The U.S. Supreme Court has decided to take up a case that threatens the very existence of the nation’s premier consumer watchdog agency, the Consumer Financial Protection Bureau (CFPB). Last October, the Fifth Circuit Court of Appeals ruled that the CFPB’s funding structure violated the Appropriations Clause of the Constitution, and that the agency’s payday lending rule was therefore invalid.

Though the CFPB has only been around a dozen years, making it a relatively new agency, it’s done a lot in that time—regulating mortgage lending, credit cards, banking, and consumer loans. A Supreme Court decision against the agency would call into question every decision it has ever made, every regulation it has ever issued, and every enforcement action it has ever taken.

The CFPB and the Dodd-Frank Act

In response to the financial crisis of the late 2010s, Congress passed and President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, 12 U.S.C. §§ 5481–5603. The law, commonly known as the Dodd-Frank Act, created the CFPB as a federal agency tasked with increasing accountability for consumer protection by consolidating consumer financial protection authorities existing across seven different federal agencies into one. The CFPB was empowered to protect consumers from unfair, deceptive, and abusive financial practices, and to provide oversight of financial institutions, consumer lending, and banking.

Congress took a number of steps to protect the CFPB’s independence. First, it housed the agency within the Federal Reserve System. It also limited the president’s ability to dismiss the agency’s director (in 2020, the Supreme Court struck down this limitation in Seila Law LLC v. CFPB). Another important step that Congress took was creating the funding mechanism for the Bureau, which is relevant here.

Instead of being funded by Congress through annual appropriations, the agency receives its funding directly from the Federal Reserve, the nation’s central bank. Each year, the CFPB’s director asks the Fed for an amount “reasonably necessary” to carry out its function. So long as the amount doesn’t exceed 12% of the Fed’s total operating expenses, the bank must transfer over the requested amount to the agency (for the first five years of its existence, the CFPB was permitted to exceed this cap by $200 million as long as it reported the anticipated excess to Congress and the President.)

The Payday Lending Rule

In 2016, the CFPB proposed a rule to regulate payday loans, vehicle title loans, and certain high-cost installment loans. Commonly known as the “payday lending rule,” the rule became effective on January 16, 2018 and had a compliance date of August 19, 2019. The aim was to create consumer protections by deeming certain lending practices “unfair and abusive,” which was accomplished through two important parts.

The first part of the rule created “mandatory underwriting provisions,” in which the rule requires lenders, before making loans, to reasonably determine that a consumer has the ability to repay it. If not, the loans would be deemed “abusive” or “unfair.” There were exemptions created to this general rule for certain short-term loans made with certain consumer protections (12 C.F.R. § 1041.4).

The second part—which is relevant here—limited the ability of lenders to withdraw automatic payments from consumers’ accounts after two consecutive attempts have failed due to insufficient funds. Any subsequent attempts must be separately authorized by the consumer under the rule. Known as the “payment provisions,” the scope of these rules is broad. As long as the lender is attempting to obtain payment on a covered loan, the two-attempt limit applies to any lender-initiated withdrawal from a consumer’s account, including checks, debit and prepaid card transfers, and preauthorized electronic funds transfers.

Community Financial Services Ass’n of America v. CFPB (5th Circuit)

In April 2018, two trade groups (the Community Financial Services Association of America and the Consumer Service Alliance of Texas) sued the CFPB on behalf of payday lenders and credit access businesses, asking a federal court in Texas to strike down the payday lending rule. Mick Mulvaney, who was at the time the acting director of the Bureau, announced that the agency intended to engage in notice-and-comment rulemaking to reconsider the payday lending rule. At the request of the parties, the district court stayed court proceedings and stalled the rule’s effective date.

While things were pending in court, in early 2019, President Trump nominated, and the Senate confirmed, Kathleen Kraninger as the CFPB’s new director. The CFPB proposed a rule rescinding the underwriting provisions but leaving the payment provisions intact. In July 2020, following the Supreme Court’s decision in Seila Law, the CFPB finalized this rule and simultaneously issued a “ratification” in which it affirmed the payment provisions of the payday lending rule.

In August 2020, the federal district court lifted its stay, and the plaintiffs amended their complaint to challenge the payment provisions on various grounds, including that the CFPB violated procedural requirements in promulgating the provisions. When the trial court ruled against the plaintiffs, they appealed to the U.S. Court of Appeals for the Fifth Circuit.

In a 2022 unanimous decision , a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit reversed, rendered judgment for the plaintiffs, and vacated the payday lending rule. The plaintiffs had raised four “overarching” issues on appeal:

• The rule’s promulgation violated the APA
• The rule was invalid because the CFPB’s director was unconstitutionally insulated from presidential removal
• The CFPB’s rulemaking authority violated the nondelegation doctrine
• The CFPB’s self-funding mechanism violated the Appropriations Clause

The APA

The plaintiffs’ first argument was that the payday lending rule violated the APA in two different ways. They contended that the prepaid lending rule wasn’t supported by the agency record insofar as the agency concluded that the risks consumers faced of increased insufficient fund fees and that having their accounts closed constituted “unfair” and “abusive” practices. They also contended that the payment provisions were arbitrary and capricious in their entirety as well as in two specific contexts (installment loans and debit and prepaid card payments).

