Fifth Circuit Issues Decision Holding that the Funding Mechanism for the Consumer Financial Protection Bureau Is Unconstitutional

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On October 19, 2022, the Fifth Circuit Court of Appeals (Fifth Circuit) held that the funding mechanism for the Consumer Financial Protection Bureau (CFPB) is unconstitutional and violates the Appropriations Clause of the Constitution.  Community Fin. Services Assoc. of Am. Ltd., No. 21-50826 (5th Cir. Oct. 19, 2022).  In light of the CFPB’s unconstitutional funding, the Fifth Circuit vacated the CFPB’s rule to regulate payday, vehicle title and other high-cost installment loans (Payday Lending Rule).  The Fifth Circuit’s decision may have wide-reaching ramifications for the CFPB because, according to the court’s reasoning, the unconstitutional funding of the CFPB undermines all of its regulatory authority.

In vacating the Payday Lending 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 U.S.C. § 5497 that allows the CFPB’s Director to simply requisition from the Federal Reserve an amount “determined by the Director to be reasonably necessary to carry out” the CFPB’s functions.  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 “double insulation from Congress’s purse strings that is unprecedented across the government.”

The Fifth Circuit stated that, rather than holding funds with the Department of Treasury, Congress improperly “went to even greater lengths to take the Bureau completely off the separation-of-powers books” by allowing the CFPB to maintain a separate Bureau of Consumer Financial Protection Fund at a Federal Reserve bank (CFPB Fund) that is under the control of the CFPB’s Director and for which access does not require any further act of Congress.

The court further held that Congress improperly relinquished its jurisdiction to review the CFPB’s funding because under 12 U.S.C. § 5497(a)(2)C), such funds are not considered government funds or appropriated monies.

Additionally, quoting 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 court, responsible for creating substantive rules for a wide swath of industries, prosecuting violations, and levying knee-buckling penalties against private citizens.”  The court went on to call the CFPB an “abomination” that the Framers of the Constitution warned “would destroy that division of powers on which political liberty is founded.” (citing 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 “Congress’s mere enactment of a law, by itself, does not satisfy the [Appropriations] clause’s requirements.” Likewise, 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) that are also self-funded.  As the court noted, those other agencies do not have the “double-insulated funding structure” and enforcement or regulatory authority comparable to the CFPB’s.

The court then considered what the remedy should be given the unconstitutionality of the CFPB’s funding and held that there is a direct connection between the unconstitutional funding mechanism and the promulgation of the Payday Lending Rule.  Therefore, the Payday Lending Rule could not have been passed without the unconstitutional funding. Accordingly, the court vacated the Payday Lending Rule as a product of the unconstitutional funding scheme.

The CFPB has made clear that it does not agree with the Fifth Circuit’s decision through an October 25, 2022, response to a notice of supplemental authority filed in CFPB v. TransUnion, Case No. 1:22-cv-01880 (N.D. Ill. 2022), in which the CFPB stated that “[t]he Fifth Circuit panel thought that Congress violated the Appropriations Clause and the separation of powers when it passed a law authorizing the Bureau to spend money.  That decision is neither controlling nor correct.”  Given the CFPB’s response and the potential impact of this decision, it is likely that CFPB will seek a grant of a writ of certiorari to the Supreme Court.  The CFPB’s deadline to do so is January 17, 2023.