Separation of Power:What the Courts and Presidential Election Mean for the Consumer Finance IndustryBY H. BLAKE SIMS AND K. DAILEY WILSONThe Consumer Financial Protection Bureau (the Bureau) has been a hot topic lately – and not for its usual role as chief examiner and enforcer of the consumer finance world. On June 29, 2020, the Supreme Court issued its decision in Seila Law LLC v. Consumer Financial Protection Bureau, holding that the Bureau’s single director structure was unconstitutional. But what does this mean for consumer financial services providers? While some of the ramifications are unclear, the validity of actions taken by pre-Seila Law Bureau Directors – as well as the 2020 Presidential election and its potential impact on Bureau leadership and policy – have become major issues to watch.SEILA LAWSeila Law LLC, a California-based law firm that provided debt-related legal services, asked to set aside a civil investigative demand issued by the Bureau on the basis that the Bureau was unconstitutionally structured. Specifically, Seila Law alleged that the Bureau’s single director, who was removable only for cause by the President, violated the separation of powers.Prior to Seila Law, the President appointed the Bureau’s Director, with the advice and consent of the Senate, for a five-year term. The Director could be removed by the President only for “inefficiency, neglect of duty, or malfeasance in office.” Although the Bureau agreed with Seila Law that the agency’s structure violated the Constitution, the Supreme Court carried on with the case because the Bureau still sought to enforce its civil investigative demand against Seila Law.The Supreme Court agreed with both Seila Law and the Bureau, holding that “the [Bureau’s] leadership by a single individual removable only for inefficiency, neglect, or malfeasance violates the separation of powers.” Under Article II of the United States Constitution, the President possesses executive power – the power to implement and enforce the laws promulgated by Congress. In exercising this power and enforcing the laws, the President can appoint executive officers to assist the President in carrying out his executive duties. The executive power also includes the ability to remove executive officials that the President has the authority to appoint.Although the President’s executive power is well-established, the Supreme Court has found that there are limitations on the President’s ability to hire and fire. In Humphrey’s Executor v. United States, the Supreme Court  addressed whether the Federal Trade Commission’s (FTC) multimember commission structure violated the separation of powers. The Court upheld the FTC’s leadership structure and found that Congress could “give forcause removal protections to a multimember body of experts balanced along partisan lines, that performed legislative and judicial functions and was said not to exercise any executive power.” In other words, FTC Commissioners do not serve merely at the pleasure of the President. The Court specifically noted that, unlike the Bureau, the FTC was led by a bipartisan multimember commission with staggered terms that prevented a complete change in leadership from occurring at any one time.In a subsequent case, Morrison v. Olson, the Court upheld a provision granting “goodcause tenure protection” to an independent counsel. Under Morrison, the Court noted that the “removal protections did not unduly interfere with the functioning of the Executive Branch because the ‘independent counsel [was] an inferior officer under the Appointments Clause, with limited jurisdiction and tenure and lacking policymaking or significant administrative authority.’”In Seila Law, however, the Supreme Court declined to extend the logic of Humphrey’s Executor and Morrison to the Bureau’s leadership structure, ultimately finding it unconstitutional. Specifically, the Court held that the Bureau’s leadership structure vests “significant governmental power in the hands of a single individual accountable to no one. The Director is neither elected by the people nor meaningfully controlled (through the threat of removal) by someone who is.” The Court also noted that the Bureau Director’s five-year term could result in a President never having the opportunity to appoint a Director, thereby never having the opportunity to shape consumer financial policies.Further, the fact that the Bureau obtained funds outside of the normal appropriations process threatened presidential control. Generally, agencies obtain funding through a budget adopted by Congress and signed into law by the President. This process gives the President some ability to impact agency policy because the President has the ultimate say on each budget. However, the Bureau can circumvent this process and request funds directly from the Federal Reserve.Having held that the Bureau’s leadership structure was unconstitutional, the Court also held that the issue of leadership structure was severable from the remainder of the Dodd- Frank Act. As a result, the Bureau remains intact, but the Director is now removable by the President. The Court remanded the case to the lower courts to determine whether the civil investigative demand issued against Seila Law should be upheld.THE SEILA LAW DECISION ALSO HAS INTERESTING RAMIFICATIONS FOR THE 202 PRESIDENTIAL ELECTION.KRANINGER RATIFICATIONFollowing the Seila Law decision, the issue of ratification arose. The Supreme Court indicated that the issue of whether the Director could ratify prior decisions and actions, such as the civil investigative demand in Seila Law, was an issue to be taken up by the lower courts. Essentially, the issue is whether the Director has conducted an independent evaluation of the merits of each prior agency action taken under a prior improperly appointed Director. So the issue has become whether current Director Kathy Kraninger could (and would) ratify prior Bureau actions.On July 7, 2020, Kraninger did just that. The first ratification approved several types of Bureau actions occurring between January 4, 2012 and June 30, 2020, including ratification of each rule or regulation promulgated by the Bureau and each consumer information publication issued by the Bureau. The Bureau notably did not ratify the Arbitration Rule1 or the Small-Dollar Rule in this ratification order. The Bureau also did not ratify previous enforcement actions that, according to the Bureau, “[h]ave no legal consequences for the public, or enforcement actions that have been finally resolved.” The Bureau indicated it was separately considering whether to ratify pending enforcement actions.The Bureau’s second ratification specifically authorized the payments provisions of