Fifth Circuit decision vacates a Consumer Financial Protection Bureau ("CFPB" or "Bureau") Payday Lending Rule because the Bureau's funding mechanism violates the Constitution's Appropriations Clause.

On October 19, 2022, the United States Court of Appeals for the Fifth Circuit held that Congress's decision to delegate its appropriations power to the CFPB violates the Constitution's structural separation of powers. It accordingly vacated a rule regulating payday lending because the funds used to promulgate the rule were wholly drawn through the agency's unconstitutional funding scheme. See Community Fin. Servs. Ass'n of Am. v. CFPB, No. 21-50826, – F.4th – (Slip Op. Oct. 19, 2022).

In 2018, Community Financial Services Association of America and the Consumer Service Alliance of Texas, two trade associations of consumer lenders subject to the Bureau's 2017 Payday Lending Rule, filed a lawsuit. Among other claims, the lawsuit challenged the Bureau's unique funding scheme, under which the Bureau enjoys unchecked power to set its own budget up to 12% of the Federal Reserve's total operating expenses and demand funds directly from the Federal Reserve without any review by Congress's appropriations committees. See 12 U.S.C. § 5497(a)(2)(A). The Fifth Circuit explained that this unprecedented funding mechanism means that Congress not only ceded direct control over the Bureau's budget by exempting it from annual or other time-limited appropriations or review, but also ceded any indirect control by "providing that the Bureau's self-determined funding be drawn from a source that is itself outside the appropriations process." Slip Op. 30. Accordingly, "the Bureau's funding structure violates the Appropriations Clause of the Constitution and the separation of powers principles enshrined in it." Slip Op. 23.

The court concluded further that because the Bureau promulgated the Payday Lending Rule using unconstitutionally requisitioned funds, vacatur of the Rule was the appropriate remedy: "without its unconstitutional funding, the Bureau lacked any other means to promulgate the rule." Slip Op. 38.

The consequences of this decision are significant. The decision is the first to hold that the Bureau's funding mechanism violates separation of powers, a constitutional error that only Congress can remedy. The court's decision not only will assist others challenging the Bureau's past actions, but also calls into question all the Bureau's current and future actions unless and until Congress fixes this structural infirmity. Given the Bureau's recent and repeated efforts to increase collaboration with state attorneys general, it is also possible that the Bureau may lean even more heavily on states to take investigative and enforcement action until this issue is resolved.