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The Future of the CFPB Post-Appeals Court Decision
CFPB Held Unconstitutionally Funded October 28, 2022
Ellen T. Berge Partner | [email protected]
Leonard L. Gordon Partner | [email protected]
Jonathan L. Pompan Partner | [email protected]
Michael J. Bresnick Partner | [email protected]
Joshua H. Raymond Partner | [email protected]
Welcome
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CLE Credit
This activity has been approved for Minimum Continuing Legal Education credit by the State Bar of California in the amount of 1 hour, of which 1 hour applies to the general credit requirement, and by the State Bar of New York in the amount of 1 hour, of which 1 credit hour can be applied toward the Areas of Professional Practice requirement. Venable certifies that this activity conforms to the standards for approved education activities prescribed by the rules and regulations of the State Bar of California and State Bar of New York, which govern minimum continuing legal education. Venable is a State Bar of California and State Bar of New York approved MCLE provider.
A code will be distributed through the Q&A chat section at the end of the program, and a CLE submission form will be sent to participants next week via email.
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Today's Webinar
1. Introduction 2. CFSA v. CFPB 3. Impact on the Small Dollar Rule 4. What does this mean for other CFPB actions? 5. CFPB Investigations, and Active Litigation 6. What's next? 7. Q&A
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Our Panelists
For an index of articles and presentations on CFS topics, see www.Venable.com/cfs/publications.
Ellen T. Berge
Partner
Leonard L. Gordon
Partner
Michael J. Bresnick
Partner
Joshua H. Raymond
Partner
Jonathan L. Pompan
Partner
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CFSA v. CFPB
What Happened?
How Did We Get Here?
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Consumer Financial Protection Act of 2010
Title X of the Dodd-Frank Act, entitled the "Consumer Financial Protection Act of 2010," consolidated many federal consumer protection responsibilities into the CFPB.
Stripped rulemaking authority for a host of federal consumer statutes from other agencies and authorizes CFPB to prescribe uniform rules
Stripped federally-chartered institutions of a significant degree of charter preemption authority
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Building the CFPB
Independent bureau of the Federal Reserve Board (FRB)
A director with a 5-year term Nominated by the President and approved by the Senate
Statutory language that makes clear the FRB itself cannot interfere with the functions of the CFPB An independent agency within an independent agency FRB may delegate their bank consumer examination and supervision functions to the CFPB
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Funding of the New CFPB
Under the Dodd-Frank Act, the CFPB is funded principally by transfers from the Board of Governors of the Federal Reserve System up to a limit set forth in the statute.
The CFPB can request funds from the Federal Reserve that are reasonably necessary to carry out its consumer financial protection functions.
The CFPB's funding from the Federal Reserve is capped at a pre-set percentage of the total 2009 operating expenses of the Federal Reserve System, subject to an annual adjustment.
According to the CFPB:
"The Dodd-Frank Act followed long-established precedent in providing the CFPB with funding outside of the congressional appropriations process. Congress has consistently provided for independent funding for bank supervisors to allow for long-term planning and the execution of complex initiatives and to ensure that banks are examined regularly and thoroughly for both safety and soundness and compliance with
the law."
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CFSA v. CFPB
Consumer Financial Services Association of America (CFSA) is an industry trade organization for small-dollar lenders that challenged the Payday Lending Rule, finalized in 2017.
CFSA sued the CFPB to invalidate the Payday Lending Rule.
CFSA made numerous arguments regarding the validity of the Rule. In particular, CFSA argued that the Rule should be invalidated because it was arbitrary and capricious, and the CFPB receives its funding in an unconstitutional manner.
The CFPB receives its funding from the Federal Reserve rather than through Congressional appropriations.
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U.S. Court of Appeals for the Fifth Circuit
Panel held that the CFPB is funded in an unconstitutional manner.
The court reasoned that the Constitution's framers sought to create separation of powers by placing the power of the purse exclusively in Congress's purview, articulated through the Appropriations Clause in the Constitution.
When Congress combined authority (rulemaking, supervision, enforcement) over consumer financial services with the ability to self-fund into one agency, Congress violated the principle of separation of powers and the Appropriations Clause.
