Fifth Circuit Issues Ruling Declaring Consumer Financial Protection Bureau Funding Mechanism Unconstitutional | Goodwin
On October 19, 2022, the Fifth Circuit Court of Appeals (Fifth Circuit) ruled that the Consumer Financial Protection Bureau (CFPB) funding mechanism was unconstitutional and violated the Appropriations Clause of the Constitution. Community End. Assoc. of Am. ltd.no. 21-50826 (5th Cir. Oct. 19, 2022). In light of the CFPB’s unconstitutional funding, the Fifth Circuit struck down the CFPB’s Rule to Regulate Payday Loans, Vehicle Titles, and Other High-Cost Installment Loans (Payday Loans Rule). The Fifth Circuit’s decision may have wide ramifications for the CFPB because, according to the court’s reasoning, the CFPB’s unconstitutional funding undermines its entire regulatory authority.
In overriding the payday loan rule, the Fifth Circuit held that unlike most executive agencies that rely on annual appropriations for funding, the CFPB has a “self-actualizing perpetual funding mechanism” enacted in 12 USC § 5497 which permits the Director of the CFPB to simply requisition from the Federal Reserve an amount “determined by the Director to be reasonably necessary to carry out” the functions of the CFPB. The court also noted that the Federal Reserve itself is a source that is outside of the regular appropriations process, which provides the Bureau with a “double insulation of the purse strings from Congress that is unprecedented across government.” “.
The Fifth Circuit said that, rather than holding funds with the Treasury Department, Congress improperly “extended even further to completely remove the Office from the separation of powers books” by allowing the CFPB to maintain an Office separated from Consumer Financial. Protection Fund with a Federal Reserve Bank (CFPB Fund) which is under the control of the Director of the CFPB and access to which requires no further act of Congress.
The court further ruled that Congress improperly waived jurisdiction to review CFPB funding because under 12 USC § 5497(a)(2)(C) such funds are not considered government funds. or appropriate funds.
Further, citing the Supreme Court’s decision in Seila Law LLC v CFPB, 140 S.Ct. 2183, 2200 (2020), the court noted that the unconstitutionality of the CFPB’s funding is exacerbated because the CFPB “acts as a mini-legislature, prosecutor and tribunal, charged with creating substantive rules for a wide range of industries, prosecuting violations and impose knee-jerk sanctions against individuals. The court went on to call the CFPB an “abomination” which, according to the framers of the Constitution, would “destroy that division of powers on which political liberty is founded.” (quoting The Works of Alexander Hamilton, vol. 2, Federalist No. 61 (Henry Cabot Lodge ed., 1904)).
The court rejected the CFPB’s arguments that its funding is constitutional because Congress enacted the mechanism since “the mere enactment of a law by Congress, by itself, does not satisfy the [Appropriations] clause requirements. Similarly, the court did not credit the Bureau’s argument that its funding was constitutional because there are several other executive agencies (the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration and the Federal Housing Finance Agency) which are also self-funded. As the court noted, these other bodies do not have the “double insulated funding structure” and enforcement or regulatory authority comparable to that of the CFPB.
The court then considered what remedy should be given to the unconstitutionality of the CFPB funding and concluded that there is a direct connection between the unconstitutional funding mechanism and the enactment of the payday loan rule. Therefore, the payday loan rule could not have been passed without the unconstitutional funding. As a result, the court struck down the payday loan rule as a product of the unconstitutional funding scheme.
The CFPB made it clear that it disagreed with the Fifth Circuit’s decision in an October 25, 2022 response to a supplemental authority notice filed in CFPB v. TransUnion, Case No. 1:22-cv-01880 (ND Ill. 2022)in which the CFPB stated that “[t]The Fifth Circuit committee ruled that Congress violated the appropriations clause and the separation of powers when it passed legislation authorizing the Bureau to spend money. This decision is neither determinative nor correct. Given the CFPB’s response and the potential impact of this decision, it is likely that the CFPB will seek the grant of a writ of certiorari from the Supreme Court. The CFPB deadline to do so is January 17, 2023.