Authority of Consumer Finance Protection Board Is Now Less Certain

Last month, the Fifth Circuit Court of Appeals ruled that Consumer Finance Protection Board (“CFPB”) was funded in an unconstitutional manor because it violated separation of powers principles enshrined in the Appropriations Clause of the Constitution. The case, styled Community Financial Services Association of America v. Consumer Financial Protection Bureau, calls into question the CFPB’s ability to regulate on consumers’ behalf.

The lawsuit came about in April 2018 when a trade association sued the CFPB on behalf of “payday” (high-interest, short-term) loan makers, seeking an order setting aside a CFPB ruling that, according to them, hindered their businesses. The trade association alleged that the CFPB’s rule exceeded its legal authority and violated the Administrative Procedure Act. But it further argued that all CFPB rules were invalid because the CFPB itself was funded by an improper delegation of Congress’ rulemaking authority that violated the Constitution’s separation of powers.

In its ruling agreeing with the plaintiffs, the Fifth Circuit determined that the CFPB enjoys a “self-actualizing, perpetual funding mechanism. While the great majority of executive agencies rely on annual appropriations [from Congress] for funding, the [CFPB] does not.”

Instead, it receives funding directly from the Federal Reserve, which is itself funded outside the appropriations process through bank assessments:

Each year, the [CFPB] simply requests an amount determined by the Director to be reasonably necessary to carry out the agency’s functions. The Federal Reserve must then transfer that amount so long as it does not exceed 12% of the Federal Reserve’s ‘total operating expenses.’  For the first five years of its existence (i.e., 2010–2014), the CFPB] was permitted to exceed the 12% cap by $200 million annually so long as it reported the anticipated excess to the President and congressional appropriations committees. [internal citations omitted]

This scheme was held to be unconstitutional because, “the funds siphoned by the [CFPB], in effect, reduce amounts that would otherwise flow to the general fund of the Treasury, as the Federal Reserve is required to remit surplus funds in excess of a limit set by Congress.”  The Fifth Circuit found this to be a “double insulation” from Congress’s purse strings that is “unprecedented” in the federal government. While the Fifth Circuit did not find that all CFPB rules were unenforceable, its final holding in this case was to “vacate the Payday Lending Rule as the product of the Bureau’s unconstitutional funding scheme.”

Whether this decision is viewed as a good or bad one largely depends on one’s political perspective. According to its website, the CFPB was created after the 2008 financial crisis to provide accountability for enforcing federal consumer financial laws and to protect consumers in the financial marketplace. Its work includes rooting out unfair, deceptive or abusive acts or practices by writing rules, supervising companies and enforcing the law and monitoring financial markets for new risks to consumers.

Despite its noble mission statement, the CFPB has its share of critics, who say it is anti-business. The U.S Chamber of Commerce criticizes the CFPB and its current director Rohit Chopra, saying they are “trying to radically reshape the American financial services sector by breaking time-tested bipartisan norms and skirting the agency’s legal authority. By attempting to change rules without accountability, the CFPB is creating uncertainty that will harm consumers by causing financial companies to adjust the types of mortgages, car loans, and personal credit they can offer. The current ideological agenda and unlawful actions will hurt consumers, businesses, and our economy.”

Massachusetts Senator Elizabeth Warren, of the CFPB’s biggest supporters, immediately criticized the ruling as “a lawless and reckless decision. [The] CFPB has returned billions of dollars to Americans by doing its job, and its funding is clearly constitutional. Extreme right-wing judges are throwing into question every rule the CFPB enforces to protect consumers and businesses alike.”

TAKEAWAY: An appeal to the Supreme Court is expected, but survival of the CFPB as it currently exists is uncertain as a result of this ruling. Businesses that rely on CFPB regulations in dealing with consumers should keep a close eye on this situation. Some of them have already moved to stay CFPB enforcement actions on the basis of this ruling. 

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