The Consumer Financial Protection Bureau has survived numerous constitutional challenges since its creation by the Consumer Financial Protection Act, 12 USC §§ 5481, and following. (the “Act”), in 2011.[1] But on October 19, 2022, the CFPB suffered a setback following the Fifth Circuit’s decision in Community Financial Services Association of America, Ltd. vs. CFPBno. 21-50826, (5th Cir. 2022).
In a unanimous decision, the Fifth Circuit held that “Congress’s decision to abdicate its appropriations power under the Constitution, that is, to cede its purse power to the Bureau, violates the structural separation of powers of the Constitution”.
In this lawsuit, plaintiffs Community Financial Services Association of America and Consumer Service Alliance of Texas challenged the validity of the CFPB’s 2017 payday loan rule.[2] on several fields. Plaintiffs first argue that in enacting the rule, the Bureau acted arbitrarily and capriciously and exceeded its statutory authority. The plaintiffs also argue that the Office is unconstitutionally structured, challenging the Office’s director’s isolation from removal, Congress’s broad delegation of power to the Office, and the Office’s unique double-insulated funding mechanism. While the district court rejected plaintiff’s arguments, the Fifth Circuit struck down the payday loan rule on the grounds that the CFPB funding scheme violates the Constitution’s Appropriations Clause and separation of powers principles.
The Office’s funding regime is unique in that it is not funded by periodic parliamentary appropriations. The Fifth Circuit examined in detail the two methods of financing the CFPB. The first method of funding is the CFPB Director’s annual request to the Federal Reserve for an amount “reasonably necessary to carry out” the functions of the Bureau. By law, the Federal Reserve, an independent agency and not under the control of Congress, must grant the request as long as it does not exceed 12% of the Federal Reserve’s total operating expenditures. The lack of congressional involvement in the appropriations process was ruled unconstitutional.
The CFPB’s second source of funding comes from monies it obtains in the form of restitution, restitution, and civil penalties through investigations and civil suits under consumer protection laws. The law expressly removes these funds from congressional oversight and places them exclusively under the control of the director of the CFPB. Because the CFPB is an executive agency with “broad design, execution, and judgment power over a significant portion of the U.S. economy”, the Fifth Circuit concluded that the lack of review by Congress of the “CFPB funding apparatus cannot be reconciled with the appropriations clause”. and the basis of the clause, the constitutional separation of powers.
The Community financial services The decision is not only important for the viability of the CFPB as an agency in the future, but it also opens the door to new and renewed challenges for the existing rules of the CFPB.[3]. In rescinding the 2017 payday loan rule, the Fifth Circuit found that the rule was “entirely traced through the [CFPB’s] unconstitutional funding scheme. Lawmakers have already made this point, as illustrated by the statement released by U.S. Senate Banking Committee member Pat Toomey (R-Pa.): “The Fifth Circuit’s decision to strike down the CFPB payday loan rule Because it is the product of an unconstitutional funding scheme ruling, it calls into question the validity of all of the agency’s actions to date.
The defendants in the CFPB’s enforcement actions also took over the Fifth Circuit’s decision and sought remand in those cases. In a pending enforcement action in Illinois, the Bureau filed a response to a supplemental notice of authority, stating that the “[Fifth Circuit] decision is neither determinative nor correct.[4] The CFPB raises three main points in its response. First, he claims that the “Fifth Circuit’s decision is without legal merit” because the court cites no case law that Congress violated the appropriations clause when it authorizes spending by statute. Second, the CFPB argues that its source of funding from the Federal Reserve does not result in the absence of congressional oversight because Congress still has the “ability to oversee how the Bureau spends that money to fulfill its his duties”. And third, the CFPB argues that the Fifth Circuit’s decision “finds no support in a statutory provision stating that funds transferred to the Bureau ‘shall not be construed as government funds or restricted monies’,” 12 U.S.C. § 5497 (c ) (2) .” The CFPB will no doubt raise these arguments on appeal.
On November 14, 2022, the CFPB filed a writ of certiorari with the Supreme Court, asking it to review the Fifth Circuit’s decision “at the earliest opportunity.” The CFPB argues that further examination is necessary “because the [Fifth Circuit’s] decision declared an act of Congress unconstitutional, because it completely contradicts a decision of the DC circuit, and because it threatens to inflict immense legal and practical damage on the CFPB, consumers and the financial sector of the nation. The CFPB is considering waiving its right to file a reply brief after the expiration of the time limit to oppose the motion for certiorari on December 14, 2022, so that the Supreme Court can consider the motion at its conference on January 6, 2023 and hear the case at its April session. 2023 session. The CFPB will likely ask the Fifth Circuit to suspend his term and, if denied, will seek a stay from the Supreme Court. We will continue to monitor and report any developments.
[1] More recently, in 2020, the Supreme Court left the CFPB intact after ruling that the president’s power to remove the CFPB director “for cause” only was unconstitutional. Seila Law LLC v. Consumer Financial Protection Bureau, 140 S.Ct. 2183 (2020). The CFPB continued to operate after the “for cause” removal provision was severed from the rest of the law, allowing the president to now remove the director “at will”.
[2] The CFPB Payday Loan Rule 2017 governs the underwriting of certain personal loans with short-term or lump-sum payment structures, as well as lenders’ payment withdrawal practices for these loans and certain additional installment loan products (on salary, vehicle title and certain high-interest loans). Rule or Installment Loans Rule). In this case, it is the “payment provisions” of the payday loan rule that limit a lender’s ability to obtain loan repayments through pre-authorized account access. See 12 CFR § 1041.8. The Bureau has determined that in the absence of specific new authorization, it is ‘unfair and abusive’ for lenders to attempt to withdraw payments for covered loans from consumer accounts after two consecutive withdrawal attempts have failed due to a lack of sufficient funds. Identifier. § 1041.7; 82 Fed. Reg. at 54472.
[3] These rules would include the rules for administering mortgage loans under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z).
[4] CFPB v. Trans Union, et al.ND Ill. Case No. 22-cv-01880 (Doc. 47).
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