On March 7, the Community Financial Services Association of America (CFSA) and the Consumer Service Alliance of Texas filed a petition for a writ of certiorari with the U.S. Supreme Court seeking to overturn a decision by the U.S. Court of Appeals for the Fifth Circuit. The Fifth Circuit held that in order to obtain judicial relief, a party challenging governmental action taken by an individual who remained in office against the President’s wishes due to an unconstitutional removal restriction must show that a hypothetical replacement officer would have taken a different action. The petitioners argue that this standard is unreasonably burdensome and inconsistent with the Supreme Court’s decision in Collins v. Yellen.

Background

The petitioners are challenging a rule promulgated by the Consumer Financial Protection Bureau (CFPB or Bureau) under the leadership of Director Richard Cordray, a President Obama appointee. The rule, which targets small dollar lending practices, was finalized in 2017 and became effective in January of 2018. The petitioners argue that the rule is invalid because it was issued by Director Cordray while he was unconstitutionally shielded from removal by President Trump.

The Supreme Court previously upheld the small dollar lending rule against CFSA’s challenge to the Bureau’s funding structure. However, the petitioners now argue that Director Cordray was able to remain in office longer than he should have because President Trump was uncertain about his authority to remove Cordray. This uncertainty, they argue, allowed Director Cordray to finalize the rule, which would not have occurred had he been removed earlier.

Legal Argument

The petitioners argue that the Fifth Circuit’s requirement for them to demonstrate that a hypothetical replacement would have acted differently is at odds with the Supreme Court’s decision in Collins v. Yellen. In Collins, the Court addressed the issue of whether actions taken by an agency head who was unconstitutionally shielded from removal could be invalidated at a later time. The Court held that a party must show that the unconstitutional removal protection caused “compensable harm.” As a result, the petitioners contend that the Fifth Circuit’s interpretation of the “compensable harm” requirement imposes an unrealistic burden, making it virtually impossible for private parties to obtain relief for violations of the separation of powers.

Lower courts in the Fifth Circuit have interpreted this requirement to mean that CFSA would have to show both that President Trump would have fired Director Cordray and that then would have altered how the CFPB approached the small dollar rule. According to CFSA, the Fifth Circuit’s approach is unusually stringent as both the Ninth and Tenth Circuits interpret the standard as requiring plaintiffs to show only that a president would have fired the challenged official in absence of the removal protection. According to the petition, the Fifth Circuit’s approach requires petitioners to “supply evidence that, in a world where Cordray had been removable, President Trump’s hypothetical replacement for him in 2017 would have acted differently with respect to the Rule. This counterfactual standard is at odds not only with Collins itself, but also with the decisions of other circuits, which ask only for evidence that the action at issue was taken by an officer whom the President wanted to remove but could not due to the statute.”

Additionally, the petitioners reference the Supreme Court’s decision in Seila Law LLC v. CFPB, where the Court held that the CFPB’s structure, which limited the President’s ability to remove the CFPB’s Director, was unconstitutional. They argue that although this ruling came down after the small dollar lending rule was promulgated, it supports their position that the rule should be invalidated.

Our Take

While the CFSA’s petition could result in another reprieve for lenders subject to the Rule, the March 30 compliance deadline has yet to change. Impacted lenders should accordingly continue their preparations with that date in mind absent a court order or formal guidance from the CFPB to the contrary.