What’s Next for CFPB Funding After Appellate Ruling: Explained

The Consumer Financial Protection Bureau faces yet another existential fight after the Fifth Circuit found its funding mechanism to be unconstitutional.

In its Oct. 19 ruling, the U.S. Court of Appeals for the Fifth Circuit said that the CFPB’s independent funding through the Federal Reserve was unique among federal financial regulators and other agencies. The funding mechanism allows the CFPB to be “double-insulated” from Congressional oversight, the appeals court said.

Just two years ago, the CFPB survived a trip to the US Supreme Court over a challenge to the constitutionality of its single-director leadership structure. The agency could face another high-stakes challenge at the high court over the Fifth Circuit ruling in Community Financial Services Association of America v. CFPB.

Depending on how the Supreme Court rules, Congress also could get involved to bring the agency into the appropriations process.

A broad Supreme Court ruling could have a major impact on the way other financial regulators – including the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency – fund their operating budgets.

How is the CFPB currently funded?

To ensure the CFPB’s independence, the Dodd-Frank Act—which created the agency after the 2008 financial crisis—ensured that its funding would not come through the Congressional appropriations process or through assessments and fees charged to companies they regulate. Other financial regulators, such as the OCC and FDIC, are funded through such fees.

The 2010 law effectively made the CFPB an independent unit of the Fed and capped the amount the CFPB could withdraw from the Fed at 12% of the central bank’s overall budget.

The CFPB requests money quarterly.

Mick Mulvaney, who briefly served as the CFPB’s acting director under President Donald Trump, famously requested $0 for the second quarter of fiscal year 2018.

The CFPB under its current director, Rohit Chopra, requested a $315.7 million for the first quarter of fiscal 2023, according to the agency’s Oct. 14 letter to the Senate Banking Committee.

For context, the Biden administration requested Congress provide the Securities and Exchange Commission with $2.2 billion in funding for fiscal 2023.

What’s the Problem?

Republicans, and many in the financial services industry, have complained that the CFPB’s funding mechanism made it unaccountable to the public and Congress.

The House Financial Services Committee and Senate Banking Committee have oversight authority over the agency.

The CFPB director is required to appear before Congress at least twice each year. Former Director Richard Cordray appeared more frequently than that.

Several courts, including the U.S. Court of Appeals for the D.C. Circuit, have rejected constitutional challenges to the CFPB’s funding.

The Fifth Circuit declined to rule on the question in a May en banc ruling in another case, All American Check Cashing v. CFPB. But several judges in that case signed on to a concurring opinion that the bureau’s funding mechanism violated the Constitution’s appropriations clause.

A three-judge Fifth Circuit panel didn’t miss on its next chance to tackle the CFPB funding question in its Oct. 19 ruling.

The basis of the ruling was that the CFPB was “double-insulated” from oversight. Dodd-Frank allowed the agency to ask for money with only a statutory cap setting the limit, setting it outside annual appropriations. And the CFPB seeks money from the Fed, which itself is funded from investments in securities and other sources outside the appropriations process.

The panel didn’t provide any other guidance on what should happen next, which means there’s a lot of uncertainty coming in the next year at least.

What’s Next?

CFPB watchers say its appeal to the Supreme Court is highly likely. If the Fifth Circuit ruling stands, the CFPB won’t be able to operate in Mississippi, Louisiana and Texas while being fully functioning in the rest of the country.

That would mean rules, regulations and enforcement actions wouldn’t apply in those three states, setting up an untenable situation.

The Supreme Court has had the chance to eliminate the CFPB on constitutional grounds in the past. But it chose not to for fear of creating chaos in the financial markets. A decade’s worth of rules, regulations, enforcement actions would be tossed out if the court took the maximalist approach. Even the industries the CFPB regulates doesn’t want that.

The Supreme Court could overturn the Fifth Circuit ruling – unlikely given the court’s ideological bent – or send the funding issue back to Congress. That could mean allowing the CFPB to operate for a period of time while Congress negotiates.

Republicans will likely want concessions before agreeing to funding.

There could be new restrictions on the CFPB. The staff, which is paid more than typical government workers in similar positions, could see pay cuts.

What About the Other Banking Regulators?

The CFPB argued to the Fifth Circuit that other federal financial regulators, like the Fed, FDIC and OCC, are also funded independently. Medicare, Medicaid and Social Security are also funded outside appropriations.

The Fifth Circuit didn’t buy that argument, and tried to make a distinction between the CFPB and other agencies through its discussion of double insulation.

Most legal observers expect the Supreme Court to ultimately try to rule on the CFPB question without touching the other agencies.

There are decades of precedence on keeping agencies out of the appropriations if they aren’t funded through the Treasury.

The Supreme Court may be reticent to declare all federal banking agencies’ funding unconstitutional, which could lead to chaos.

Read More

• CFPB Appellate Ruling Portends ‘Chaos’ in Financial System
• Consumer Financial Protection Ruling Is Illogical: Noah Feldman
• Fifth Circuit Says CFPB Funding Mechanism Violates Constitution
• Read the opinion here