A Supreme Court decision could abolish a pair of financial crisis-era regulators charged with safeguarding two cornerstones of the U.S. economy: consumers and government-sponsored enterprises.
The high court announced Oct. 18 it would hear a case to determine whether a president can fire the director of the Consumer Financial Protection Bureau at will, opening up the possibility that the Federal Housing Finance Agency could also be dismantled, given its single-director leadership structure.
The issue centers around an interpretation of Article II of the Constitution that allows a president to nominate — and therefore remove — the heads of federal agencies. The creation of the CFPB in the Dodd-Frank Act purposely insulated the agency from the at-will provision in the law to protect the director from being fired for political reasons.
The Supreme Court's ruling could potentially eliminate the CFPB entirely and set a precedent that other single-director federal agencies are unconstitutional, as well.
What could happen to the CFPB
According to experts, there are three scenarios that could play out at the Supreme Court.
The most likely decision of the court is a "line-out," which would simply remove the single line from the law that restricts a president from removing the director for only "inefficiency, neglect of duty, or malfeasance in office," effectively giving the president the power to remove the director at will.
That outcome would hand more authority to the White House, but it may be progressive-leaning justices' best bet to keep the agency in existence, according to Rick Fischer, a CFPB compliance expert at Morrison & Foerster LLP, a law firm.
"If I'm a liberal justice, maybe I'm thinking this could be a gift in this particular context," Fischer said in an interview.
The current makeup of the court, Fischer said, comes into play because the most recent justice to be confirmed, Brett Kavanaugh, wrote the 2016 majority opinion in a lower-court case that ruled the CFPB's leadership structure was unconstitutional.
"Because of their massive power and the absence of Presidential supervision and direction, independent agencies pose a significant threat to individual liberty and to the constitutional system of separation of powers and checks and balances," Kavanaugh wrote.
An appeals court reversed that decision in early 2018, upholding the CFPB's single-director construct.
The second and most dramatic ruling the Supreme Court could hand down would be to find the entire agency unconstitutional. That would occur if the justices are convinced that the just-cause provision is essential to the role of the director and cannot be separated from Dodd-Frank.
It is unlikely the court will pursue that path because of the turmoil it would unleash on U.S. businesses that have become accustomed to regulation by the agency, Fischer said.
Still, Daniel Kearney, a financial regulations policy lawyer at WilmerHale, predicted that the court will find that the CFPB's leadership structure violates the separation of powers principle.
"There is the possibility that the entire statute could be struck down if it's determined that Congress would not have wanted the other surviving provisions in Dodd-Frank to carry on without the unconstitutional provision," Kearney said.
The final Supreme Court scenario is that the court could side with the 2018 appeals court decision and preserve the agency's single-director structure, handing a win to Democrats in Congress who created the agency in response to the 2008 financial crisis.
Chuck Gabriel, president of Capital Alpha Partners, a Washington, D.C.-based policy analysis firm, said in an interview that even if the agency stays intact with either the "line-out" or the appellate court decision, the CFPB has proven to be moldable to the party in control of the White House.
"For all the gnashing of teeth over the agency," Gabriel said, "the agency never really did all that much."
Gabriel pointed to current CFPB Director Kathleen Kraninger's decision to join the Department of Justice in the case arguing that the president can fire her if he wishes. Kraninger announced in a letter to congressional leadership that the president's inability to remove the director of the bureau at his discretion is unlawful.
FHFA in jeopardy
Similarly structured agencies could be at risk of dismantlement or being fundamentally altered as a result of the Supreme Court's ruling.
Notably, the future of the FHFA, an agency established to regulate Fannie Mae and Freddie Mac, may hang in the balance.
During the 2008 financial crisis, the mortgage giants were placed into conservatorship by the agency. Under a single director's authority, FHFA has broad power to control major aspects of the the entities' operations.
Shareholders of the companies won a major suit in September when an appeals court ruled that the "net worth sweep" was unconstitutional. The sweep is a requirement that the GSEs pay all money earned above $3 billion each to the Department of Treasury.
The appeals court also agreed with shareholders in a separate opinion in the case, saying the FHFA is unconstitutional because its head can only be removed for cause, mirroring many of the arguments leveled against the CFPB.
Gabriel said he expects that there would be an "expedited" effort to apply the Supreme Court's decision to FHFA and to other agencies.
WilmerHale's Kearney said the CFPB decision could call into question the laws that insulate agencies from presidential control.
"There are going to be questions, not just for FHFA, but for other agencies," Kearney said.