Supreme Court Denies Review of Constitutional Challenge to CFPB

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On Jan. 14 the Supreme Court denied the cert petition in State National Bank of Big Spring v. Mnuchin, No. 18-307, which challenged the structure of the Consumer Financial Protection Bureau.  At issue was the validity of two key CFPB features—a single director whom the President could remove only for cause, and funding that was independent of congressional appropriations. The bank had been joined in its challenge by the Competitive Enterprise Institute, which coordinated the lawsuit, and the 60 Plus Association.  When the case was first filed in 2012, eleven states joined it in a broad challenge to Dodd Frank.  After the plaintiffs were dismissed by the district court for lack of standing, the bank’s case was reinstated in a D.C. Circuit decision written by then-circuit judge Kavanaugh—a fact which likely led to his recusal from consideration of the cert petition. 


Sam Kazman, General Counsel, Competitive Enterprise Institute



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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 Litigation Practice Group, was recorded on Monday, January 28, 2019 during a live teleforum conference call held exclusively for Federalist Society members.          


Wesley Hodges:  Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is "The Supreme Court Denies Review of Constitutional Challenge to CFPB." My name is Wesley Hodges, and I'm the Associate Director of Practice Groups at The Federalist Society.


As always, please note that all expressions of opinion are those of the expert on today's call.


Today we are very fortunate to have with us Mr. Sam Kazman, who is the General Counsel at the Competitive Enterprise Institute. After our speaker gives his remarks today, we will move to an audience Q&A, so please keep in mind what questions you have for him or for this case. Thank you very much for sharing with us today, Sam. The floor is yours.


Sam Kazman:   Thank you and let me welcome you all to this podcast. So it was two weeks ago today that the Supreme Court turned down the case State National Bank of Big Spring, Texas, which involved a constitutional challenge to the CFPB, the Consumer Finance Protection Bureau. It's a case in which CEI, itself, has been involved since the very onset – actually, before that. And I guess let me just say a few brief words about CEI. That's my organization. We're the Competitive Enterprise Institute. We've been around since 1984 doing our best to oppose overregulation in various aspects of the economy and scientific and technological fields.


And we first started to get involved in this case in the wake of the enactment of the Dodd-Frank Act back in 2010, which for those of you familiar with it, was one massive enactment. By some estimates, it would kick off, and it had already started to kick off, about 400 separate rulemaking proceedings. And among its other effects was the creation of the CFPB – Consumer Finance Protection Bureau, which had massive powers over financial and economic activities, consumer purchasing, and so forth. Many of those powers stem from a consolidation of other consumer finance laws that various agencies had been implementing. They were all now put under CFPB jurisdiction. And there were several very unique aspects of the CFPB. One was that it was an independent agency, but unlike most independent agencies which have multi-member bodies, CFPB was headed by a single person. That person's term was longer than the President's. And that person could only be removed by the President for-cause. It was not an at-will situation at all.


Secondly, and I guess in a way just as serious, was the fact that the CFPB drew its funding, not from Congressional appropriations but from the Federal Reserve. It was actually housed in the Federal Reserve, and it could, in a sense, receive on-demand funding for up to, I think, a 10 percent of the Federal Reserve's budget.


So right at the outset, you had two very major elements of constitutional checks and balances from which the CFPB was centrally exempt. We thought this was an incredibly dangerous situation. And in terms of getting this case started, we'd initially gone to several financial institutions, large ones, asking whether they might be interested in getting together on a challenge to this law. And we were uniformly turned down. Well, we thought we understood that. I mean, after all, it's quite a risk for an individual institution, a large bank and so on, to put its neck on the line in this manner. So instead, we went to trade associations because after all, trade associations had actually been formed long ago as a way to do things that individual members, individual industry members, might be reluctant to do, and in a sense, offer them some protection. And yet, once again we were uniformly turned down in terms of finding any trade association that might have an interest in taking on a challenge.


We finally did luck out. We came across this bank in the town of Big Spring, Texas. It was all of $300 million in assets at the time we approached them. And they were willing to take on this case. Their board thought that there were some serious problems here, and they realized that the Bureau's regulations might spell some very big trouble for them. In fact, one of the things they soon had to do as a result of CFPB regulations was to get out of the home mortgage business.


So they became our primary plaintiff. CEI joined the lawsuit as well together with the 60 Plus Association, which is a conservative seniors' group. We filed our compliant back in 2012, June of 2012. Shortly thereafter, we were joined by three states and we expanded the complaint to go after not just CFPB, but the Financial Stability Oversight Council and the Orderly Liquidation Authority. And then we filed a second amended complaint in which a total of 11 states had joined us, 60 Plus, and the Bank itself.


