Once again, a federal court has found the CFPB’s structure to be unconstitutional. The Fifth Circuit U.S. Court of Appeals found the funding mechanism, whereby the CFPB is funded from appropriations from the Federal Reserve, violates the U.S. Constitution’s required separation of powers. The case involved is Community Financial Services of America v. Consumer Financial Protection Bureau, which sought to invalidate the CFPB’s recent Payday Lending Rule.
In its findings, the court mostly found in favor of the CFPB, keeping the Payday Lending Rule. However, importantly, the court found the CFPB’s funding structure violated the Appropriations Clause of the U.S. Constitution, which requires all government appropriations to be done through the Congress. The CFPB instead gains its funding through the Federal Reserve so as to insulate the agency from political whims of the Congress under the act which created the CFPB, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Under those provisions, the CFPB, through its director must submit an annual request to the Federal Reserve, that is “reasonably necessary to carry out” its functions, which amount may not exceed 12% of the Federal Reserve’s total operating expenses. These funds that make up the CFPB’s budget are already outside the congressional appropriations process as the Federal Reserve is funded through direct bank assessments. The CFPB is expected to either further appeal the Fifth Circuit decision or to seek an en banc rehearing of the case, but has not taken either action yet.
In the meantime, as we await further action from the CFPB, defendants in other cases brought by the CFPB have already sought to capitalize on the ruling: TransUnion has sought dismissal of an action brought by the CFPB in an Illinois case on the basis of the Fifth Circuit ruling, and two other defendants in a Utah federal case and another federal case in the Ninth Circuit have sought dismissal on the same grounds. In responses, the CFPB has characterized the Fifth Circuit decision as “neither controlling nor correct” and “mistaken.” In its statement about the ruling, the CFPB dismissed its basis stating, “there is nothing novel or unusual about Congress’s decision to fund the CFPB outside of annual spending bills.”
However, so far, the CFPB has not indicated what next steps it will take in response to the ruling. We will continue to monitor developments and advise on any significant updates.
