Count on Continued Enforcement After Fifth Circuit CFPB Decision

A panel of the US Court of Appeals for the Fifth Circuit recently issued a unanimous opinion that the Consumer Financial Protection Bureau’s funding structure is unconstitutional. The immediate result of the decision was the invalidation of the bureau’s Payday Lending Rule.

But if the US Supreme Court or more lower courts adopt the court’s reasoning, the decision could have much broader implications for the bureau. The CFPB shot back in another case raising similar issues, hinting how it plans to respond to the Fifth Circuit’s decision.

In general, providers of consumer financial products and services should not expect a more favorable enforcement environment following the decision, aside from the Pay Day Lending Rule.

The Decision

In CFSA v. CFPB, the plaintiffs challenged the Payday Lending Rule, a 2017 regulation governing payday and certain other high-cost installment loans. The plaintiffs raised several statutory and constitutional grounds, and the Fifth Circuit rejected most of them.

The court agreed, however, that the bureau’s funding structure violates the US Constitution’s appropriations clause, and that the regulation had to be vacated.

The appropriations clause provides, “No money shall be drawn from the Treasury, but in Consequence of Appropriations made by law.” The court explained that the clause reinforces Congress’s authority over fiscal matters and requires it to use that authority.

As the court put it, the clause “takes away from Congress” any option “not to require legislative appropriations prior to expenditure.”

The court cites several aspects of the CFPB’s funding mechanism in support of its conclusion that the mechanism violated the appropriations clause.

While almost every other federal agency relies on annual congressional appropriations for funding, the CFPB receives its funding on the front end directly from the Federal Reserve, an agency that is funded outside the ordinary appropriations process.

Unlike other self-funded agencies, the CFPB need not remit any funds to the Treasury. And its funds are, by statute, not subject to review by the congressional committees on appropriations, even on the back end.

These features, the court concluded, combined to create an “unprecedented arrangement” that undermined transparency and democratic accountability.

The court held that the Payday Lending Rule must be vacated as a result—acknowledging “the distinction between the bureau’s power” to take action and “the funding that would enable the exercise of that power.”

It held that the CFPB had the power to promulgate the Payday Lending Rule. But because the funding used to promulgate that rule came from the agency’s unconstitutional structure, the court found a direct link between the funding mechanism and the regulation.

It concluded that the plaintiffs were thus entitled to an order vacating the Payday Lending Rule as a remedy for that constitutional wrong.

CFPB Says Ruling Doesn’t Limit Power

The bureau provided its first extended response to the Fifth Circuit’s decision in an enforcement action in the US District Court for the Northern District of Illinois. In CFPB v. TransUnion, the defendant raised a similar appropriations clause defense to an enforcement action by the bureau. The CFPB responded that the Fifth Circuit’s decision is “neither controlling nor correct.”

The bureau argued that its funding mechanism is not unique, noting that the bureau obtains funds from the same source as the Federal Reserve Board, also part of the Federal Reserve.

It asserted that the bureau’s exemption from appropriations committee review “is not constitutionally relevant.” And it argued that several other financial regulators’ funds are also not treated as government funds or appropriated monies.

The bureau chastised the Fifth Circuit for having “mustered no case from more than 230 years of constitutional history” that found a spending statute to violate the appropriations clause. It urged the district court to “join every other court to address the issue—including the en banc D.C. Circuit—in upholding the bureau’s statutory funding mechanism.”

And the bureau added that, in any event, any error in its funding mechanism “would not deprive the Bureau of the power to carry out the responsibilities given it by Congress to enforce the law.”

CFPB Appears Intent to Continue Work

The CFPB’s response in TransUnion provides some hints about how the CFPB is likely to respond to the Fifth Circuit’s decision in the immediate future—at least outside the Fifth Circuit itself.

Unsurprisingly, the CFPB doesn’t appear to acquiesce in the Fifth Circuit’s view of the constitutionality of its funding structure, or the implications of the decision on the bureau’s actions. Instead, as the bureau did when faced with prior constitutional challenges, it seems intent to continue, and vigorously defend, its work.

Even within the Fifth Circuit, the decision does not compel the CFPB to change its investigatory, regulatory, or enforcement operations—aside from efforts to enforce the Payday Lending Rule that the Fifth Circuit vacated.

The CFPB is therefore formally free to continue that work, with the understanding that unless and until it obtains further review of the Fifth Circuit’s decision, it may well be unwound by federal courts. The tenor of the CFPB’s TransUnion brief suggests that it may be willing to take that risk.

Finally, however hamstrung the bureau might be, providers of consumer financial products and services should not count on a more favorable enforcement environment. Depository institutions will still be regulated by their prudential regulators.

The Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., Federal Reserve Board, National Credit Union Administration all enforce prohibitions on unfair and deceptive acts and practices similar to those that the bureau enforces.

And other institutions will still be regulated by the states, which have the same authority as the bureau to enforce the CFPA’s prohibitions on engaging in unfair, deceptive, and abusive acts and practices and violating other federal laws.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Write for Us: Author Guidelines

Author Information

Jeff Ehrlich is a partner at McGuireWoods and member of the Financial Services Litigation Department. He previously served as deputy enforcement director for the Consumer Financial Protection Bureau, leading the CFPB’s Field Litigation Team, and managing investigations and litigation in regional offices and headquarters.

Jonathan Ellis is a partner at McGuireWoods and co-leader of the Appeals and Issues Team. He previously served in the in the Department of Justice as an Assistant to the Solicitor General. He represented the CFPB before the US Supreme Court in Seila Law v. CFPB regarding constitutionality of statutory tenure protection.