"We agree that, for the most part, the Plaintiffs' claims miss their mark. But
one arrow has found its target: Congress's decision to abdicate its appropriations power under the Constitution, i.e., to cede its power of the purse to the Bureau, violates the Constitution's structural separation of powers. We thus reverse the judgment of the district court, render judgment in favor of the Plaintiffs, and vacate the Bureau's 2017 Payday Lending
Rule."
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U.S. Court of Appeals for the Fifth Circuit (cont'd)
"Congress's appropriations power, including the express exemption from congressional review of its funding, renders the Bureau `no longer dependent and, as a result, no longer accountable' to Congress and, ultimately, to the people . . . . By abandoning its `most complete and effectual' check on `the overgrown prerogatives of the other branches of the government'--indeed, by enabling them in the Bureau's case--Congress ran afoul of the separation of powers embodied in
the Appropriations Clause."
Slip op. at 32.
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U.S. Court of Appeals for the Fifth Circuit (cont'd)
The court required CFSA to show that the unconstitutional funding mechanism inflicted harm on CFSA before the court would invalidate the rule.
But the court said this was straightforward in this case. Since the CFPB received all its operational funds through the Federal Reserve, the unconstitutional funding mechanism was the only way that the CFPB could have promulgated the rule.
The court invalidated the Payday Lending Rule.
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U.S. Court of Appeals for the Fifth Circuit (cont'd)
"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."
Slip op. at 38.
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Impact on the Small Dollar Rule
Will the Payday Lending Rule Make a Comeback?
After the district court upheld the Payday Rule on summary judgment, the plaintiffs appealed on four principal grounds:
1. the Rule was outside the Bureau's authority and violated the Administrative Procedure Act;
2. it was promulgated by a director unconstitutionally insulated from presidential removal;
3. the Bureau's rulemaking violated the nondelegation doctrine; and
4. the Bureau's funding mechanism violated the Appropriations Clause.
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What Does This Mean for Other CFPB Actions?
U.S. Court of Appeals
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Courts Are Already Being Asked to Consider the Holding
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Courts Are Already Being Asked to Consider the Holding
CFPB v. TransUnion (Illinois) (would appeal to 7th Circuit) CFPB v. Progrexion Marketing, Inc. (Utah) (would appeal to 10th Circuit) CFPB v Nationwide Biweekly Administration (9th Circuit)
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What Other CFPB Actions May Be Challenged?
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CFPB Investigations and Active Litigation
Impact on Enforcement Actions
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U.S. Court of Appeals
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What's Next?
"The power of the purse is the only real power of government." - Senator Robert Byrd
Composition of the 117th Congress
HOUSE
SENATE
435 Seats
221 Democrats 0 Independents
218 Votes for Majority*
212 Republicans 2 Vacancies
Vacancies: FL-13, IN-2
100 Seats
48 Democrats 60 Votes for
2
Supermajority*
Independents**
51 Votes for
Majority*
50 Republicans 0 Vacancies
*If no vacancies and all members vote **The two independent senators (Sanders - VT and King - ME) caucus with the Democrats
SOURCE US House Press Gallery United States Senate.. SLIDE LAST UPDATED ON 9/14/22
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How Does This Get Resolved?
The court's logic could extend to any rulemaking, or enforcement action, that the CFPB has engaged in thus far.
If this decision stands without any fix from Congress, this could be the template to invalidate everything that the CFPB has done.
This decision is binding on federal district courts in Louisiana, Mississippi, and Texas.
Possible fix? If Congress funds the CFPB in a constitutional manner, the CFPB might be able to ratify its prior actions, similar to what it did after the Seila Law LLC case.
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Questions & Answers
For an index of articles and presentations on CFS topics, see www.Venable.com/cfs/publications.
Ellen T. Berge
Partner
Leonard L. Gordon
Partner
Michael J. Bresnick
Partner
Joshua H. Raymond
Partner
Jonathan L. Pompan
Partner
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2022 Venable LLP. This document is published by the law firm Venable LLP. It is not intended to provide legal advice or opinion. Such advice may only be given when related to specific fact situations that Venable has accepted an engagement as counsel to address.