We were in district court. We got kicked out, all of us, for lack of standing in 2013. And then we won a reversal of that in the D.C. Circuit before a three-judge panel, consisting of Judges Kavanaugh, Rogers, and Pillard. Judge Kavanaugh wrote the decision reinstating the standing of both the Bank and, effectively, CEI and 60 Plus. As for the states and their concern as to what might happen regarding things like the shares -- the companies in which their retirement funds held shares, which was an Orderly Liquidation issue. He said they may well have standing at some point but not yet.


So our case, the original three plaintiffs, was, we thought, back on track. The fact that Judge Kavanaugh wrote the decision, participated in the panel and wrote the decision reinstating us I think turned out to actually play a very important role in the Court's very recent denial of cert, but that's something I'll get to very shortly.


At the same time that we were back in district court, another case by the name of PHH, which was a mortgage reinsurance company, had another lawsuit against CFPB, which was straight in the D.C. Circuit court. Once again, they, in October 2016, won their case on the constitutionality. And that decision, too, was written by Judge Kavanaugh. He essentially found that CFPB's director exercised in certain ways more power than anyone, except the President of the United States. His focus was on the fact that CFPB's head could only be fired for-cause and not at-will. This, in his view, was a violation of the Appointments Clause of the Constitution. It was one of the two issues that the CEI and the State National Bank had focused on in their lawsuits. Interestingly enough, on the issue of the lack of Bureau accountability to Congress, the fact that they did not depend on Congress for their funding, was not a major issue. Judge Kavanaugh in his ruling characterized it as the "'icing on' an unconstitutional 'cake.'"


But anyway, he did rule for PHH in that case. That case then went back for an en banc rehearing. And in 2018 the entire D.C. Circuit ruled with, I think, three or four dissents that CFPB was, in fact, validly structured. While our case had been on hold in district court, once that ruling came down, we were able to not only get out of district court, but to go very quickly through the circuit court as well, within a matter of like four or five months and file our cert petition. And, unfortunately, that is the petition that the Supreme Court turned down.


I had mentioned that it was Judge Kavanaugh's involvement in reinstating our standing back in 2015 that may have played a role in the Court's ultimate decision. And part of that has to do with the recusal practices of both the circuit and the Supreme Court. It had been the case that if you were a judge on the circuit court and you were involved on the merits of a case and then you became a justice on the Supreme Court, you would recuse yourself. If you were involved in the case though, but it was not on the merits, you did not have to.


However, when the Kavanaugh confirmation hearings began last summer and there were a huge number of questions being thrown at Judge Kavanaugh, and in response to one of them he did in writing spell out what is recusal policy would be. And it was, essentially, that if he participated in any matter as a circuit judge, he would recuse himself. So that was a significant expansion of the basis for recusal. And I suspect that if he had not adopted that broader policy, he may well have been involved in the decision on cert because it turns out that in denying cert, the Court noted that Justice Kavanaugh played no role whatsoever in -- he did not participate in considerations regarding the cert petition.


So, essentially, that spelled the end of our case. I think one interesting development that occurred during the course of our case was that under the Trump administration, the Department of Justice actually switched position on the validity of the CFPB. In their more recent pleadings after the Trump administration came in, they now viewed the Appointments violation as being very clear, whereas in the past they claimed that there was no such violation. And in opposing us on cert, they did not go after us on the merits. They simply attacked our standing, which was somewhat unusual, given that our standing had been upheld by a bipartisan, unanimous panel.


So we are out. In PHH, which had its panel finding of unconstitutionality overturned en banc, they have decided not to seek cert. But there are a number of other cases coming up through the courts where that issue is very likely to come up. There's one in the Fifth Circuit. There's one in the Second. And I believe there's one in the Ninth as well. And then you've got this decision, not on CFPB, but on a case called Collins v. Mnuchin, which involves not Dodd-Frank but something called the Federal Housing Finance Agency and the law that created it, where in the Fifth Circuit you had a finding of unconstitutionality on reasons that were somewhat similar to what we were raising in the CFPB case. That case was reheard en banc in the Fifth Circuit only last week. So the outcome there is unclear, but it is certainly one case that if the Court takes it up may well end up in a ruling that could or could not be directly applicable to the CFPB.


Much of what's going on here in terms of the issues involves the validity of independent agencies and involves also the very structure of government. In our view, the CFPB was an outlier of an agency. That is, it was totally unprecedented, both in terms -- given the combination of factors that each independently might have found unconstitutional, and yet here, we're combined into one entity, one combination, that somehow did pass muster at the en banc D.C. Circuit. That is, the lack of accountability to the President, an ability to fire at-will, to remove at-will. And the lack of ability to Congress. It was our feeling that this was going to trigger huge amounts of administrative abuse by the agency. And I think its history, during most of the time it's been in power, sort of evidences that.


