On October 19, 2022, the United States Court of Appeals for the 5th Circuit dealt a severe blow to the Consumer Financial Protection Bureau’s (“CFPB”) enforcement authority, finding the CFPB’s “self-funding” mechanism unconstitutional as it violates the Appropriations Clause of the U.S. Constitution. While the 5th Circuit affirmed the U.S. District Court for the Western District of Texas’s decision (a) that payday lenders may not obtain pre-loan authorization to make numerous withdrawals from consumer bank accounts, (b) upholding CFPB director removal provisions, and (c) validating Congress’s provision of broad enforcement authority to the CFPB, it rejected the District Court’s holding that the CFPB’s funding structure passes constitutional muster. Indeed, the 5th Circuit determined that the CFPB funding structure inherently violates the separation of powers doctrine by violating the Appropriations Clause of the U.S. Constitution. The decision has sparked considerable debate across the consumer finance industry and Constitutional scholars, but more pragmatically represents another blow to the CFPB’s day-to-day activities that implied in the 5th Circuit’s decision are being performed via unconstitutional funding and, therefore, are void.
What You Need to Know:
- The Consumer Financial Protection Bureau (“CFPB”) is the primary federal agency responsible for regulating the consumer finance industry.
- The CFPB has been subject to various attacks in recent years, with one such attack resulting in the U.S. Supreme Court declaring that the CFPB director removal process is unconstitutional.
- While other federal agencies operate under autonomous funding mechanisms, the CFPB has a unique funding structure that takes it one step further outside the traditional Congressional appropriations process, causing industry participants to question the CFPB’s accountability.
In Consumer Financial Services Association of America, Limited v. Consumer Financial Protection Bureau, several trade groups brought suit against the CFPB arguing that a CFPB restriction on the number of withdrawal attempts that a lender can make against a consumer’s bank account after the consumer defaults on the loan was arbitrary and capricious, and therefore violated Administrative Procedure Act (“APA”). The plaintiffs also argued that the removal provisions for the CFPB director are improper and therefore the withdrawal limitation is—consequently—void; that Congress exceeded its powers in delegating broad enforcement powers to the CFPB; and that the method in which the CFPB is funded is unconstitutional. Addressing the first three issues, the 5th Circuit soundly rejected the plaintiffs’ arguments.
The 5th Circuit found that the withdrawal limitation is within the scope of the CFPB’s enforcement authority primarily because the limitation prevents substantial injury to consumers which is not avoidable from the consumers’ perspective. The 5th Circuit further found that the limitation was neither arbitrary nor capricious.
With respect to plaintiffs’ contention that the improper CFPB director removal provisions necessarily invalidate the withdrawal limitation, the 5th Circuit disagreed. In doing so, the 5th Circuit cited Seila Law, LLC v. Consumer Financial Protection Bureau, a 2020 U.S. Supreme Court decision that held that a CFPB rule allowing for presidential removal of the CFPB director only “for inefficiency, neglect of duty, or malfeasance in office[]” was unconstitutional as violative of separation of powers. Notably, and while the Supreme Court struck the removal provision as invalid, it specifically held that that provision was severable and therefore did not automatically invalidate the remainder of the Consumer Financial Protection Act, 12 U.S.C. §§ 5481–5603 (the federal statute creating the CFPB). Also relevant to the 5th Circuit’s decision was the Supreme Court case of Collins v. Yellen, where the Court determined that a for-cause-only removal provision applying to the director of the Federal Housing Finance Agency (“FHFA”) was invalid but—like in Seila—did not mean that all of the FHFA’s actions needed to be undone. Rather, the Supreme Court articulated a test to determine whether the existence of the improper removal provision could have had an effect on the validity of the specifically challenged regulation. Namely, the Court required that the removal provision must have inflicted harm through enactment of the challenged rule (i.e., the provision must have improperly influenced the director’s actions in approving the challenged rule). Applying this test to the withdrawal limitation at issue in Consumer Financial Services Association, the 5th Circuit held that the CFPB director (Richard Cordray) was not subject to any improper influence via the for-cause removal provision such that he would have acted differently in approving the rule.
