• Ruling finds CFPB funding unconstitutional, seeks to distinguish CFPB funding from other self-funded agencies.
  • Fifth Circuit vacates 2017 Payday Lending Rule on grounds that it was promulgated using funds obtained outside of the Congressional appropriations process, raising possibility of legal challenges to all agency actions.
  • Uncertainty regarding litigation risk of agency activities raises questions of need to place CFPB on appropriations.

The Fifth Circuit’s Ruling

On October 19, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit (“Fifth Circuit”) ruled that the Consumer Financial Protection Bureau’s (CFPB) funding mechanism is unconstitutional in response to a challenge from the Community Financial Services Association of America and Consumer Service Alliance of Texas.

The CFPB draws its funding from the Federal Reserve, rather than through Congressional appropriations. The Fifth Circuit’s ruling took issue with the “double isolation” of the CFPB from Congressional oversight since the Federal Reserve also is not subject to the appropriations process. The Fifth Circuit found that this arrangement “violates the Constitution’s structural separation of powers.”

A CFPB spokesperson responded to the ruling, stating, “Other federal financial regulators and the entire Federal Reserve System are funded that way, and programs such as Medicare and Social Security are funded outside of the annual appropriations process. The CFPB will continue to carry out its vital work enforcing the laws of the nation and protecting American consumers.”

The Fifth Circuit’s ruling rejected this argument, stating: “Even among self-funded agencies, the Bureau is unique. The Bureau’s perpetual self-directed, double-insulated funding structure goes a significant step further than that enjoyed by the other agencies on offer.”

Implications for the CFPB and Self-Funded Agencies

The CFPB will likely appeal the decision. If so, it can request a rehearing before the full Fifth Circuit, or request that the Department Justice seek to bring the case to the Supreme Court.

As an immediate consequence of the ruling, the Fifth Circuit vacated the CFPB’s 2017 Payday Lending Rule on the grounds that it was promulgated as part of an unconstitutional funding scheme. This raises the possibility of legal challenges to other CFPB rules or actions carried out using funds from the Federal Reserve. The uncertainty regarding the legitimacy of CFPB funding may raise questions in Congress about whether putting the CFPB on appropriations would strengthen the agency and its mission and add certainty to its actions.

The ruling attempted to distinguish the CFPB’s funding structure from other self-funded regulatory agencies. However, those agencies also may face questions because of this ruling. Those agencies are likely preparing responses to challenges to their funding structures and more actively monitoring litigation risk regarding their rules and actions. Further, this ruling may contribute to sentiment that all similar agencies should be funded through Congressional appropriations.

Implications for Industry

Industry should monitor this developing issue closely as this ruling will not be the final word. While the outcome overturned a controversial rule in this case, it is unclear how other courts would rule on matters involving similar circumstances and defenses. Industry should consult their counsel and continue to ensure effective risk management and compliance processes are in place in all their business operations.

Put Patomak’s Banking Expertise to Work 

Patomak has deep experience in helping banks and other financial institutions assess emerging risks related to public policy developments and market opportunities. Contact us to learn how Patomak can help you navigate these challenges and help you meet your business goals.

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