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Holding the Purse and Wielding the Sword: The Fifth Circuit Finds CFPB's Funding Mechanism Unconstitutional

ABSTRACT: The structure of the CFPB has suffered yet another blow with the Fifth Circuit Court of Appeals holding its self-funding scheme to be unconstitutional. For now, lenders are not bound by the CFPB's Payday Lending Rule, but the decision potentially has much broader ramifications as well.

In a recent decision, the United States Court of Appeals for the Fifth Circuit held that the Consumer Financial Protection Bureau’s (“CFPB”) self-funding scheme violated the U.S. Constitution’s Appropriations Clause and the separation of powers. And though the Fifth Circuit’s decision narrowly considers the CFPB’s Payday Lending Rule, the Court’s holding begs the question: If the CFPB’s funding structure violates the Constitution, are all CFPB actions connected to that funding structure similarly unconstitutional?

In Community Financial Services Association of America, Ltd. v. CFPB, two trade groups brought an action challenging the validity of the CFPB’s Payday Lending Rule, specifically the payment provisions prohibiting lenders from obtaining loan repayments through preauthorized access. See 12 C.F.R. § 1041.8. The Rule and its comments prohibited the “unfair and abusive” practice by lenders of initiating additional payment transfers from consumers’ accounts after two consecutive failed attempts, as such attempts can subject consumers to overdraft fees. See id. § 1041.7. 

The district court granted summary judgment in favor of the CFPB. Plaintiffs appealed on the following grounds: (1) the Payday Lending Rule 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 Constitution’s Appropriations Clause. The Fifth Circuit affirmed the district court’s entry of summary judgment in favor of the Bureau on the first three challenges. On the fourth, however, the Fifth Circuit found in favor of the plaintiffs—holding that the Bureau’s funding structure violates “the Appropriations Clause and the Constitution’s underlying structural separation of powers.”

The Fifth Circuit grounded its holding in what it referred to as the Bureau’s “double-insulated” funding structure. Dissimilar from most agencies established by Congress, the CFPB’s funds are not subject to review by the House or the Senate Committee on Appropriations. Instead, the Bureau’s director requests its funding from the Federal Reserve—an entity who itself falls outside the bounds of the appropriations process. As the court opined, “the Bureau’s funding is double-insulated on the front end from Congress’s appropriations power. And Congress relinquished its jurisdiction to review agency funding on the back end,” creating a funding scheme free from any oversight whatsoever. 

In quoting the foundational precepts presented by the Federalist Papers and the Federal Convention of 1787, the Fifth Circuit found Congress’s relinquishment to be exacerbated by the “Bureau’s capacious portfolio of authority.” Referencing the Supreme Court’s decision in Seila Law, the Fifth Circuit described the Bureau “‘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.’” This expansive executive quality coupled with a double-insulated funding scheme free from Congress’s “purse strings, expressly exempt from budgetary review,” is the “epitome of the unification of the purse and the sword” the Framers feared.

Thus, because the CFPB could not have administered the Payday Lending Rule without its unconstitutional funding scheme, the court found in favor of the plaintiffs and vacated the Payday Lending Rule. 

At the outset, the Court’s holding means lenders are not subject to the Payday Lending Rule, unless Fifth Circuit is overturned. And because this holding calls into question all CFPB actions from its inception, the case is not over. As a three-judge panel heard the case, the Bureau will likely appeal the decision either to a full Fifth Circuit hearing or directly to the Supreme Court. For this reason, litigation based on the Fifth Circuit’s holding will take years and create the possibility of a circuit split as companies outside of the Fifth Circuit seek to challenge other CFPB actions on this theory. Baker Sterchi attorneys will continue to monitor this litigation.

* Jack Nielsen, Law Clerk, assisted in the research and drafting of this post. Nielsen is a 3L student at the University of Kansas School of Law.