Appeals Court Rules CFPB Funding Mechanism Is Unconstitutional

The ruling, supported by a major credit union group, calls into question all past action taken by the bureau.

A federal appeals court on Wednesday dropped a bombshell on the financial services industry, ruling that the CFPB’s funding structure is unconstitutional and, as a result, the agency’s payday loan rule was voided.

The Fifth Circuit Court of Appeals ruled that Congress “abdicated” its responsibility to subject the agency to the annual appropriations process, saying that Dodd-Frank, which created the bureau, gave the agency “an off-books charge card.”

In voiding the payday rule because of agency funding, the court throws into question all past actions taken by the bureau.

Background on the Case

The ruling came in a challenge to the payday lending rule filed by the Community Financial Services Association, the trade group representing payday lenders. The rule itself, first issued by then-Director Richard Cordray, stated that lenders had to verify that a borrower had an ability to repay the loan before the transaction was made. It further stated that it was unfair and abusive for lenders to withdraw loan payments from a borrower’s account after two successive attempts to withdraw funds failed due to insufficient funds.

The Trump Administration, which took a more pro-business stance than Cordray, who was an Obama Administration appointee, withdrew the ability-to-repay part of the rule, but did not void the payment restrictions.

The association continued to press the payments issue. The appeals court ruled on Wednesday that the agency did not exceed its powers in issuing the rule, but that since its funding is illegal, the rule was too.

“In other words, without its unconstitutional funding, the Bureau lacked any other means to promulgate the rule,” the court found.

The next step for the case would be a Supreme Court appeal by the CFPB. However, the court already previewed its position on the bureau in a separate case, ruling that its structure was unconstitutional because Dodd-Frank only allowed the president to remove a director for cause.

A CFPB spokesperson has said that there is nothing unique about Congress funding the agency outside of the appropriations process.

Credit Union Response

CUNA President/CEO Jim Nussle praised the ruling.

“The court’s decision today is consistent with CUNA’s longstanding position that CFPB funding go through the standard appropriations process,” he said. “It’s been clear this is the most appropriate avenue since the very start of the CFPB, as it would provide addition Congressional oversight and incentivize the bureau to focus its attention on bad actors causing real harm to consumers.”

Political Response

Congressional reaction to the court ruling was squarely partisan—which may preview the fight if the agency suddenly is subject to the appropriations process.

Since the CFPB’s creation, Republicans on Capitol Hill have introduced several bills that would place the agency under the appropriations process.

“The CFPB has been an unconstitutional and unaccountable agency since its inception,” Senate Banking Committee ranking Republican Sen. Pat Toomey, R-Pa., said.” I’ve long argued that the CFPB should be subject to Congressional appropriations. As the Constitution requires, the people’s representatives shall determine how their tax dollars are spent. I’m glad to see the court agrees.”

He added the court’s ruling calls into question all of the agency’s actions since it was created.

However, Senate Banking Chairman Sen. Sherrod Brown, D-Ohio, said the ruling favored “Wall Street over consumers.”

“After more than a decade of coordinated and sustained attacks on consumers, and repeated failures to weaken the CFPB, big corporations and anti-consumer interests have turned to the courts to incapacitate the only financial agency that specifically looks out for consumers,” Brown stated.

What Comes Next?

The funding question could be a thorny issue that a lame duck Congress is forced to address following the mid-term elections. Congress has not completed the FY23 appropriations process, so the question of CFPB funding could be in play when Congress returns.