The Consumer Financial Protection Bureau (CFPB) funding mechanism was found unconstitutional by the United States Court of Appeals for the 5th Circuit. Rather than being funded directly by Congress through appropriation legislation, the Consumer Protection Agency receives its funding from the Federal Reserve.
The ruling is a victory for a payroll loan group that filed suit against the federal agency in its 2017 payroll loan rule, which provided for a certain level of consumer protection.
The financial industry makes a big profit
The CFPB was created in 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act. To avoid political pressure on the federal agency, the Democratic decision makers who drafted the bill created a way for the agency to receive funding from the Federal Reserve instead of Congressional funding.
More than a decade later, an appeals court found this arrangement unconstitutional because it violated the founding documents of the structural separation of powers.
In 2020, the STF declared the unconstitutionality of an additional area of the body’s structure. Specifically, the court ruled that a president could only dismiss the director of the CFPB for cause and not of his own free will, violating the constitutional separation of powers.
The original lawsuit against the CFPB was brought by a payroll loan group under the agency’s 2017 Final Payroll Loan Rule, which required payroll lenders to determine, among other things, that customers have an opportunity to repay the loan before to approve it.
In 2020, the agency rescinded the “ability to pay” requirement, but left another provision that prohibited creditors from attempting a third withdrawal from the client’s accounts after two failed withdrawals, unless the client consented to another attempt.
With the recent decision of the 5th US Court of Appeals, it overturned the entire payday loan rule.
CFPB’s next steps
For years, the financial industry and Republican lawmakers have worked to limit CFPB oversight, arguing that it lacks accountability. Its funding structure is just one focus. However, a CFPB spokesperson noted that other financial regulators and the entire Federal Reserve System are funded outside of Congressional spending bills.
The agency is expected to seek an en banc review of the decision, which will allow the case to be heard by all appeals court judges, rather than a smaller panel. However, the CFPB refused to confirm this course of action. The case may also eventually be reviewed by the Federal Supreme Court.
With no clear next steps, however, the decision is a huge blow to the agency and its mission, and creates a less certain future for its regulatory powers.