CFPB Funding Mechanism Violates Constitution, Says Fifth Circuit (1)

Independent funding of the Consumer Financial Protection Bureau through the Federal Reserve violates the Constitution’s separation of powers clause, the Fifth Circuit has said.

Constitutional flaws found by the United States Court of Appeals for the Fifth Circuit in its decision on Wednesday also struck down the remaining parts of the CFPB’s restrictions on lenders offering payday loans, auto titles and other loans. short term at high interest rate.

“The Bureau’s perpetually self-directed, double-insulated funding structure goes one step further than that enjoyed by the other proposed agencies,” Judge Cory T. Wilson wrote for the three-judge appeals court panel.

The decision was a victory for payday lenders who had tried to remove a CFPB rule that would restrict their ability to access customers’ bank accounts and other measures. It also adds another headache for an agency that only recently dismissed a constitutional challenge to its leadership structure.

If the CFPB fails to overturn the Fifth Circuit’s decision on a likely appeal, the agency could face a massive fight in Congress for funding and potential placement on Congressional appropriations, particularly if the Republicans take over one or both houses of Congress in the upcoming midterm elections.

A CFPB spokesperson said there was “nothing new or unusual” about the CFPB’s funding mechanism, noting that the Federal Reserve System and programs like Medicare and Social Security are funded. outside of the credit allocation process.

“The CFPB will continue to carry out its vital work enforcing the nation’s laws and protecting American consumers,” the CFPB spokesperson said.

The Community Financial Services Association of America, the payday loan industry group leading the litigation over the rule, did not immediately respond to a request for comment.

Congress created the CFPB in 2010 in the Dodd-Frank Act, the legislative response to the 2008 financial crisis. only for cause and by providing independent funding through the Fed rather than through the Congressional appropriations process.

In June 2020, the Supreme Court ruled in Seila Law vs. CFPB that protections against removal for cause were unconstitutional and made the director of the CFPB an at-will employee of the president.

The High Court did not address the issue of funding. But other circuit courts had found that the bureau’s funding mechanism met constitutional requirements.

But the Fifth Circuit board found that CFPB funding was unique among federal regulatory agencies, including those funded without appropriations. The Fed, which is partly funded by assessments charged to banks, must return those funds beyond a prescribed limit to the Treasury Department.

The payday loan rule invalidated by Wednesday’s decision was finalized in 2020 after Kathy Kraninger, the Trump-era CFPB director, approved it.

The Trump-era version of the rule removed strict underwriting provisions that were originally put in place in 2017 by former CFPB director Richard Cordray.

The CFPB is expected to request an en banc review of the decision to the Fifth Circuit. The Supreme Court could also hear it at some point given the federal agency’s structural challenges.

Judges Don R. Willett and Kurt Engelhardt joined Wilson in the opinion.

The deal is Community Financial Services Association of America vs. CFPB5th Cir., No. 21-50826, notice 10/19/22.

Joseph E. Golightly