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CFPB Funding Mechanism Violates Constitution, Fifth Circuit Says (1)

Oct. 19, 2022, 9:57 PMUpdated: Oct. 19, 2022, 11:21 PM

The Consumer Financial Protection Bureau’s independent funding through the Federal Reserve violates the Constitution’s separation of powers clause, the Fifth Circuit ruled.

The constitutional flaws found by the U.S. Court of Appeals for the Fifth Circuit in its Wednesday ruling also invalidated the remaining portions of the CFPB’s restrictions on the lenders offering payday, auto title and other short-term, high-interest loans.

“The Bureau’s perpetual self-directed, double-insulated funding structure goes a significant step further than that enjoyed by the other agencies on offer,” Judge Cory T. Wilson wrote for the appeals court’s three-judge panel.

The ruling was a win for payday lenders that had been attempting to kill a CFPB rule that would restrict their ability to access customers’ bank accounts and other measures. It also adds another headache for an agency that only recently shed a constitutional challenge to its leadership structure.

If the CFPB fails to get the Fifth Circuit ruling overturned in a likely appeal, the agency could face a massive fight in Congress over funding and potential placement on Congressional appropriations, particularly if Republicans retake one or both houses of Congress in the upcoming midterm elections.

A CFPB spokesman said there was “nothing novel or unusual” about the CFPB’s funding mechanism, noting that the Federal Reserve System and programs like Medicare and Social Security are funded outside of the appropriations process.

“The CFPB will continue to carry out its vital work enforcing the laws of the nation and protecting American consumers,” the CFPB spokesman said.

The Community Financial Services Association of America, the payday lending industry group leading the litigation over the rule, didn’t immediately reply to a request for comment.

Congress created the CFPB in 2010 in the Dodd-Frank Act, the legislative response to the 2008 financial crisis. The law intended to insulate the CFPB from political pressures by both requiring that the CFPB’s single director could only be fired for cause and by providing independent funding through the Fed rather than through the Congressional appropriations process.

In June 2020, the Supreme Court ruled in Seila Law v. CFPB that the for-cause removal protections were unconstitutional and made the CFPB director an at-will employee of the president.

The high court didn’t address the funding question. But other circuit courts had found that the bureau’s funding mechanism meets constitutional muster.

But the Fifth Circuit panel found that the CFPB’s funding was unique among federal regulatory agencies, including those that are funded without appropriations. The Fed, which is in part funded by assessments charged to banks, has to turn over those funds above a prescribed limit to the Treasury Department.

The payday lending rule invalidated by Wednesday’s decision was finalized in 2020 after Kathy Kraninger, the Trump-era CFPB director, signed off on it.

The Trump-era version of the rule removed tough underwriting provisions that were initially put in place in 2017 by former CFPB Director Richard Cordray.

The CFPB is expected to seek an en banc review of the decision at the Fifth Circuit. The Supreme Court could also hear it at some point given the structural challenges to the federal agency.

Judges Don R. Willett and Kurt Engelhardt joined Wilson in the opinion.

The case is Community Financial Services Association of America v. CFPB, 5th Cir., No. 21-50826, Opinion 10/19/22.

(Updates with more information from opinion and background throughout and comment from CFPB.)

To contact the reporter on this story: Evan Weinberger in New York at

To contact the editor responsible for this story: Roger Yu at