The Fifth Circuit rejected this APA argument in its entirety. The court determined that the agency record fully supported its finding that the risks to consumers remedied by the rule were “unfair” and “abusive,” and that the payment provisions were in a position to reduce those risks. As to installment loans and card payments specifically, the court reasoned that while the risk to consumers of injury may be less, consumers could still face overdraft fees, return payment fees, and late fees.

Presidential Removal

The plaintiffs next argued that the payment provisions were invalid because the payday lending rule was promulgated by an agency whose director was unconstitutionally shielded from removal. The agency’s enabling act made the director removable for cause only (“inefficiency, neglect of duty, or malfeasance in office.”). In Seila Law (2020), and subsequently, in Collins v. Yellen (2021), the Supreme Court ruled that laws limiting the president’s power to remove executive agency heads violated the separation of powers.

But in both Seila Law and Collins, the Supreme Court refused to invalidate all agency action because of the unconstitutional legislation. Instead, it severed the removal provision from the law and upheld the remaining provisions. The Fifth Circuit rejected the plaintiffs’ attempt to distinguish this case law and refused to invalidate the payment provisions on this ground.

The Nondelegation Doctrine

Plaintiffs then argued that the CFPB’s rulemaking authority violated the nondelegation doctrine, under which Congress is constitutionally prohibited from delegating its legislative powers to another branch of government. Plaintiffs contended that the agency had virtually no limits on its discretion to determine whether conduct was “unfair” or “abusive,” and that therefore its enabling act violated the separation of powers.

Rejecting this argument, the Fifth Circuit wrote that the doctrine was satisfied if the agency is guided by an “intelligible principle.” Citing the Supreme Court’s decision in American Power & Light Co. v. SEC (1946), the court defined this to be “if Congress clearly delineates the general policy, the public agency which is to apply it, and the boundaries of this delegated authority.” The court reasoned that in the CFPB’s enabling act, Congress set out its general policy preferences and boundaries, albeit broad ones, on the agency’s authority.

Appropriations Clause

In the Fifth Circuit’s view, the plaintiffs’ fourth argument was the charm. Recognizing that the Appropriations Clause issue had not been squarely before the court before, the court found persuasive the “magisterial” concurring opinion authored by Judge Edith Jones in CFPB v. All American Check Cashing, Inc. (2022), in which she concluded that the CFPB’s self-funding mechanism violated the Constitution.

The court observed that the Appropriations Clause, which says that “no money shall be drawn from the Treasury, but in consequence of appropriations made by law,” vests Congress with exclusive authority over the “federal purse.” It noted that to be valid, the exercise of delegated power required a valid reservation of Congressional control over funds in the Treasury.

In considering the agency’s self-funding mechanism, the court, citing Seila Law, concluded that it “receives funding directly from the Federal Reserve, which is itself outside the appropriations process through bank assessments.” In this way, Congress gave up both direct and indirect control over the CFPB’s funding.

Further, the agency’s funding isn’t just held in a Treasury account. Instead, the CFPB holds its money in a separate fund, “the Bureau of Consumer Financial Protection fund,” which by statute is held at a federal reserve bank. So the Bureau’s funding is doubly insulated, both on the front end and on the back end, from Congressional oversight. Given the awesome scope of the CFPB’s power, this unlimited self-funding mechanism was just too much for the court, which held that it violated the appropriations clause.

The Remedy

That left the Fifth Circuit to decide what to do about it. Although the Dodd-Frank Act gave the CFPB the authority to promulgate the payday lending rule, the CFPB, in the court’s view, lacked the “wherewithal to exercise that power via constitutionally appropriated funds.” To prevail, plaintiffs needed to show that the unconstitutional funding structure actually caused them harm.

The court reasoned that making such a showing, in this case, was straightforward: you could draw a line between the promulgation of the payday lending rule and the constitutionally infirm funding. Without the funding, the agency couldn’t have issued the rule. Plaintiffs were therefore entitled to a “rewinding” of the agency’s action. The court rendered judgment in favor of the plaintiffs and struck down the payday lending rule as the “product of the [CFPB]’s unconstitutional funding scheme.”

CFPB v. Community Fin. Serv. Ass’n of America, No. 22-448 (U.S.)

The audible gasp you may have heard on October 19, 2022 was the sound of the CFPB’s staff upon reading the Fifth Circuit’s decision. Taken to its logical extension, every action ever taken by the CFPB was the product of its “unconstitutional funding scheme” and is therefore invalid. The decision calls into question the very constitutionality of the CFPB itself.

Before the CFPB’s staff could start looking for new jobs, the Biden Administration asked the Supreme Court to step in without asking for review by the full Fifth Circuit. The federal government argues that the CFPB’s funding mechanism is “entirely consistent with the text of the Appropriations Clause, with longstanding practice and with this court’s precedent.”

In February 2023, the Supreme Court granted a writ of certiorari and agreed to review the lower court’s decision. The high court declined to fast-track the case for consideration during this term. A decision will likely be issued next term by the end of June 2024.

Related Resources:

• What Is Dodd-Frank and What Would Its Rollback Mean? (FindLaw’s Learn About the Law)

• What Is the Consumer Financial Protection Bureau? (FindLaw’s Learn About the Law)
• The Appropriations Clause (FindLaw’s U.S. Constitution Pages)

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