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The Fifth Circuit vacated the Consumer Financial Protection Bureau’s (CFPB) 2017 Payday Lending Rule following its finding that the funding structure of the CFPB is unconstitutional. The CFPB filed a petition for certiorari in November 2022, and the Supreme Court has announced it will review this appellate decision.

What is the CFPB?

The CFPB was created by the 2010 Dodd-Frank Act in response to the 2008 financial crisis. Prior to Dodd-Frank, seven different agencies were tasked with enforcing consumer protection statutes. The CFPB now maintains jurisdiction over these statutes in upholding its mission to serve as a consumer protection force against unfair, deceptive, or abusive practices within the financial markets. It monitors financial institutions, enforces federal financial laws, and provides resources for consumers to educate themselves about financial products. The CFPB is an independent bureau within the Federal Reserve System, and it is funded from the Federal Reserve’s earnings instead of congressional appropriations. This structure lies at the center of the most recent challenge to the CFPB’s constitutionality.

Community Financial Services Association of America vs. CFPB

In October of 2022, the Fifth Circuit held the funding structure of the CFPB violates the Appropriations Clause of the Constitution. In this case, the plaintiffs challenged the validity of the CFPB’s 2017 Payday Lending Rule. They raised four arguments, one of which stated the Bureau’s funding mechanism violates the separation of powers mandated by the Constitution. The Fifth Circuit agreed, stating the decision of Congress to relinquish its appropriations power to the Federal Reserve violates separation of powers. The opinion expressed concern over the extent of the CFPB’s authority paired with the “double-insulation” that separates its funding from Congress. The CFPB argued the funding scheme is in fact constitutional because it was enacted by an act of Congress itself. However, the opinion rejected this line of thinking and drew a clear divide between the enactment of a law and a formal appropriation by Congress.

Seila Law LLC v. CFPB

This is not the first challenge to the CFPB’s constitutionality in recent years. In 2020, the Supreme Court released its opinion for Seila Law LLC v. Consumer Financial Protection Bureau (“Seila”), a case focused on the leadership structure of the CFPB. In Seila, a 5-4 majority held the leadership structure of the CFPB was unconstitutional. The original leadership structure provided for one sole director who could only be terminated for cause. This contradicted Article II of the Constitution, which gives the president power to remove principal officers at will, subject to two exceptions that did not apply to the facts in Seila. The majority concluded the language establishing the leadership structure of the CFPB was severable from the remainder of the statute establishing the bureau. Thus, the CFPB may continue to operate, but the director must be removable by the president at will.

What’s Next?

Some legal experts have said this case could pose a larger threat to the CFPB than Seila, as remedying constitutional challenges to the CFPB’s funding may not be as simple as changing the leadership structure. Oral argument will likely be heard for this case in the next Supreme Court term, so an opinion will be unlikely prior to 2024. However, for the time being, industry associations are expressing the importance of preparing for a potential change in the status quo to protect the normal functioning of the financial markets.

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