by Caroline Mudd, Esq.

ArmstrongTeasdale LLP *

USFN Member (KS, MO)

Dramatic changes for the CFPB could be in sight as early as the first half of 2023, if the United States Supreme court accepts review of a Fifth Circuit Court of Appeals decision that vacated the Consumer Financial Protection Bureau’s (CFPB) “Payday Lending Rule.” On November 14, 2022, the CFPB filed a petition for certiorari with the Supreme Court seeking review of the decision in Community Financial Services Association of America, Ltd. v. Consumer Financial Protection Bureau,[1] in which the Fifth Circuit found that the Bureau’s self-funding structure violates the Appropriations Clause of the United States Constitution. CFPB requested the Court set this case for argument in the current term arguing that the Fifth Circuit’s decision “threatens the ability of the CFPB to function and risks severe market disruption;” and further arguing, “[d]elaying review until next Term would likely postpone resolution of the critical issues at stake until sometime in 2024.”[2]

               This matter originated in the Western District of Texas following a suit brought by Community Financial Services, et.al., a collective party representing payday lenders and credit access businesses (“CFSA”), which alleged that the Payday Lending Rule,[3] enacted in January of 2018, exceeded the CFPB’s authority, violated the Administrative Procedure Act (APA)[4], and was further invalid as the funding structure of the CFPB was unconstitutional. Summary judgment was denied to the CFSA and granted to the CFPB. On appeal, the Fifth Circuit sided with the CFPB with regard to three of its arguments, finding that the Payment Provisions of the Payday Lending Rule did not violate the APA, that the Supreme Court’s finding that the CFPB’s director’s insulation from presidential removal was unconstitutional[5] did not in and of itself warrant vacating the Rule, and that the Bureau’s rulemaking authority did not violate the nondelegation doctrine.[6] 

However, the Fifth Circuit reversed the district court’s summary judgment ruling with regard to the issue of whether the CFPB’s funding mechanism violates the Appropriations Clause of the Constitution,[7] as well as the separation of powers doctrine. In making this determination, by way of background, the Fifth Circuit first noted the extensive power and control of the CFPB as the Bureau has the power to conduct investigations, initiate administrative adjudication, prosecute civil actions, and seek remedies, including restitution, injunctions, and civil penalties. Further, the court stated, these powers are given to an agency run by a single director rather than a board or agency, like most other government agencies. In addition, the court further took notice that the Supreme Court had previously commented on the extensive power of the CFPB in Seila Law, stating that the Bureau “acts as a mini legislature, prosecutor, and court, responsible for creating substantive rules for a wide swath of industries, prosecuting violations, and levying knee-buckling penalties against private citizens.”

               The Fifth Circuit noted that while most executive agencies are funded by annual appropriations, the CFPB receives funding directly from the Federal Reserve in an amount requested by the CFPB director. Unless the requested funding is in excess of 12% of the Federal Reserve’s operating expenses, the Federal Reserve must grant the CFPB director’s funding request. The court added that as the Federal Reserve is itself outside of the appropriations process, the CFPB is “double insulated” from Congressional control. Further, the court stated that instead of holding its funds in a Treasury account, the CFPB funds are held at a Federal Bank, the funds are under the control of the CFPB director, and Congress has legislated that these funds “ . . . shall not be subject to review by the Committees on Appropriations of the House of Representatives and the Senate.”  12 USC §5497(a)(2)(C). The Fifth Circuit determined that the financial structure of the CFPB rendered it unaccountable to “Congress, and, ultimately, to the people,” thus rendering it unconstitutional. The court further reasoned that as the CFPB promulgated the Payday Lending Rule through the use of unconstitutional funding, that the rule itself should be vacated.             

In urging the Supreme Court to review this matter in the current term, the CFPB advised that in the short time since the Fifth Circuit has rendered its decision, several defendants in CFPB enforcement matters have sought dismissal of actions taken against them by the CFPB based on the Community Financial Services decision. The CFPB also predicted that while this matter is pending certiorari, a multitude of challenges will be brought against the CFPB, not only with regard to the Payday Lending Rule, but as well as challenges that could potentially call into question the validity of any and all past actions of the CFPB. Although the Supreme Court granted CFSA’s motion to extend their time to file their brief in opposition to certiorari to January 13, 2023,[8] it is entirely possible that if the Supreme Court grants certiorari, the Court will render a decision in this matter of potential massive consequence to the United States’ financial services industry before the end of June 2023.