The funding mechanism for the Consumer Financial Protection Bureau (CFPB) has been ruled unconstitutional by the 5th U.S. Circuit Court of Appeals. Rather than receiving funding directly from Congress via appropriations legislation, the consumer watchdog agency receives its funding from the Federal Reserve.
The ruling is a victory for a payday lending group that brought a lawsuit against the federal agency after its 2017 payday lending rule that provided certain consumer protections.
- The CFPB's funding arrangement is unconstitutional, according to a three-judge panel of the 5th U.S. Circuit Court of Appeals.
- While the ruling came in an appeal from a payday lending group, it's considered a victory for the finance industry as a whole, arguably at the expense of consumers.
- The agency has declined to say whether it will appeal the decision to the Supreme Court.
The Finance Industry Gets a Major Win
The CFPB was created in 2010 through the Dodd-Frank Wall Street Reform and Consumer Protection Act. To prevent the federal agency from being subject to political pressure, the Democratic policymakers who wrote the bill established a way for the agency to receive funding from the Federal Reserve instead of through Congressional appropriations.
More than a decade later, an appeals court ruled that arrangement unconstitutional because it violates the founding document's structural separation of powers.
In 2020, the Supreme Court ruled that another area of the agency's structure is unconstitutional. In particular, the court deemed that a president could only fire the CFPB director for cause rather than at will, which violated the separation of powers provision of the Constitution.
The original lawsuit against the CFPB was brought by a payday lending group following the agency's final payday lending rule in 2017, which required payday lenders to determine that customers have the ability to repay the loan before approving it, among other things.
In 2020, the agency rescinded the "ability-to-pay" requirement but still left another provision in place that prohibited lenders from attempting a third withdrawal from customer accounts after two failed withdrawals unless the customer consented to another attempt.
With the latest ruling from the 5th U.S. Court of Appeals, the entire payday lending rule has been vacated.
The CFPB's Next Steps
For years, the finance industry, as well as Republican legislators, have worked to limit the CFPB's oversight, arguing that it lacks accountability. Its funding structure is just one area of focus. However, a CFPB spokesperson noted that other financial regulators and the entire Federal Reserve System are funded outside Congressional spending bills.
The agency is expected to seek an en banc review of the decision, which allows the case to be heard by all of the judges of the appeals court rather than a smaller panel. However, the CFPB has declined to confirm that course of action. The case may also be reviewed by the Supreme Court at some point.
However, with no clear next steps, the decision is a major blow to the agency and its mission and creates a less certain future for its regulatory power.