(Bloomberg) -- The U.S. Supreme Court agreed to consider giving the president broad power to replace the director of the Consumer Financial Protection Bureau, accepting a case that could curb the independence of the watchdog agency tasked with regulating mortgages and credit cards.
The justices said they will hear an appeal from Seila Law, a California law firm being investigated by the CFPB over its sales pitches to indebted consumers. The firm is trying to derail the probe by arguing that the bureau was set up in violation of the constitutional separation of powers.
President Donald Trump’s administration and the CFPB itself are partially backing the appeal, arguing that the Constitution requires that the president be allowed to fire the agency’s director for any reason. Seila Law’s appeal goes further, asking the court to abolish the agency altogether.
The 2010 law that set up the CFPB says the director can be removed only for “inefficiency, neglect of duty, or malfeasance in office.”
The case could have implications for a fight between the Federal Housing Finance Agency and Fannie Mae and Freddie Mac investors over the so-called net worth sweep, an Obama-era policy that requires the companies to send nearly all their profits to the Treasury. The investors have filed a Supreme Court appeal that raises similar issues about the agency’s structure.
U.S. Solicitor General Noel Francisco, the Trump administration’s top courtroom lawyer, told the high court the constitutional issue in the CFPB case “has broad implications for the president’s ability to supervise the executive branch.“ The court will hear arguments next year and rule by early July.
During most of Trump’s first year as president, the CFPB had a holdover director, Richard Cordray, who pressed an aggressive regulatory agenda. Cordray, a Democrat, stepped down in November 2017 to begin an unsuccessful campaign for governor of Ohio. The current director, Kathy Kraninger, is a Trump appointee who was confirmed by the Senate in December 2018 to serve a five-year term.
Ironically, a Supreme Court victory for the administration would make Kraninger more vulnerable to being replaced should a Democrat win the 2020 presidential election. The agency was the brainchild of Senator Elizabeth Warren, now a leading Democratic candidate for president.
The CFPB, set up in the wake of the 2008 financial crisis, regulates credit cards, auto loans and other consumer finance products. Supporters say its independence helps insulate it from political pressures, letting it focus on protecting consumers from financial scams and predatory loans. Critics say it has stifled economic growth through over-regulation.
The court’s newest justice, Brett Kavanaugh, considered the issue as an appeals court judge, writing that the president shouldn’t be stuck with a CFPB director appointed by a predecessor. Kavanaugh said the appropriate solution was to leave the bureau intact but give the president the power to dismiss the director at any time.
In upholding the agency, a San Francisco-based federal appeals court pointed to a 1935 Supreme Court decision that helped lay the legal groundwork for the modern administrative state. That ruling, Humphrey’s Executor v. United States, upheld provisions that similarly insulate the five members of the Federal Trade Commission from being fired in the absence of misconduct.
The Supreme Court reaffirmed that ruling in a 1988 decision that backed federal use of an independent counsel.
“Those cases indicate that the for-cause removal restriction protecting the CFPB’s director does not impede the president’s ability to perform his constitutional duty to ensure that the laws are faithfully executed,” Judge Paul Watford wrote for the appeals court. “The Supreme Court is of course free to revisit those precedents, but we are not.”
Seila Law contends the CFPB is different from the FTC because it has a single director, rather than a multi-member commission. FTC commissioners serve seven-year terms that expire at different times, and no more than three members can be of the same political party.
“An agency with a multi-member structure cannot act without consensus, making it harder for the agency to infringe individual liberty,” Seila argued in its appeal. “A single director faces no similar constraint on his decision.“
The case is Seila Law v. CFPB, 19-7.
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