The long-awaited Opinion from the United States Supreme Court has been rendered: The structure of the Consumer Financial Protection Bureau (the “CFPB”), and specifically its appointment of a single director, removable only for cause, is unconstitutional. The Court rendered its 5-4 Opinion, authored by Chief Justice Roberts, earlier this week. The Supreme Court held that the CFPB’s current structure violates the Separation of Powers clause of the U.S. Constitution. The Supreme Court reasoned that the CFPB “lacks a foundation in historical practice and clashes with constitutional structure by concentrating power in a unilateral actor insulated from Presidential Control.” The Opinion went on to provide for the longstanding history of the U.S. President’s powers to remove executive officials, with very limited exception.
Defenders of the CFPB’s statutory structure cited to other agencies that have operated under a similar structure, including the Social Security Administration and the Federal Housing Finance Agency. But, the Court held, the former is distinguishable because it does not have the authority to conduct enforcement actions. And the latter is subject to ongoing criticism and constitutional challenges. The Court noted that the Fifth Circuit recently held the FHFA to be unconstitutional in Collins v. Mnuchin, 938 F. 3d 553, 587-588 (2019).
While the High Court was split over first issue, a more overwhelming 7-2 majority ruled on the second issue at hand that unconstitutional “removal” clause of the statutes creating the CFPB are severable from the other statutory provisions. Therefore, the Court held, the CFPB can continue to operate under the existing statutes.
Justice Kagan authored a dissent to the majority opinion, arguing that the President had ample power under the existing structure to remove the CFPB Director when appropriate. She cautioned about why the CFPB was created in the first place and that by undermining its independence, the majority Opinion would send “Congress back to the drawing board.”
Going forward, we now know that the CFPB is not going anywhere, but current and future Presidents will exercise more control over who will be in charge of the Bureau. What is not clear from the Opinion is the impact that it will have on enforcement actions ratified by “unconstitutionally insulated” directors. Because Mick Mulvaney was an acting director terminable-at-will, actions ratified by him are likely protected under the Opinion. But any actions ratified by the first-appointed director, Richard Cordray, or current director Kathleen Kraninger, may face legal challenges going forward.
In just 2 short weeks, the first round of Paycheck Protection Program (“PPP”) funding under the CARES Act was exhausted. And it is not difficult to see why – after all, so long as the employer receiving those funds uses at least 75% of the loan proceeds for payroll costs during the eight-week covered period, the loan amount allocated toward each of the following expenses can be forgiven:
- Payroll costs
- Payment of interest on covered mortgage obligations
- Payment on any covered rent obligations, and
- Covered utility payments.
But many small businesses have expressed frustrations about the loan process and lack of access to funding. Adding to those frustrations are the growing reports of not-so-small businesses, or companies with access to other financing, receiving loans and exhausting available funding.
With many parts of the country either closed down or reopening in phases, now is still the time to take advantage of PPP loans. Some tips for small businesses considering applying for a PPP loan are provided below:
- Act swiftly and decisively. The application period is open through June 30, 2020, but since these loans are given on a first-come, first-served basis, it is best to apply as quickly as possible.
- Even if you already submitted an application during the first round of PPP loans, be vigilant in communicating with your lender.If you have not received an approval or denial, stay in frequent contact with your lender in order to ensure that your application packet is complete and that additional information is not needed. If your lender asks for additional documentation, make that a first priority and get it promptly submitted in order to ensure you have the best chance at receiving funds.
- Try working with smaller local banks and community lenders. Most people have learned by now that working with a bank with whom you have an established relationship can give you priority in the PPP Loan application process. But if you have not had luck in this regard, consider working with a new community-based lender for a better chance at receiving funding –local business tends to sympathize and collaborate with other local business.
