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Join this webinar to learn what servicers need to know about recent and upcoming servicing compliance regulations and strategies experts are implementing to prepare for servicing regulatory audits.

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Politics & Money

Ninth Circuit Court upholds CFPB investigation on Seila Law

Says CID was constitutional

The Ninth Circuit Court of Appeals issued a decision in favor of the Consumer Financial Protection Bureau’s actions taken against Seila Law.

The case, Consumer Financial Protection Bureau v. Seila Law LLC, has been one of the most significant cases against the bureau as it fought, and won, the battle against the CFPB’s constitutionality.

Other companies tried and failed when they sought court decisions against the CFPB, such as when the Court of Appeals for the District of Columbia Circuit issued its stunning decision to reverse its earlier ruling and uphold the constitutionality of the CFPB against mortgage firm PHH Corp., which elected not to pursue the case to the Supreme Court.

After the court ruled the CFPB unconstitutional under its current structure, saying it violated the Constitution’s separation of powers by placing leadership of the agency in the hands of a single director who could only be removed for cause, Seila Law was determined to take the case a step further.

In short, the CFPB director was determined to have held too much power, a ruling that was ratified when the court declared they could be removed at-will by the president. Seila Law then argued that actions taken against it while the director was only removable for cause were also unconstitutional, and should be discarded.

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Presented by: Wolters Kluwer Financial Services

This time, the court, presided over by Circuit Judges Susan Graber and Paul Watford and District Judge Jack Zouhary, ruled in favor of the CFPB, upholding the bureau’s civil investigative demand.

The CID was first ratified by former Acting Director Mick Mulvaney during his one-year as head of the CFPB. Later, after the Supreme Court ruling, CFPB Director Kathy Kraninger expressly ratified the agency’s decision to issue a CID against Seila Law, and denied its request to modify it or set it aside. This decision was made when Kraninger knew she could be removed at will by President Donald Trump.

“Director Kraninger’s ratification remedied any constitutional injury that Seila Law may have suffered due to the manner in which the CFPB was originally structured,” Watford wrote in his opinion. “Seila Law’s only cognizable injury arose from the fact that the agency issued the CID and pursued its enforcement while headed by a Director who was improperly insulated from the President’s removal authority. Any concerns that Seila Law might have had about being subjected to investigation without adequate presidential oversight and control had now been resolved. A Director well aware that she may be removed by the President at will had ratified her predecessors’ earlier decisions to issue and enforce the CID.”

Seila Law attempted to argue that it was not enough to simply “ratify” its previous actions, since they were made under unconstitutional leadership. It argued a whole new investigation would need to be started. However, the court sided against this claim.

Interestingly, however, the court concluded that the CID was validly ratified by Kraninger on July 9, 2020. It did not give an opinion on whether or not Mulvaney’s actions were constitutional, possibly leaving the door open for future challenges.

“We conclude that the CID was validly ratified, but we need not decide whether that occurred through the actions of Acting Director Mulvaney,” Watford stated.

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