Turning to the plaintiffs’ challenge to Congress’s delegation of broad enforcement authority to the CFPB, the 5th Circuit rejected this argument as well. Though Congress generally may not delegate its lawmaking authority to other agencies, the 5th Circuit rightly noted that this principle has been significantly delimited. Namely, the Supreme Court has held that “[s]o long as Congress ‘lay[s] down by legislative act an intelligible principle to which the person or body authorized to [act] is directed to conform, such legislative action is not a forbidden delegation of legislative power.’” Touby v. United States, 500 U.S. 160, 165 (1991). Further, it is “constitutionally sufficient if Congress clearly delineates the general policy, the public agency which is to apply it, and the boundaries of this delegated authority.” Am. Power & Light Co. v. SEC, 329 U.S. 90 (1946). The 5th Circuit determined that the CFPB’s rulemaking authority passed each of these tests, and rejected plaintiffs’ argument.
The bulk of the 5th Circuit’s decision focused on whether the CFPB’s funding structure is unconstitutional as violative of the separation of powers doctrine and the appropriations clause of the U.S. Constitution. Unlike some other government agencies that obtain funding directly from Congressional appropriations, the CFPB is funded by the Federal Reserve—an agency which is itself outside the traditional appropriations process, in that it is funded by assessments it requires banks to pay. Specifically, the CFPB requests from the Federal Reserve an amount “determined by the Director to be reasonably necessary to carry out” the Bureau's functions. 12 U.S.C. § 5497(a). The Federal Reserve must grant that request so long as it does not exceed 12 percent of the Federal Reserve's “total operating expenses.” 12 U.S.C. § 5497(a)(1)–(2).12. As the 5th Circuit noted, “[t]he funds taken by the [CFPB], in effect, reduce amounts that would otherwise flow to the general fund of the Treasury, as the Federal Reserve is required to remit surplus funds in excess of a limit set by Congress.” See 12 U.S.C. § 289(a)(3)(B).
Additionally, the CFPB maintains “a separate fund, . . . the ‘Bureau of Consumer Financial Protection Fund,’ ” which “shall be maintained and established at a Federal [R]eserve bank.” 12 U.S.C. § 5497(b)(1). This fund is “under the control of the Director,” and the monies on deposit are permanently available to him without any further act of Congress. Id. § 5497(c)(1). To further the CFPB’s independence from Congressional appropriation, the Act also provides that “[f]unds obtained by or transferred to the [CFPB] Fund shall not be construed to be Government funds or appropriated monies.” Id. § 5497(c)(2). To emphasize this point even further, the Act states that “funds derived from the Federal Reserve System . . . shall not be subject to review by the Committees on Appropriations of the House of Representatives and the Senate.” Id. § 5497(a)(2)(C).
In sum, through the Act Congress not only ceded its ability to directly control the CFPB through the appropriations process, but also the ability to indirectly control it, thereby creating a unique and unprecedented double insulation for the CFPB. The intention of this funding scheme was to insulate the CFPB from the Congressional appropriation process and the political ramifications associated therewith in furtherance of separation of powers principles.
Addressing plaintiffs’ challenge, the 5th Circuit found that this framework is unconstitutional. In doing so, the 5th Circuit rejected the CFPB’s argument that because its funding mechanism was enacted by Congress, it cannot run afoul of the appropriations clause. As the Court noted, this argument is illogical because accepting this argument, no statute could ever run afoul of the appropriations clause because Congress necessarily enacts all federal statutes. The court also rejected the CFPB’s argument that because other federal agencies are self-funded, the CFPB’s funding scheme is proper as well. Namely, the CFPB cited the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and other federal agencies as having budgetary autonomy. The 5th Circuit disagreed with these comparisons, however, noting that those agencies receive their funding directly from Congress, and not from the Federal Reserve—which is an entity that is outside the appropriations process itself. It is this two-layered separation from Congress that the 5th Circuit held rendered the CFPB funding mechanism unparalleled and therefore unconstitutional. But it seems at least a bit illogical for the 5th Circuit to hold that the Federal Reserve’s self-funding is constitutional because it remits any funds in excess of its operational costs to the Treasury. As noted above, part of the Federal Reserve’s costs is its funding of the CFPB. So, all of its other expenses and how it otherwise uses it self-funding is okay, but not the amounts given to the CFPB?
Having rejected the CFPB’s arguments, the 5th Circuit offered its thoughts on the CFPB funding structure, noting that:
The Bureau's perpetual insulation from Congress's appropriations power, including the express exemption from congressional review of its funding, renders the Bureau “no longer dependent and, as a result, no longer accountable” to Congress and, ultimately, to the people. By abandoning its “most complete and effectual” check on “the overgrown prerogatives of the other branches of the government”—indeed, by enabling them in the Bureau's case—Congress ran afoul of the separation of powers embodied in the Appropriations Clause.