It was only a few years ago that Richard Cordray, then director of the CFPB, when he was quizzed in front of a Congressional finance panel, asked about the Bureau's expenditures, massive expenditures on renovating its offices, told the Congress woman, "Why does that matter to you?" That was his flat out answer. "Why does that matter to you?" Things did change somewhat under the Trump administration in terms of who was running it, the agency, and what polices -- to what extent that they were pushing policies to the extreme. But nonetheless, you do not want an unaccountable agency being saved by the fact that it currently has in place a director who is good or bad because obviously that's the sort of thing that can change very, very quickly.


If you look at the cases that are really key here, in terms of setting out a framework for the constitutionality of independent agencies, there are, chiefly, four of them. The first, the oldest one, is Myers v. United States. It was decided back in 1926. It involved restrictions on the President's ability to remove the postmaster general, and those restrictions were, in fact, invalidated. That was followed by Humphrey v. Federal Trade Commission, a case from -- I'm sorry, Humphrey's Executor, which involved the Federal Trade Commission. And there the restrictions on removal were upheld.


Now, remember, when you're talking about the Federal Trade Commission, you're not talking about a single-headed agency. It is a number of commissioners and whenever you have more than one commissioner, you have a process of collegiality that is viewed as being very important in terms of tempering the ability of one person to go off the deep end. And yet, the restrictions of the removal of FTC commissioners by the President were upheld, with the Court focusing on the fact that the FTC was not really exercising executive-type powers.


The next major case was Morrison, which involved the validity of the independent counsel. Once again, those restrictions there on removal were upheld, once again on the basis, largely, of what sorts of powers—namely here largely investigative—that the independent counsel was exercising. And then, finally, you had a case known as Free Enterprise Fund v. Public Company Accounting Oversight Board. That board was created under Sarbanes–Oxley. It's affectionately known not by that very long name but as "peek-a-boo" (PCAOB). And there you had board members that were housed within the Securities and Exchange Commission, and that were under, to some extent, some sort of oversight by the Securities and Exchange Commissioners. And the Court there overturned that structure. It specifically overturned the notion that the members of PCAOB could not be removed at-will.


What if found was you have sort of a double layer of insulation from precedential oversight because standing between the Board and the President was the SEC, which also could not be removed at-will. And that was simply illegitimate. What's interesting is the fact that Judge Kavanaugh was heavily involved in that case as well. Back writing at the appellate level, he had written a dissent arguing that PCAOB was unconstitutional. It was a very strong dissent. It ran about 60 pages, and that was the key, I believe, to why the Supreme Court took that case. And then the Supreme Court went on to ultimately rule -- to ultimately invalidate PCAOB, in least in terms of the removability of its members. And I should mention there that CEI was involved as co-counsel.


So there you have things. You've got the number of cases, which I believe are going to be raising the same issues regarding the CFPB and independent agencies that we were trying to raise. I think we will get a ruling on some of those issues within the next few years. Given the current position of the Department of Justice, I think the outlook is good in terms of which way those rulings might go. And so while this was a big setback to us, certainly to 60 Plus and most especially to this State National Bank of Big Spring, Texas, I think all in all things do look good as far as the outcome of these issues.


One item I do want to bring up is going back to this footnote by Kavanaugh in the panel ruling on PHH, where the line I had quoted was that -- remember, his focus was on the fact the President could not remove the CFPB head at-will. It could only be for-cause. And then the other issue of the lack of constitutional oversight through the appropriations process as being "icing on the unconstitutional cake", in our view, that actually threatened to create a much more dangerous situation than we had before that ruling. And the reason is this: until that ruling, CFPB was, in a sense, a total outlier – a totally unprecedented type of agency with neither presidential accountability nor Congressional oversight.


If you followed Judge Kavanaugh's approach and simply made the CFPB head removable at-will, it in the sense becomes a regular part of the Executive Branch, except that it has an independent funding stream. That is, yes, the President can remove at-will, but you've got an agency—we'll almost assume cabinet status—getting money with absolutely no Congressional oversight whatsoever. All of the sudden because it becomes a regularized agency, and yet it's independent of Congress, it becomes much more of a blueprint that other agencies would want to be cast in, would want to follow. I mean, what agency would not like to get its funding without having to go through the appropriations process. But instead having access to its funds on demand. And so because you regularized what really still is an unconstitutional agency, as far as Congressional oversight goes, you create a much greater danger than when CFPB was sort of a one-and-only anomaly.


