Update: The Aftermath of the Fifth Circuit CFPB Holding

ABSTRACT: Over the past several weeks, last year’s Fifth Circuit Opinion holding the CFPB’s self-funding structure unconstitutional, and subsequent limbo during the appeal to the Supreme Court, has prompted briefing from various state executives and has impacted state cases and enforcement actions.

As the Fifth Circuit Opinion (discussed in Baker Sterchi’s previous blog here) holding the self-funding mechanism of the CFPB unconstitutional makes its way through the Supreme Court, the impact of this litigation is seen across the country. To recap, the Fifth Circuit case involved a CFPB-issued payday lending rule that prohibited lenders from attempting to withdraw funds after 2 failed payment attempts without further authorization from the borrower. The Fifth Circuit struck down the rule, finding that because the CFPB receives direct funding from the Federal Reserve instead of having funds allotted by Congress, the CFPB’s funding structure violates the appropriations clause and is therefore unconstitutional. Since then, the legality of other CFPB rules has come into question.

On Monday, the United States District Court for the Southern District of New York issued a ruling staying a case brought by the CFPB against Credit Acceptance Corporation for alleged predatory lending practices, pending any “major development” in the pending Supreme Court case. The Court reasoned that “any potential harm to the public caused by delaying this action is outweighed by the benefit to consumers in proceeding in a streamlined fashion.” Similarly, last week the Texas District Court granted (in part) a preliminary injunction, stopping the CFPB from enforcing a rule that requires demographic data for small business borrowers, pending a decision from the Supreme Court. The injunctive relief was limited to the parties in that action; the Court declined to issue a nationwide injunction.

These two recent decisions follow amicus briefing submitted in July by 26 states, including Kansas and Missouri, to the Supreme Court advocating for the Fifth Circuit decision to be upheld. The states’ briefing echoes arguments we have seen about lack of accountability and the importance of the appropriations clause for the separation of powers. More specific to the states, though, the briefing included argument that it was Congress’ intent for the CFPB to work directly with the States, reasoning that Congress “took special care to preserve state authority over areas that might otherwise fall under the CFPB’s jurisdiction.” Moreover, “the states bring special expertise in the consumer protection field that respondents, as regulated parties, do not share,” they argued. The States requested the opportunity to present oral argument in this matter based on the substantial role they play in protecting consumers, supervising “approximately 3,981 banks with more than $7.15 trillion in combined assets, representing 79% of all U.S. banks.”

The CFPB knows what is potentially at stake – in its petition for Supreme Court review, the CFPB noted that the Fifth Circuit’s decision “calls into question virtually every action the CFPB has taken in the 12 years since it was created.”

Argument is set for October 3, 2023, on this case. Baker Sterchi will monitor the hearing and subsequent ruling, which will have a major impact on pending litigation and enforcement actions for some time to come.

* Kaleb McKinnon, 2023 Summer Law Clerk, assisted in the research and drafting of this post. McKinnon is a rising 3L student at Drake University Law School.