Federal courts have delivered another blow to the Consumer Financial Protection Bureau, with the 5th Circuit Court of Appeals ruling on Wednesday that the bureau's funding model is unconstitutional. The court held that Congress alone should be appropriating money to fund the CFPB rather than having funds allocated through the Federal Reserve. The three-judge panel also struck down a small-dollar lending rule which has received opposition from payday lenders, a victory for lenders that have targeted the agency’s structure in a years-long bid to tamp down regulation.
A three-judge panel of the 5th U.S. Circuit Court of Appeals ruled that the design of the CFPB violated the Constitution because it receives funding through the Federal Reserve, rather than appropriations legislation passed by Congress. Democrats established the structure when they created the CFPB in the 2010 Dodd-Frank law as a way to shield the bureau from political pressures that could impact its oversight of the finance industry.
The judges also vacated a 2017 small-dollar lending rule targeted by the payday lending advocates who brought the case—the Community Financial Services Association of America and the Consumer Service Alliance of Texas.
“Congress’s decision to abdicate its appropriations power under the Constitution, i.e., to cede its power of the purse to the Bureau, violates the Constitution’s structural separation of powers,” the judges wrote.
The appeals court ruling marked the latest victory for the finance industry, which has fought for years in Congress and the courts to blunt the CFPB’s reach and limit its ability to police financial services. Republican lawmakers have also worked for years to stifle the CFPB and revamp its structure, arguing the agency lacks accountability.
The CFPB Wednesday declined to say whether it would appeal the decision to the full 5th Circuit. CFPB spokesperson Sam Gilford said “there is nothing novel or unusual about Congress’s decision to fund the CFPB outside of annual spending bills.”
“Other federal financial regulators and the entire Federal Reserve System are funded that way, and programs such as Medicare and Social Security are funded outside of the annual appropriations process,” Gilford added. “The CFPB will continue to carry out its vital work enforcing the laws of the nation and protecting American consumers.”
The Supreme Court in 2020 ruled that another provision of the agency’s structure — a single director who could only be fired for cause, rather than at will, by the president — violated the Constitution’s separation of powers.
"It remains to be seen whether this is a minor or major setback for the CFPB,” said Jeff Ehrlich, partner at McGuireWoods and former deputy enforcement director at the Consumer Financial Protection Bureau. "Either way, it likely doesn’t spell doom for the Bureau. Most of this work, but the enforcement work in particular, is going to be done by someone. In many cases, the states have the same enforcement authority as the Bureau under the Consumer Financial Protection Act. There is also room for the FTC to pick up any slack."
Mr. Ehrlich added that even with a blow to the funding, other regulators will likely enter any enforcement vacuum and handle much of the prosecutorial work done by the CFPB.
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