitchen sink approach because the CFPB is so broadly powerful, and so many sort of axiomatic separation of powers issues have been raised, whether it's the funding or the oversight, or the removal, or a single director versus a commission, the sort of stripping of judicial review. It feels to me like almost any one of those alone could be enough to give the Court reason to look at this carefully. Do you focus on one, or do you make sort of the totality of the circumstances argument? How does that work?


Hon. Boyden Gray:  Well, our argument is a totality of the circumstances. It's the whole mosaic, if you will, a combination of all three branches being, in a sense, nullified in terms of their oversight capacity. So there are cases, well known cases, which approve one aspect or another, but not the combination that we're alleging here. There are cases which have long okayed financial agencies, for example, allowing them to take money from, well, their own regulated industry to fund their operation. There are other cases, of course, where you have removal questions, but Congress is still in charge of funding and therefore has the power of the purse. And then, of course, there are cases where the courts distinguish certain situations or application of Chevron, and other cases, big issue cases, for example, where Chevron doesn't apply.


      So there are rulings that okay various aspects of the separation of powers review capacity, but very few cases, if any, where an agency combines all of these -- well, one agency combines all of these defects in one place. So that's why CFPB is unusual, but I think what will happen once the Court gets into it is that it will begin to look at the structural problems created by the combination of nondelegation and Chevron and go beyond just the question of the removal of authority or the authority of Congress over the purse, over appropriations. I think it's going to move beyond that and get into the larger questions of who's really in charge here, these mega agencies that could take an ambiguity, stretch it into authority Congress never probably ever intended to grant, and are they going to force Congress, or at least give a little kick to Congress, and say look, it's time for you to get back into the game and provide some specificity.


      I use this -- maybe it's wrong since I was involved, and I should say, that I'm not the only lawyer involved here. We've got CEI involved, Sam Kazman, who's the general counsel who is also co-counsel, and then Greg Jacob at O'Melveny & Myers, deeply involved. So I have colleagues. I'm not alone in this, but I am alone, I think, in having seen a statue, 1990 Clean Air Act amendments, where I was deeply involved when I was in the White House where the details were not punted to an aide. John Dingle, God bless him, he never would delegate anything he didn't have to to the Environmental Protection Agency. He didn't trust them, and he put the numbers in the statute; grants per mile, tons coming out of a smokestack in a utility, all that stuff was spelled out in the statute, amazing when you look back at it. The statute wasn't that many pages. It was all done very tersely, but it was done with great specificity.


      And I know Congress is capable of doing it. They just have gotten out of the habit and gotten quite used to letting the agencies do all the work. I think they enjoy inviting back door corrections to what they've done in not providing clear guidance, and they probably welcome the campaign contributions that come with requests from the regulated industry to see if they can get special favors from congressional intervention, back door, quietly, without any transparency.


      And that's one of the factors that may be at play here. I don't know. And there are lots of different theories running around, and many of them may all be operating in unison to create the situation where Congress has just simply ducked its responsibility, but we do live in a representative republic, and the congressional representatives of the people really do have an obligation to declare what the law is supposed to be when they pass it.


Dean Reuter:  I'm going to return, if we could, to the case you mentioned, the Southern District of New York. If I heard you right, I understood the Court basically said the statute can't be saved. In other words, the issues you mentioned, the separation of powers issues that you've mentioned are so thorny that the Court can't find a way to save the statute. What are the circumstances under which there'd be a nationwide injunction? I mean, if a district court finds an agency action infirm or unconstitutional, it can issue a nationwide injunction, and it has, famously; different district courts have, but there's no nationwide injunction here, I take it, or there's been a stay of the Court's action during the pendency of an appeal. What are the standards there? This is a little off topic maybe, but…


Hon. Boyden Gray:  Yeah, I don't think that, well, the Southern District is pretty sophisticated with these kinds of issues, and I really don't think that they would -- they don't have to go because they've been on top of a big hunk of the financial world, so they don't have to issue a nationwide injunction together to affect the biggest part of the financial industry. So they don't have to do it. I don't think they would do it. I think there is a stay here, but I'm not sure. I'd have to check.


Dean Reuter:  Interesting. I'll ask one final question. You mentioned -- well, let me just let our listeners know that you mentioned the Gundy case, a nondelegation case that's being argued next week, actually, in the Court, and we're going to preview that case in a teleforum on Thursday at 2 p.m. Eastern time at this same number for people who are interested.


      Let me ask you a question, if I could, and it calls for speculation on your part, but what's your sense of the appetite of the Court as it's currently composed for visiting the big issues? This, I think, would count as one of the big issues, and I'd count among them Chevron and auer deference and separation of powers as in this case, nondelegation as in the Gundy case. Is the court really indicating an appetite to revisit these issues, stare decisis even?


Hon. Boyden Gray:  Well, I think so. And what evidence do I have? I may have mentioned a couple of points at the outset, but I think that Justice Thomas has written three -- I won't go into detail, but he has written three important dissents where he's put nondelegation and Chevron up front as major issues to consider. And that has galvanized a lot of action.


      You have, of course, the addition of confirmation of Justice Gorsuch, who wrote about this topic quite a bit on his appellate court. And he gave a very, very candid and powerful speech about this set of issues to The Federalist Society last year at your annual conference in which he said, "We all thought that it was beyond the Court's ability to roll back some of the grants of authority, such as on breadth and stretch of the commerce laws, be we've rolled some of that back. And when it comes to nondelegation, there's no reason in the world to think that we can't do the same thing with respect to nondelegation and revisit Schechter and Panama Refining to see if there's a way to hold Congress a little more accountable." So I think, I mean, it was a very candid speech, and so I think he's ready. The fact that Gundy was granted was, I think, a very positive sign for this.


      And then Chief Justice Roberts, of course, wrote a very powerful sort of anti-regulatory, if you will, but broadly speaking, this dissent in the City of Arlington case. So I think the Court's ready to do this. And even on the so-called left of center side of things, if you look at Justice Breyer and Justice Kagan, she's -- Justice Kagan's written a lot about presidential authority. She's spent a lot of time, of course, with it. She was in the White House Counsel's Office; she's very familiar with it. And Justice Breyer was primarily an anti-trust lawyer and professor at Harvard, but he was also an administrative law expert and co-authored a famous textbook with Dick Stewart who was then at Harvard, now at NYU Law School. So I think he's ready to address some of these issues, too. He may come out differently than, say, Gorsuch does, or Thomas does, but I think there's going to be a very rich dialogue among the Justices on these cases.


      And I think Breyer, for example -- I don't know why I keep coming back to him -- but he was a regulatory expert. He was a regulatory expert when he was in the private sector at Harvard and kept his interest up in the first -- when he was still appellate judge. Once he got to the Supreme Court, of course, he had to stop. And I think he has always, because I run into him occasionally, I think he retains an intense interest in regulatory issues and kind of wishes he could get back into them, and I think he's going to have an opportunity to.


Dean Reuter:  Interesting. Well, these are interesting matters, and I guess we'll see the fate of this case and the Fifth Circuit and Southern District of New York cases as time progresses. I want to thank you, Ambassador Gray, for joining us today. It's certainly enlightening. I want to thank the audience as well for dialing in and remind the audience to monitor The Federalist Society's website and check your emails for announcements of upcoming teleforum conference calls, but until that next call, we are adjourned. Thank you very much, everyone.


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