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A US court decision says the Consumer Financial Protection Bureau's (CFPB) funding structure is unconstitutional, striking a potential blow to the agency’s work and calling into question all previous rules.
Last week (October 19), 5th US Circuit Court of Appeals ruled that the CFPB’s funding structure is unconstitutional and, as a result, annulled the agency’s payday lending rule.
The CFPB was created under the post-crisis Dodd Frank Reform Act as an independent regulatory agency housed within the Federal Reserve System.
Judges say the agency’s funding scheme is “unique across the myriad independent executive agencies across the federal government” since it is not funded with periodic congressional appropriations but receives funding directly from the Federal Reserve.
“Each year, the Bureau simply requests an amount ‘determined by the Director to be reasonably necessary to carry out the’ agency’s functions,” the decision says. “The Federal Reserve must then transfer that amount so long as it does not exceed 12% of the Federal Reserve’s ‘total operating expenses’.”
The court case has been brought by two payday lending groups, which sought to overturn the CFPB regulation governing high-interest-rate lenders.
The panel of three judges now says the CFPB’s payday lending rule is invalid because it is the product of an unconstitutional funding scheme.
The CFPB is the most powerful consumer protection agency in the US. It was created during the Obama era and has been at the centre of political attacks by Republican lawmakers from the beginning.
In a statement released following the decision, Senate Banking Committee Ranking Member Pat Toomey (R-PA) stressed the move “calls into question the validity of all of the agency’s actions to date”.
The CFPB’s rulemaking and enforcement powers cover most of the consumer-facing financial products and have been aggressively used under the current leadership of Rohit Chopra.
In addition, the agency is responsible for enforcing and updating Regulation E, which establishes a basic framework for electronic fund and remittance transfer systems under the Electronic Fund Transfer Act (EFTA).
The CFPB is also actively involved in creating rules for data aggregators and setting up a US open banking framework, while also working on guidance for buy now, pay later (BNPL) products.
“The CFPB has been an unconstitutional and unaccountable agency since its inception,” the top Republican Senator said.
By contrast, Sherrod Brown (D-OH), Democratic chair of the Senate Banking Committee, argued Congress “deliberately ensured the independent funding of the CFPB” so that it can meaningfully carry out its mandate.
“It is not a coincidence that, while other financial regulators like OCC, FDIC, NCUA, and the Federal Reserve all have independent funding structures, Wall Street chose to attack the one financial regulator charged with protecting consumers.”
The Better Markets advocacy group emphasised that the CFPB's funding structure was "Congress’s deliberate choice" and is underpinned by the "important reasoning… to partially insulate the agency from the inevitable political and industry pressure that happens when an independent regulator protects consumers against wealthy, powerful and influential financial institutions."
The decision “jeopardizes the CFPB’s ability to stand up to financial predators and stop unfair practices”, according to Lauren Saunders, associate director of the National Consumer Law Center.
Pointing out that the panel was composed “entirely of appointees of President Trump” she stressed industry lobbyists could use “congressional donations and back-room deals” to curtail CFPB resources if funding went through Congress.
A CFPB spokesperson told the media “there is nothing novel or unusual about Congress’s decision to fund the CFPB outside of annual spending bills.” The spokesperson said that Medicare and Social Security are all funded outside of the annual appropriations process.
The spokesperson confirmed the CFPB will "continue to carry out its vital work enforcing the laws of the nation and protecting American consumers."
The agency now has two weeks to challenge the decision, in which case the matter would go back to the same court to be decided on by a full panel. In the event of further appeal it would move to the Supreme Court.
In the meantime, experts believe it is possible that other CFPB rules would be challenged in the region belonging to the Fifth Circuit jurisdiction, that is Texas, Louisiana, and Mississippi.
This is not the first time US courts rule that a part of the CFPB structure is unconstitutional.
In 2020, the Supreme Court said the agency’s leadership structure, whereby its single director can be removed only by cause, violates the separation of powers.
Nonetheless, the court ruled that the agency may continue to operate but its director must be removable by the President at will.
