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Legal Expert: Supreme Court Unlikely To Wipe Out CFPB

Feb 28, 2023
Supreme Court

As it did in 2020 ruling, court likely to cut a portion of Dodd-Frank law and let Congress fix it.

When the U.S. Supreme Court begins reviewing a lower court’s ruling that the Consumer Financial Protection Bureau’s funding method is unconstitutional, it will consider more than just that decision.

The court on Monday disclosed that it would accept the case, approving petitions for a review filed by both the CFPB and the plaintiffs in a payday lending case ruled on in November by the 5th U.S. Circuit Court of Appeals in New Orleans. 

The high court listed the case on the docket for its next session, which begins in October. Exactly when it will hear arguments as part of its review, and when it will issue its decision, remain open questions.

It also isn’t clear that the Supreme Court will finally have to decide whether the way the CFPB was organized by Congress is constitutional. According to one legal expert, the court may well decide to once again toss out part of the law that created the CFPB while preserving the rest, as it did in an earlier case that a different lower court had decided in a completely different way.

“One of the bases for the court to take the case,” attorney Jay Beitel, a principal with the Texas law firm Polunsky Beitel Green, said Monday, “is that there are different circuit courts that have looked at the same or a similar issue and come up with a different answer.”

“There was one ruling from the 9th Circuit Court,” he continued, “and a 180-degree opposite ruling in the 5th Circuit.”

5th Circuit Court Ruling

It was the 5th Circuit Court ruling that prompted the CFPB to petition the Supreme Court for a review.

In that case, a three-judge panel ruled on Oct. 19, 2022, that the CFPB’s funding method was unconstitutional. That ruling was included in the appellate court’s decision in a case brought by payday lending groups. The plaintiffs, 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 payday 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 had rejected each of 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 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.”

9th Circuit Court Ruling

That decision, as Beitel alluded to, was the opposite of a ruling in a different but related case decided by the 9th U.S. Circuit Court of Appeals in San Francisco. 

In 2017, the CFPB issued a civil investigative demand to Seila Law LLC, a California-based law firm that provides debt-related legal services to clients. The civil investigative demand — similar to a subpoena — sought information and documents related to the firm’s business practices. 

Seila Law asked the CFPB to set aside the demand, on the grounds that the agency’s leadership by a single director who could be removed by the president only for cause (as opposed to at will) violated the separation of powers. The CFPB declined to set aside the demand, but Seila Law still refused to comply with it. 

The CFPB then filed a petition to enforce the demand in U.S. District Court. Seila Law renewed its claim that the CFPB’s structure was unconstitutional, but the District Court disagreed and ordered Seila Law to comply.

Seila Law then appealed to the 9th Circuit Court, which upheld the lower court’s ruling.

That case was eventually heard by the U.S. Supreme Court in June 2020. In a 5-4 decision, the court ruled that the limits the Dodd-Frank law placed on the president’s authority to remove the CFPB director are unconstitutional, overturning the 9th Circuit Court’s decision. However, the high court also held that the offending provision in the law could be removed while preserving the rest of the law, leaving the CFPB’s powers intact.

‘Limit The Solution’

Given how the Supreme Court ruled in the Seila Law case, Beitel said he believes the justices will ultimately rule in a similar way in the payday lending case.

As the court stated in its ruling in 2020, in a decision written by Chief Justice John Roberts, ”Generally speaking, when confronting a constitutional flaw in a statute, we try to limit the solution to the problem, severing any problematic portions while leaving the remainder intact.” 

“I think the same thing is going to be true here,” Beitel said of the payday lending case. “If they agree with the fifth circuit that the funding is not proper, they can find a way to say only the funding is the issue and remove it, and leave the rest of the law alone.”

That would then leave it to Congress to update the law to enable funding the agency, he said.

Another possibility, Beitel said, is that the court may issue a ruling against the constitutionality of the funding method, but hold it in abeyance for six months to allow Congress to fix the issue.

“The court is more likely to do that than to say the CFPB is not properly constituted and negate everything they’ve done since 2015,” he said.

Doing that — invalidating the CFPB and all of the rules and regulations it has imposed and enforced since its inception in 2015 — would potentially create chaos in the mortgage industry, Beitel said.

That’s because the Dodd-Frank law gave the CFPB a broad scope of functions, including the authority to prescribe rules or issue orders or guidelines for any federal consumer financial law, including mortgage origination standards.

“Every mortgage lender in U.S. has had to follow the trade amendments.” Beitel said, referring to standards imposed by the CFPB on mortgage lending. “They’ve spent millions to comply with them. People have been operating under these rules ever since. If the Supreme Court is going to set that back to pre-2015 … I don’t think they would do something that would just be a wipe out of the CFPB.”

He added that there is a third possible way the high court could rule.

“Of course, they may rule that the funding’s fine,” he said.

Whatever the Supreme Court ultimately decides, its decision is not expected until the end of this year or in early 2024.

About the author
David Krechevsky was an editor at NMP.
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