The Consumer Financial Protection Bureau has survived many constitutional challenges since it was created by the Consumer Financial Protection Act, 12 U.S.C. §§ 5481, et seq. (the “Act”), in 2011.[1]  But on October 19, 2022, the CFPB suffered a setback in the wake of the Fifth Circuit’s decision in Community Financial Services Association of America, Ltd. v. CFPB, No. 21-50826, (5th Cir. 2022).

In a unanimous decision, the Fifth Circuit held that “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.”

In this lawsuit, Plaintiffs Community Financial Services Association of America and Consumer Service Alliance of Texas challenged the validity of the CFPB’s 2017 Payday Lending Rule[2] on several grounds.  Plaintiffs first contend that in promulgating the rule, the Bureau acted arbitrarily and capriciously and exceeded its statutory authority.  Plaintiffs also contend that the Bureau is unconstitutionally structured, challenging the Bureau director’s insulation from removal, Congress’s broad delegation of authority to the Bureau, and the Bureau’s unique, double-insulated funding mechanism.  While the district court rejected Plaintiff’s arguments, the Fifth Circuit invalidated the Payday Lending Rule on the basis that the CFPB’s funding scheme violates the Appropriations Clause of the Constitution and separation of powers principles. 

The Bureau’s funding scheme is unique in that it is not funded with periodic congressional appropriations.  The Fifth Circuit examined the CFPB’s two funding methods in detail.  The first funding method is through the CFPB director’s annual request to the Federal Reserve for an amount that is “reasonably necessary to carry out” the Bureau’s functions.  Under the Act, the Federal Reserve, an independent agency and not under Congress’s control, must grant the request so long as it does not exceed 12% of the Federal Reserve’s total operating expenses.  The lack of congressional involvement in the appropriations process was found to be unconstitutional.

The CFPB’s second source of funding comes from monies it obtains in the form of restitution, disgorgement, and civil penalties through investigations and civil prosecutions of consumer protection laws.  The Act expressly takes these funds out of congressional oversight and puts them exclusively under the CFPB director’s control.  Since the CFPB is an executive agency with “vast rulemaking, enforcement, and adjudicatory authority over a significant portion of the U.S. economy,” the Fifth Circuit concluded that the lack of congressional review over the CFPB’s “funding apparatus cannot be reconciled with the Appropriations Clause and the clause’s underpinning, the constitutional separation of powers.”  

The Community Financial Services decision is not only significant for the viability of the CFPB as an agency going forward, but it also opens the door to new and renewed challenges to the CFPB’s existing rules[3].  In vacating the 2017 Payday Lending Rule, the Fifth Circuit found that the rule was “wholly drawn through the [CFPB’s] unconstitutional funding scheme.”  Legislators have already picked up on this, as illustrated by the statement issued from U.S. Senate Banking Committee Ranking Member Pat Toomey (R-Pa.): “The Fifth Circuit’s decision to invalidate the CFPB’s payday lending rule because it is the product of an unconstitutional funding scheme calls into question the validity of all of the agency’s actions to date.”

Defendants in CFPB enforcement actions have also picked up on the Fifth Circuit decision and have sought dismissal in those cases.  In an enforcement action pending in Illinois, the Bureau filed a response to a notice of supplemental authority, stating that the “[Fifth Circuit] decision is neither controlling nor correct.”[4]  The CFPB raises three primary points in its response.  First, it claims that the “Fifth Circuit’s decision is without support in law” because the court cites to no case law holding that Congress violated the Appropriations Clause when it authorizes spending by statute.  Second, the CFPB argues that its source of funding from the Federal Reserve does not result in the lack of congressional oversight because Congress still has the “ability to oversee how the Bureau spends that money to carry out its duties.”  And third, the CFPB contends that the Fifth Circuit’s holding “finds no support in a statutory provision stating that funds transferred to the Bureau ‘shall not be construed to be Government funds or appropriated monies,’ 12 U.S.C. § 5497(c)(2).”  The CFPB will undoubtedly raise these arguments on appeal.

On November 14, 2022, the CFPB filed a petition for a writ of certiorari with the Supreme Court, asking it to review the Fifth Circuit’s decision “promptly.”  The CFPB argues that further review is necessary “because the [Fifth Circuit’s] decision declared an Act of Congress unconstitutional, because it squarely conflicts with a decision of the D.C. Circuit, and because it threatens to inflict immense legal and practical harms on the CFPB, consumers, and the Nation’s financial sector.”  The CFPB plans to waive its right to file a reply brief after the deadline to oppose the certiorari petition lapses on December 14, 2022, so the Supreme Court can consider the petition at its January 6, 2023, conference and hear the case during its April 2023 sitting.  The CFPB will likely ask the Fifth Circuit to stay its mandate and, if denied, seek a stay from the Supreme Court.  We will continue to monitor and report on any developments.

[1] Most recently in 2020, the Supreme Court left the CFPB intact after it ruled that the president’s power to remove the CFPB director “for cause” only was unconstitutional.  Seila Law LLC v. Consumer Financial Protection Bureau, 140 S.Ct. 2183 (2020).  The CFPB continued to operate after the “for cause” removal provision was severed from the rest of the Act, allowing the president to now remove the director “at-will.” 

[2] The CFPB’s 2017 Payday Lending Rule governs the underwriting of certain personal loans with short-term or balloon-payment structures, as well as lenders’ payment withdrawal practices for those loans and certain additional installment loan products (Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule or Rule).  At issue in this case is the “Payment Provisions” of the Payday Lending Rule, which limit a lender’s ability to obtain loan repayments via preauthorized account access.  See 12 C.F.R. § 1041.8.  The Bureau determined that, absent a new and specific authorization, it is “unfair and abusive” for lenders to attempt to withdraw payments for covered loans from consumers’ accounts after two consecutive withdrawal attempts have failed due to a lack of sufficient funds.  Id. § 1041.7; 82 Fed. Reg. at 54472.

[3] Such rules would include mortgage servicing rules under the Real Estate Settlement Procedures Act (Regulation X) and the Truth-In-Lending Act (Regulation Z). 

[4] CFPB v. TransUnion, et al., N.D. Ill. Case No. 22-cv-01880 (Doc. 47).

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Photo of Kristine E. Kruger Kristine E. Kruger

Kristine Kruger is an experienced litigator who works closely with her clients to develop effective litigation strategies by carefully evaluating each client’s case-specific goals and business objectives. She has extensive experience representing a broad range of clients in high priority complex litigation matters…

Kristine Kruger is an experienced litigator who works closely with her clients to develop effective litigation strategies by carefully evaluating each client’s case-specific goals and business objectives. She has extensive experience representing a broad range of clients in high priority complex litigation matters, including consumer protection, product liability, environmental litigation, consumer finance, business disputes, and general commercial matters.