Supreme Court to Decide the Constitutionality of the CFPB

On March 3, 2020, the Supreme Court will hear Seila Law, LLC v. Consumer Financial Protection Bureau, to determine whether the structure of the CFPB is constitutional. How the Court answers the question could have far-reaching impact, not only in determining how the CFPB operates in the future, but also in potentially invalidating past CFPB actions.

Created in 2011 in the wake of the financial collapse, and followed in detail by Citizen Works then, the CFPB exists to enforce a variety of federal consumer-protection laws and to protect consumers from the volatility of the financial marketplace that left many in dire circumstances in 2008. Prior to the creation of the CFPB, consumer-protection laws enforcement was spread throughout different government agencies—leading to a confusing patchwork of enforcement, or nonenforcement. After the collapse, the Obama administration pushed the creation of the bureau—first proposed as an independent agency by then-Professor Elizabeth Warren.

When Congress created the CFPB—as part of the Dodd–Frank Act—it wanted the agency to be powerful, free of industry influence, and safe from the political squabbles of Congress. To that end, the CFPB is unlike many other executive agencies for two reasons. First, it receives its funding directly from the Federal Reserve, guaranteeing that Congress cannot hamstring the Bureau by withholding funding. Second, the CFPB has a single director, appointed by the President with the advice and consent of the Senate, who serves a five-year term and is removable only for “inefficiency, neglect of duty, or malfeasance in office” (also known as “for cause” removal). 12 U.S.C. § 5491(c)(3).

The second of those features is at the heart of the challenge in Seila v. CFPB. Seila Law describes itself as a consumer-protection firm. When the CFPB began investigating the firm, for allegedly violating consumer-protection laws, the Bureau issued a civil investigative demand, asking for information about the firm. Seila refused to provide the information, contending that the agency was unconstitutional because it was structured with a single director who could be removed only for cause. Seila made that argument to the district court and the Ninth Circuit, and both courts rejected it. When Seila asked the Supreme Court to weigh in, the U.S. Solicitor General’s Office, in a rare move, agreed that the CFPB is unconstitutional. The Court agreed to hear the matter.

At the heart of the challenge is a separation of powers question. As a general matter, the President—who has the constitutional responsibility to see that the laws are faithfully executed—can choose who runs the various executive agencies. That way, the President can make sure that the agencies and the White House share the same priorities. There are a few exceptions though. Some agencies, such as the Federal Trade Commission, have a multi-member board and the Supreme Court has held that it is constitutional that board members are removable only for cause. See Humprey’s Executor v. United States. Similarly, the Supreme Court has upheld the constitutionality of allowing independent investigators to be removed only for cause. See Morrison v. Olson.

The Supreme Court will consider whether the CFPB’s composition is constitutional in its similarity to those structures that have already been upheld, or whether the CFPB goes further than the multi-member boards and independent investigators and must be deemed unconstitutional. The Court’s decision will likely be a controversial and important opinion for consumer protection.

A Student Debt Crisis is Imminent, But Loan Companies and the Trump Administration are Not Likely to Provide Solutions

By all accounts the country faces a looming student debt crisis.  Debts from student loans currently amount to $1.4 trillion, a number that has grown exponentially over the last decade as more and more students take on debt only to face a demanding labor market.  Default rates are also on the rise—recent data from the U.S. Department of Education indicates that 11.5 percent of student borrowers who began paying off their loans in 2014 have since defaulted.  A recent analysis from The Brookings Institute projects that these default rates will continue to escalate if no large-scale changes are made.

The situation of struggling debtors has been made worse by the dubious practices of the loan servicing companies that manage the Federal government’s Direct Loan program. Navient (formerly part of Sallie Mae) is one of the largest of these companies and currently faces lawsuits in Pennsylvania, Washington, and Illinois, as well as from the Consumer Financial Protection Bureau for its alleged mishandling of loan collection.  The CFPB suit alleges that Navient systematically deceived or misled borrowers over the phone and in writing, incorrectly processed or misallocated payments, and obscured information relating to income-driven repayment plans. Between 2010 and 2015 Navient added over $4 billion in interest rate charges. The CFPB asserts these charges could have been avoided had the company informed borrowers of their eligibility for less demanding payment plans. In its defense filing, Navient argued that “there is no expectation that the servicer will act in the interests of the consumer”—a somewhat extraordinary statement from a company contracted by the Federal government and ostensibly in the employ of U.S. taxpayers.  Such practices are not limited to Navient alone. The Pennsylvania Higher Education Assistance Agency (also known as FedLoan Servicing), which handles about a quarter of national student loans, is currently facing a suit brought by the Massachusetts Attorney General.  That suit alleges that the company overcharged borrowers and prevented public service workers and teachers from accessing benefits and loan forgiveness programs specifically targeted toward those entering public sector employment.

States that challenge these companies may soon have to directly contend with the Trump administration.  In California the Student Loan Servicing Act recently signed into law requires loan collectors to comply with a licensing program, giving the state oversight into questionable practices.  But  a confidential memo leaked in early March reveals that the U.S. Department of Education will direct states to stop interfering with collectors.  The memo first defends the Federal Direct Loan Program, pointing out that Congress created it  “with the goal of simplifying the delivery of student loans to borrowers, eliminating borrower confusion, avoiding unnecessary costs to taxpayers, and creating a more streamlined student loan program.” (Based on the Navient complaints gathered by the CFPB, theses goals of simplification and efficiency are clearly far from being reached.)  The memo goes on to say that “state regulation of the servicing of Direct Loans impedes uniquely Federal interests.”  The statement is revealing in two ways.  First, it seemingly reverses the tendency of the Trump administration to shift responsibility to states on issues, underscoring its fealty to the interests of business over that of jurisdictional principle.  Second, many argue that the most distasteful and unjust aspect of student loan administration is that it is actually profitable for the Federal government—to the tune of, by most recent estimates, $135 billion over ten years.  If this is the case, the Federal government has a vested interest in preserving the status quo.

Student debt accounts for the second largest category of consumer debt after housing.  And, as with the market for subprime housing mortgages, there is a crisis in the making.  This being said, we do not lack for remedies.  States and the CFPB, must continue to regulate and monitor loan collectors and repayment plans based on income should continue to be made accessible and comprehensible to borrowers.  But broader solutions such as debt cancellation and free college tuition are economically feasible and enjoy popular support.  Oregon, Tennessee, New York, and Rhode Island have all made community college tuition free, and there’s a push to make 4-year public colleges free as well.  As this push continues, the obstacle lies with the lobbying efforts of the loan industry and with a Federal government keen to protect their interests.