the Small-Dollar Rule issued on July 7, 2020. However, while the Bureau has ratified these provisions, the rule is currently stayed until September 11, 2020, pursuant to the pending case of CFSA v. CFPB in the Western District of Texas.2But will courts find that Kraninger’s ratifications, including her justification for failing to ratify completed actions, cure any issues stemming from the fact that the enforcement actions were brought by an unconstitutionally structured bureau? At this point, the status of prior, completed enforcement actions is unclear. The Bureau seems to think that completed enforcement actions do not need to be ratified. But is this true? Could targets of previous enforcement actions contest those actions on the basis that the actions were carried out by an unconstitutionally structured Bureau? Or is the issue moot where the subjects did not raise the constitutionality issue at the time of the action or settled the matter without adjudication? The Bureau’s recent ratifications did not address these issues or provide support for its statement that ratification of prior completed actions was unnecessary. It will be interesting to see how many, if any, targets of prior enforcement actions will seek to contest the validity of these actions. It will also be interesting to see whether the Director will be required to ratify past Bureau actions once she has conducted an independent evaluation of the merits of each prior enforcement action. What would such evaluations look like, and would they be conducted under Kraninger’s new UDAAP test?A federal court may soon address whether Kraninger can validly ratify ongoing enforcement actions. In Consumer Financial Protection Bureau v. RD Legal Funding, LLC, thenacting director Mick Mulvaney ratified the Bureau’s action against RD Legal, which RD Legal subsequently challenged. The U.S. District Court for the Southern District of New York found that the “[Bureau’s] ratification does not address accurately the constitutional issue raised in this case, which concerns the structure and authority of the [Bureau] itself, not the authority of an agent to make decisions on the [Bureau’s] behalf.” Based on this rationale, the ratifications issued by the Bureau on July 7, 2020 may not cure the constitutional defect because the issue is not whether the Bureau’s Director had the authority to make decisions on the Bureau’s behalf but whether the unconstitutionally structured Bureau had any authority to make such decisions at all.The Bureau filed a declaration with the Second Circuit on July 10, 2020, stating that Director Kraninger had ratified the Bureau’s enforcement action against RD Legal, and appealing the court’s dismissal of the action. RD Legal has filed a response, arguing in part that Kraninger’s ratification is ineffective because she cannot ratify an action that the Bureau could not validly have taken at the time such action was performed. This issue of whether the Bureau can ratify pending actions taken prior to the Court’s ruling in Seila Law is certainly going to be one to watch over the upcoming months.2020 ELECTIONThe Seila Law decision also has interesting ramifications for the 2020 Presidential election. Now that the Bureau Director is removable by the President, the President can affect consumer financial services policy from Day One of the President’s administration by inserting a political appointee as Director. Consumer finance may very well become part of each candidate’s platform in the months ahead. In fact, presumptive Democratic nominee Joe Biden has already indicated that he intends to take a firmer stance on consumer lenders during his term, issuing the following tweet in response to the Supreme Court’s decision in Seila Law: “Here’s my promise to you: I’ll appoint a director who will actually go after financial predators and protect consumers.” In addition, Elizabeth Warren, who proposed and established the Bureau, has become a key advisor to Biden. President Trump, on the other hand, would likely allow Kraninger to finish her term as Director – but in any event, the expectation is that Trump would continue current policies. With Biden currently leading in the polls, the 2020 Presidential election could certainly have serious implications for the consumer financial services industry. Is the industry going to see a reversion back to a Bureau regulating through enforcement and overreaching rules, or will it continue to see a more pragmatic Bureau focused on consumer protection, education, and access to credit? We should know the answer by November 4, 2020.Despite answering the question of the constitutionality of the Bureau’s leadership structure, Seila Law has created uncertainty in many respects. It is unclear whether Bureau ratifications actually cure the constitutional defect that existed when the Bureau took the actions – and now that the Director is removable by the President at will, we could see a new Director with each new President, resulting in potential inconsistencies in Bureau policy going forward. 1 Kraninger noted that the Arbitration Rule was not within the scope of the ratification because the President had signed, prior to its compliance date, a resolution under the Congressional Review Act providing that the Arbitration Rule has no “force or effect.”2 At the time of writing this article, expectations are that the parties will provide the court with an update on the Small-Dollar Rule during the last week of July. While the parties had previously filed joint reports agreeing to the stay, now that the Rule is final, the parties may be somewhat at odds. Important forthcoming negotiations and decisions will involve lifting the stay, continuation of the litigation on the merits, and setting a compliance date for the Rule (and the payment provision requirements that remain).3 Note that Mulvaney ratified an enforcement action against All American Check Cashing as well. On March 3, 2020, a Fifth Circuit panel ruled that the Bureau’s leadership structure was constitutional, and as a result, did not reach the ratification issue. On March 20, the Fifth Circuit entered an order vacating the panel decision and granting a rehearing en banc. As of the date of publication of this article, Director Kraninger has not ratified the All American Check Cashing CID. However, if she does so before the en banc hearing, the Fifth Circuit may take up the issue of ratification as well. H. Blake Sims is a partner in the Tennessee office of Hudson Cook, LLP. He may be reached at 423-490-7563 or by email at bsims@hudco. com. K. Dailey Wilson is an associate in the Tennessee office of Hudson Cook, LLP. She may be reached at 423-490-7567 or by email at dwilson@hudco.com.