Having invalidated the funding structure, the 5th Circuit then undertook the task of addressing what effect, if any, this invalidation has on other CFPB rules, including the lender withdrawal limitation rule it addressed earlier. Consistent with Seila and Collins, the 5th Circuit held that the unconstitutional funding scheme did not automatically invalidate all current CFPB regulations, including the withdrawal limitation rule. The court therefore turned its analysis to whether the unconstitutional funding scheme inflicted harm. Addressing that issue, the court held that:
Because the funding employed by the Bureau to promulgate the Payday Lending Rule was wholly drawn through the agency's unconstitutional funding scheme, there is a linear nexus between the infirm provision (the Bureau's funding mechanism) and the challenged action (promulgation of the rule). In other words, without its unconstitutional funding, the Bureau lacked any other means to promulgate the rule. Plaintiffs were thus harmed by the Bureau's improper use of unappropriated funds to engage in the rulemaking at issue. Indeed, the Bureau's unconstitutional funding structure not only “affected the complained-of decision,” it literally effected the promulgation of the rule. Plaintiffs are therefore entitled to “a rewinding of [the Bureau's] action.”
Accordingly, the court struck the withdrawal limitation on the grounds that it was passed through an improper funding mechanism. The court therefore reversed the District Court’s entry of summary judgment in favor of the CFPB, and entered summary judgment in favor of the plaintiffs.
This decision represents a major blow to the CFPB, but it is unlikely to represent the end of the road given each parties’ appeal rights. It is anticipated that both parties will seek clarification on all these issues before the Supreme Court, and that the Supreme Court may take the case given that it involves a constitutional issue and the ability of a critical federal agency to carry out its duties. While the Supreme Court has yet to weigh in on this issue, its comments from Seila Law may indicate how the high court may decide the issue. Specifically, and though the funding issue was not directly before the Court in that case, the Court noted in dicta that “[t]he only constitutional defect we have identified in the CFPB's structure is the Director's insulation from removal. If the Director were removable at will by the President, the constitutional violation would disappear.” Stated differently, if the director withdrawal provision was the “only” unconstitutional aspect of the CFPB’s structure at that time, then the funding mechanism complies with constitutional requirements. Lower courts have taken note of the Supreme Court’s comments in this manner, finding that the CFPB funding structure is constitutionally compliant. See CFPB v. Fair Collections & Outsourcing, Inc., No. GJH-19-2817, 2020 WL 7043847, at *9 (D. Md. Nov. 30, 2020); CFPB v. Center for Excellence in Higher Education, No. 2:19-cv-00877-RJS-CMR, 2022 WL 4182301, * (D. Utah Sept. 13, 2022); CFPB v. Law Offices of Chrystal Moroney, P.C., No. 7:20-cv-03240 (S.D.N.Y. Aug. 19, 2020). Were the Supreme Court to rule consistently with its comment from Seila Law, we could see the 5th Circuit’s decision reversed.
Were the Supreme Court to deviate from its prior position, on the other hand, Congress would need to revise the CFPB’s funding structure to remedy the unconstitutional defect. Though not certain, it is likely that Congress would aim to mirror the funding structures in place at the Federal Reserve, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, or other federal agencies that obtain funding more directly through the Congressional appropriations process. Revising the CFPB’s funding mechanism to more closely resemble those in place at these other federal agencies would remove the double-insulation component currently in place, which according to the 5th Circuit, is the primary factor rendering the CFPB’s current funding framework unconstitutional. Further, Congress would need to act quickly in making this revision, as it is anticipated that during any period in which the CFPB’s funding mechanism remains invalid (i.e., before Congress can revise it), many consumer finance industry participants may bring suit to challenge CFPB enforcement efforts or to otherwise invalidate other rules that apply to them. In sum, and though the CFPB may move to stay the effect of the 5th Circuit’s decision in Community Financial Services Association, the ruling leaves the CFPB’s enforcement abilities tremendously exposed to challenge.
In the meantime, litigants across the country have already started relying on the 5th Circuit’s decision as supplemental authority in an effort to invalidate pending CFPB enforcement suits. See CFPB v. Transunion, pending in the U.S. District Court for the Northern District of Illinois as case number 1:22-cv-01880; CFPB v. Progrexion Marketing, Inc., pending in the U.S. District Court for the District of Utah as case number 2:19-cv-00298-DBP; and CFPB v. Nationwide Biweekly Administration, pending in the U.S. District Court for the Northern District of California as case number 3:15-cv-02106-RS.
The Consumer Financial Services practice at Saul Ewing will continue to monitor this decision and its impacts. In the interim, those with questions or seeking guidance should consult with a Saul Ewing attorney.