- What if my business is in a high-turnover industry? While the PPP loan program seems like a “no-brainer” for many businesses, some high-turnover industries may worry about whether or not they can maintain the appropriate headcount in order for most or all of their loan to be forgiven. This can be especially concerning, given the short two-year maturity period on PPP loans for unforgiven portions. The Amount of forgiveness is determined by multiplying the base forgiveness amount by one of the following fractions, to be selected by the borrower:
(Average # of full-time employees per month employed during covered period)
(Ave. # of full-time employees per month employed from Feb. 15, 2019 – June 30, 2019)
(Average # of full-time employees per month employed during covered period)
(Ave. # of full-time employees per month employed during January and February of 2020)
Small business owners who are not confident in employee retention are well-advised to use loan proceeds only for payroll costs and to keep any remaining funds on hand, where possible, in case some repayment is required. And since the CARES Act does not appear to make a distinction between employees who are let go versus those who leave voluntarily, job vacancies should be filled during the covered period to the extent possible. The PPP loan program does carry some risk for high-turnover industries but given that a personal guarantor or collateral is not required, the program is still less risky than traditional loans in most circumstances.
The full text of the CARES Act is available here. Sections 1102 and 1106 provide specific guidance regarding the PPP Loan program and PPP loan forgiveness.
The movement to challenge the constitutionality of the Consumer Financial Protection Bureau (“CFPB”) was given life through the PHH Mortgage case, and then seemingly was left without a pulse after the PHH Mortgage en banc hearing. But in Seila Law, LLC v. CFPB, No. 19-7 (U.S.), the argument that the CFPB’s structure is unconstitutional was resurrected, and it has survived all the way to the Supreme Court of the United States. Today, the High Court heard oral argument from the parties.
It is not often that creditors and debt-relief agencies share the same legal argument in similar cases. However, the argument asserted by Seila Law (a consumer debt relief firm) in the case currently before the Supreme Court, PHH Mortgage, a mortgage servicer, are one and the same. Both entities were originally the subject of CFPB enforcement actions. And both argued in defense that the CFPB’s structure violates the Separation of Powers Clause of the United States Constitution, due to its single-director, terminable-only-for-cause structure. More information about the original PHH Mortgage holding, which was reversed by the D.C. Circuit court en banc, is discussed in our previous post.
A second prong has been added to the unconstitutionality argument in Seila: The Supreme Court must first decide whether the structure of the CFPB is constitutional. If the Court finds it is not, then the Court must decide whether the relevant portions of the Dodd-Frank Act, creating its current structure, may be severed from the rest of the Dodd-Frank Act. In other words, is it necessary to abolish the CFPB altogether in the event its structure is unconstitutional, or may the agency itself be preserved with a more balanced model?
Interestingly, one Supreme Court Justice has already rendered an opinion on the first argument. It so happens that Justice Brett Kavanaugh was sitting on the D.C. Circuit at the time of the original PHH holding, as well as when the en banc Court overturned the original PHH decision. In his dissent to the latter, Justice Kavanaugh stated that the CFPB’s unchecked powers violate the constitution, where the director’s power is “massive in scope, concentrated in a single person, and unaccountable to the President.” Justice Kavanaugh did not recuse himself from the current proceedings, despite critics’ insistence that he do so due to his history with the PHH case.
Kavanaugh’s comments during argument today have reportedly echoed his prior opinions. Chief Justice John Roberts is considered the potential swing vote in this case, and his questions during today’s argument were directed toward both sides.
It is highly unlikely that the Supreme Court will hold that the CFPB should be dismantled altogether. The Trump administration has even softened its position on this issue since President Trump was first campaigning. But for the first time since its creation, there is a real possibility that the structure of the agency will be put into check.
About Financial Services Law Blog
The BSCR Financial Services Law Blog explores current events, litigation trends, regulations, and hot topics in the financial services industry. This blog will inform readers of issues affecting a wide range of financial services, including mortgage lending, auto finance, and credit card/retail transactions. Learn more about the editor, Megan Stumph, and our Financial Services practice.
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