President Trump's Supreme Court Appointee Will Shape Financial Services Policy, Too
What a week! On Tuesday, a deeply entrenched incumbent with realistic aspirations for the U.S. House speakership lost his Democratic primary in New York to a 28-year old, first-time candidate who also happens to be a self-described socialist. (More on what the overarching currents behind Rep. Joe Crowley’s (D-N.Y.) surprise loss might mean for our democracy in the weeks ahead.)
Next, after weeks of negotiations – and presidential intervention amidst heart-aching headlines – the House of Representatives spectacularly failed to advance a compromise immigration measure in a lopsided, 121-301 vote.
And then – as if we needed more political excitement – Supreme Court Justice Anthony Kennedy, the Court’s perennial swing vote, announced his retirement, handing President Donald Trump the ability to potentially reshape the ideology of the highest court in the land for a generation (or even two). Indeed, the president pledged to submit to the Senate a nominee that could serve on the Court for “40, 45 years.”
Much of the post-Kennedy retirement focus from Court-watchers on both sides of the aisle has understandably been focused on the kinds of social issues that have revealed a chasm between the two Americas in which we live, divided by ideology. An analysis of what a Trump-appointed swing vote on the Supreme Court could mean for this set of issues would be both lengthy and divisive, and is, thankfully, not the focus of these pieces. We will instead keep our blinders on and narrow our view to the financial services policy arena. Because in addition to a broad swath of social issues, President Trump’s forthcoming nominee, if confirmed by the Senate, will also likely – and meaningfully – shape financial services policy.
The American judiciary is officially split on the question of whether the structure of the Consumer Financial Protection (CFPB), the consumer financial watchdog created in 2010 by the Dodd-Frank Act, is constitutional. In October 2016, a three-judge panel from the U.S. Circuit Court of Appeals for the District of Columbia ruled the Bureau’s structure is unconstitutional, holding that the agency’s single director model made it unaccountable. In a divided opinion issued 15 months later, the full D.C. Circuit Court overturned that decision. Last Thursday, U.S. District Judge Loretta Preska from the Southern District of New York ruled the CFPB’s structure in unconstitutional. Pundits and legal experts alike anticipate that the Supreme Court will ultimately have the opportunity to determine, once and for all, whether the CFPB is, as currently organized, a constitutionally-legal entity.
Brett Kavanaugh, the 53-year-old D.C. circuit judge who some reports have at the very top of the president’s short-list to replace Justice Kennedy, was part of the three-judge panel who ruled the CFPB unconstitutional in 2016. He also wrote a dissent in the January 2018 ruling upholding the CFPB’s structure. In his October 2016 opinion, Kavanaugh referred to the “massive, unchecked” power of the CFPB. If nominated and confirmed to the highest court in the land, Kavanaugh would very likely have a third and final shot at ruling on the CFPB’s constitutionality.
While the specific practical result of Judge Preska’s decision is that the CFPB can no longer participate in a lawsuit against a company that’s been accused of defrauding first responders to the Sept. 11, 2001 terrorist attack, the broader implication is that the ruling makes it clear this issue is not settled. With Office of Management and Budget Director Mick Mulvaney still in charge of the CFPB (as we discussed week, Kathy Kraninger’s nomination to the CFPB allows Mulvaney to stay on as acting director until Kraninger is confirmed), it’s likely the CFPB will comply with Judge Preska’s ruling. However, even if Mulvaney and the White House comply, a higher court could challenge Judge Preska’s ruling. In fact, Allison Schoenthal, an attorney who represents financial institutions before the CFPB and other regulators, told The Washington Post that last Thursday’s result makes it more likely the Supreme Court eventually will hear a case regarding the CFPB’s constitutionality. Schoenthal said Judge Preska definitely made the question “more attractive for the court.”
And because in this highly-partisan environment, both sides seek to use every issue for their own political leverage, if President Trump nominates a staunch CFPB opponent like Kavanaugh to the Court, expect the debate over the commission to impact the 2020 presidential election, as well.
The specifics of the case being used as a proxy fight over the Bureau’s constitutionality make it a particularly interesting one, politically. At a time when Democrats and Republicans can find little, if anything, to agree on, support for heroic 9/11 first responders remains steadfast on both sides of the aisle. Presuming, as is probably likely, that the Supreme Court ultimately rules 5-4 against the Bureau’s constitutionality in a case related to the brave men and women who ran towards the rubble on September 11th , with President Trump’s forthcoming nominee casting the deciding vote, Democratic candidates for the White House in two years will almost certainly cite the case as a prime example of why their base needs to turn out for the 2020 presidential election.
Of course, the constitutionality of the CFPB isn’t the only financial services issue the next Supreme Court justice will decide. State banking supervisors, who have seen lawsuits against the Office of the Comptroller of the Currency’s (OCC) fintech charter dismissed because the agency has not yet formally proposed such a framework, will challenge charter almost immediately after the OCC presents it to the market, which could happen as early as next month. The state banking supervisors have argued in their previous litigation that a federal bank charter for entities other than traditional national banks represents an unconstitutional expansion of the OCC’s authority. The next Supreme Court justice will very likely shape that outcome, as well.
And these are just the two most immediate financial services-related issues the Supreme Court will likely have the opportunity to hear. If the president does indeed put forward a jurist who can serve for four decades, advances in technology will allow that justice to have a hand in determining the tenor and tone of the government’s role in financial services policy on issues beyond our limited, 2018-based imaginations.