Having said all that, let me stop now and take any questions.


Wesley Hodges:  Well, thank you so much, Sam, for those remarks. Looks like we do have our first question from the audience. Let's go ahead and move to that caller.


John Choo (sp):  Hello, Sam. This is John Choo in California. My question is, then, in your view, why didn't they grant the cert? And what case are they waiting for if not the Big Spring case?


Sam Kazman:  Okay. There are several cases. And actually the government in its opposition to our cert petition raised this issue of what's called a vehicle problem and raised the fact that you've got other cases coming up. Those cases are: one is CFPB v. Selia Law coming out of the Ninth Circuit where argument was held just a few weeks ago on January 8th. Another is CFPB v. All-American Check Cashing, which, I believe, was already argued in the Fifth Circuit, but where en banc argument has been scheduled for this coming March 12th. And I believe Ted Olson is lead counsel there, and Mr. Olson was also lead counsel in the PHH case as well. And then, finally, in the Second Circuit there's a case which only now is starting to be briefed by the name of CFPB v. RD Legal Funding. Those are the three cases I know of.


I think the reason -- but your basic question is why didn’t the Court take our case? And so we argued that they certainly should. We argued that Justice Kavanaugh might decide to recuse himself from the standing aspect of our case, which was the only thing that the federal government was challenging us on. He could still participate in the merits. But when you come down to it, I think the other Justices may have thought that Justice Kavanaugh would not participate in the case at all, in which case, you might end up with a 4-4 split on the constitutionality issue. And that would have meant that a en banc ruling from the D.C. Circuit in PHH, which had upheld the validity of the CFPB, would not be overturned, effectively overturned.


So I think it ultimately came down to the notion that this was a major case. You've got cases raising possibly identical issues coming up. Why make it a more difficult case by taking it up when only eight Justices might be involved?


Wesley Hodges:  Wonderful. Well, thank you so much, Sam, for those remarks. And, John, we appreciate your question. It looks like we do have another question from the audience. Let's go ahead and turn to that caller.


Caller 2:  I apologize if you addressed this already, but I know that in several state courts, for example, when one judge is recused, someone else is appointed pro tem so that the case and the issue does not have a reduced possibility of being refused simply due to the recusal. There doesn't seem to be anything like that with the U.S. Supreme Court, though, is there?


Sam Kazman:  Not that I know of. I mean, I just don't know where you would go to appoint a replacement for a recused Justice. I think it would just be held in front of a slightly smaller bench.


Caller 2:  Which would reduce the probability of a grant, right?


Sam Kazman: Well, remember, you only need four justices to get a grant of cert. I think the focus here was not on whether cert could conceivably be granted if you were trying to pick sympathetic justices but what the outcome on the merits would be. And so, hypothetically, another Justice who might be leaning in the direction that Justice Kavanaugh would have likely been leaning might still think that they're going to end up with a 4-4 ruling, in which case the lower court ruling in PHH would, essentially, remain in place. And they just did not want to do that.


Wesley Hodges:  Wonderful. Well, thank you so much for your question, caller. We do appreciate it. Seeing no immediate questions, Sam, I turn the mic back to you. We really do appreciate all your remarks today. Do you have any closing thoughts for us before we wrap up the call?


Sam Kazman:  Well, I did mention getting into some cases of CFPB arrogance – the remark that Director Cordray had made at this Congressional hearing, telling a congressman, "Why does that matter to you?" which it's sort of striking just to read it, but if any of you are interested in an actual, little video clip of that, I believe it's still online. If you send me an email, I'll provide it to you with something that was cited in our brief, in our cert petition. And it's something that people when they hear it, talks I've given, you sometimes hear a sort of audible gasp.


Wesley Hodges:  Wonderful. And Sam, would you like to share your email or direct them to your website for that?


Sam Kazman:  Sure. It's


Wesley Hodges:  Thank you so much, Sam. Do you have any final remarks before we wrap up today? We appreciate you sharing that.


Sam Kazman:  That's pretty much it. We await the next case in this line because the agency is still out there, and even though it may temporarily be tamed -- be reined in, rather, by the person running it now -- it certainly was by Mick Mulvaney, who ran it until very recently. And that, by the way, you may recall spurred an incredible fight between him and some other official at the CFPB claiming, "No, she was the rightful director." But in any case, we do look forward to the issue being resolved, and our hope is that it'll be resolved favorably.


Wesley Hodges:  Wonderful. Well, on behalf of The Federalist Society, I'd like to thank Sam for the benefit of his valuable time and expertise today. We welcome all listener feedback by email at Thank you all for joining us for the call today. We are now adjourned.


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