Last week, the U.S. Court of Appeals for the Fifth Circuit ruled that the Consumer Financial Protection Bureau’s (CFPB) independent funding mechanism is unconstitutional. Under the Dodd-Frank Act, the CFPB is not funded through periodic congressional appropriations; instead, the bureau receives its funding directly from the Federal Reserve, which is itself funded outside the congressional appropriations process. In Community Financial Services Association of America Ltd. v. CFPB, a unanimous three-judge panel of the court held that the CFPB’s “double-insulated” funding violates the U.S. Constitution’s Appropriations Clause and the separation of powers principles on which it is based.
Specifically, two trade associations brought suit in the Western District of Texas to challenge the validity of the CFPB’s 2017 Payday Lending Rule. The federal district court rejected the trade associations’ numerous arguments for invalidating the rule, and the plaintiffs appealed. The Fifth Circuit agreed “that, for the most part, the Plaintiffs’ claims miss their mark”; but, critically, “one arrow has found its target: Congress’s decision to abdicate its appropriations power under the Constitution, i.e., to cede its power of the purse to the Bureau, violates the Constitution’s structural separation of powers.” Thus, the Fifth Circuit reversed the district court and vacated the Payday Lending Rule.
This unanimous Fifth Circuit decision comes on the heels of Judge Jones’ “magisterial” concurrence in All Am. Check Cashing, Inc., where—as the CFSA panel put it—Judge Jones “[m]ethodically analyz[ed]” the legitimacy of the bureau’s funding mechanism. After following Judge Jones’ analysis to find the CFPB’s funding source unconstitutional, the Fifth Circuit turned to the question of remedy. The panel concluded that “without its unconstitutional funding, the Bureau lacked any other means to promulgate the [payday] rule.” The plaintiffs “were thus harmed by the Bureau’s improper use of unappropriated funds to engage in the rulemaking,” entitling them to “a rewinding of [the Bureau’s] action.”
Last week’s decision may mark a sea change in the CFPB’s future. Indeed, the Fifth Circuit ruling creates an opportunity to challenge the validity of myriad rules issued and enforcement actions taken under the current CFPB funding structure—at least in the Fifth Circuit and likely elsewhere—unless the decision is appealed and reversed. Practically speaking, however, businesses and financial institutions should be cautious and consult counsel before changing their compliance programs based on this decision alone until it is clear how it plays out.
Members of Congress, since the CFPB opened its doors more than a decade ago, have introduced bills placing the CFPB under the congressional appropriations process—with Republicans repeatedly urging the need to do this to legitimize the CFPB’s funding source. This session, Congressman Andy Barr (R-KY) reintroduced H.R. 790, the TABS Act, which would put the CFPB under the appropriations process and called on the House Financial Services Committee to vote on it in the wake of last week’s decision.
The Fifth Circuit decision undoubtedly will motivate Republicans to continue pushing for these changes. However, it is unlikely this legislation will be considered this Congress, or that President Biden would sign such a change into law this, or next, Congress. It is possible, however, that the Supreme Court could direct Congress to rewrite the Dodd-Frank Act. Alternatively, the confusion created for regulated businesses by this decision may make the CFPB’s funding structure more of a bipartisan issue that could be taken up by the next Congress.
The Fifth Circuit decision most certainly will prompt additional appellate review, either by the en banc court or the Supreme Court. The CFPB could petition the Fifth Circuit for a rehearing en banc, but, considering 12 of the 16 active judges on the Fifth Circuit were appointed by Republican presidents and seven of these Republican-appointed judges have now indicated they agree the CFPB is unconstitutionally funded, it is unlikely en banc review would change the result of the panel decision. That leaves petitioning the Supreme Court for review, and a likely request to stay the Fifth Circuit’s mandate while the Supreme Court considers CFPB’s petition.
If the CFPB doesn’t appeal, all bets are off. At least for entities in the Fifth Circuit, serious questions could then be lodged as to whether past, ongoing and future CFPB actions are enforceable.
The CFPB also recently urged state attorneys general in an interpretive rule to pursue actions that violate the provisions of federal consumer financial protection law. It might be expected that as a result of the ambiguity about the CFPB’s authority because of the CFSA decision, particularly in the Fifth Circuit, it may turn to the states to step up their activity enforcing for federal consumer financial protection actions to avoid legal challenges.
Brownstein is working with clients to prepare for all of these scenarios and is also well equipped to strategize and assist as this case moves forward.
This document is intended to provide you with general information regarding the CFPB's independent funding mechanism. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.