A federal appeals court Wednesday ruled that the funding method Congress approved when it formed the Consumer Financial Protection Bureau is unconstitutional.
The decision by a three-judge panel of the 5th U.S. Circuit Court of Appeals in New Orleans was issued as part of a ruling on an appeal of a case brought by payday lending groups. The Community Financial Services Association of America and Consumer Service Alliance of Texas had sued the CFPB, challenging the validity of its 2017 payday lending rule, which regulates high-interest rate lenders.
The plaintiffs contended that in enforcing the rule, the CFPB “acted arbitrarily and capriciously and exceeded its statutory authority,” according to court documents. The groups also contended that the CFPB “is unconstitutionally structured, challenging the bureau director’s insulation from removal, Congress’s broad delegation of authority to the bureau, and the bureau’s unique, double-insulated funding mechanism.”
The U.S. District Court for the Western District of Texas rejected those arguments, but that decision was appealed to the 5th Circuit Court.
When the CFPB was created as part of the 2010 Dodd-Frank financial overhaul law, Congress chose to exempt the bureau from annual appropriations. Instead, CFPB is funded by transfers from the Federal Reserve. While the funding is capped at 12% of the Fed’s annual budget, it cannot reject requests that fall under the cap.
The 5th Circuit Court’s decision, written for the court by Judge Cory T. Wilson, states that, “Congress’ 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.”
Joining Wilson in the decision were Judge Don R. Willett and Judge Kurt D. Engelhardt. All three were appointed by former President Donald Trump.
A spokesperson for the CFPB provided a statement on the decision via email.
“There is nothing novel or unusual about Congress’s decision to fund the CFPB outside of annual spending bills,” the CFPB said in its statement. “Other federal financial regulators and the entire Federal Reserve System are funded that way, and programs such as Medicare and Social Security are funded outside of the annual appropriations process. The CFPB will continue to carry out its vital work enforcing the laws of the nation and protecting American consumers.”
Because the ruling was made by a three-judge panel of the 5th U.S. Circuit Court of Appeals, the CFPB could ask all of the active judges on the appeals court to reconsider the decision. It also could ask the U.S. Supreme Court to review it.
The Supreme Court has already ruled that part of the structure of the CFPB is unconstitutional. In a 5-4 decision issued in June 2020, Chief Justice John Roberts, writing on behalf of the majority, said, "the structure of the CFPB violates the separation of powers."
"The agency may therefore continue to operate, but its director, in light of our decision, must be removable by the president at will," Roberts wrote at the time.
In addition, the court also issued a decision by a 7-2 vote that a provision in the Dodd-Frank law that dictates the director's removal could be struck down without invalidating the entire law.
Following those rulings, Sen. Elizabeth Warren, D-Mass., who was the driving force behind creating the CFPB, issued a statement saying the CFPB was “here to stay.”
"Even after today's ruling,” she said at the time, “the CFPB is still an independent agency. The director of that agency still works for the American people. Not Donald Trump. Not Congress. Not the banking industry. Nothing in the Supreme Court ruling changes that.”
