On February 27, 2023, the Supreme Court granted the certiorari petition of the Consumer Financial Protection Bureau (CFPB) to hear a case that could cast doubt on all of the regulations that have been promulgated by the bureau to date, as well as all pending investigations and litigation brought by the agency.
The Court will consider in Consumer Financial Protection Bureau (CFPB) v. Community Financial Services Association of America (CFSA) whether the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution, which says, “no money shall be drawn from the Treasury, but in consequence of appropriations made by the law.”
How We Got Here
On October 19, 2022, a unanimous three-judge panel of the U.S. Court of Appeals for the Fifth Circuit held that the CFPB’s funding mechanism, funded by fees collected by the Federal Reserve Board rather than appropriations from Congress, is unconstitutional. According to the panel, the CFPB’s funding was doubly insulated from congressional appropriations, and, as a result, the agency was unaccountable to both Congress and the public. Specifically, the panel held that the funding mechanism violates the Constitution’s separation of powers framework, and in particular the Appropriations Clause.
The Fifth Circuit’s ruling was the culmination of a multi-year litigation challenging the CFPB’s Payday Lending Rule, which was codified in 2017. The CFSA challenged the rule and the constitutionality of the CFPB itself.
The Fifth Circuit also held that even though the CFPB funding mechanism was unconstitutional, the agency did otherwise have the authority to promulgate the rule.
With respect to the CFSA, the Fifth Circuit held, “Because the funding employed by the Bureau to promulgate the Payday Lending Rule was wholly drawn through the agency’s unconstitutional funding scheme, there is a linear nexus between the infirm provision (the Bureau’s funding mechanism) and the challenged action (promulgation of the rule) . . . Plaintiffs were thus harmed by the Bureau’s improper use of unappropriated funds to engage in the rulemaking at issue.” The Fifth Circuit’s ruling is binding on the federal district courts in Texas, Louisiana, and Mississippi.
The Supreme Court will not hear this case until its next term, which begins in October 2023. In the interim, in districts other than those bound by the Fifth Circuit ruling, the decision will continue to cloud the CFPB’s actions and create uncertainty for industry. Any potential enforcement activity will likely be met with assertions related to the unconstitutional funding mechanism of the CFPB. Nonetheless, we expect the CFPB to continue to pursue its investigatory and supervisory activity aggressively and in furtherance of its stated regulatory agenda.