Dive Brief:
- The Consumer Financial Protection Bureau (CFPB)’s funding structure is unconstitutional, a three-judge panel ruled Wednesday. Democrats said the decision could stifle the agency’s efforts to rein in consumer abuses in the financial services industry.
- The New Orleans-based 5th U.S. Circuit Court of Appeals ruled that because the CFPB receives funds from the Federal Reserve and not Congress, the bureau’s funding apparatus violates the separation-of-powers principles in the U.S. Constitution.
- In a victory for the Community Financial Services Association of America and the Consumer Service Alliance of Texas, the two payday lender trade groups that brought the case, the court also vacated a small-dollar lending rule the CFPB issued in 2017.
Dive Insight:
"While the great majority of executive agencies rely on annual appropriations for funding, the Bureau does not," the judges wrote. "Wherever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it."
In a statement to Politico, the CFPB declined to comment on whether it planned to appeal the decision.
“[T]here is nothing novel or unusual about Congress’s decision to fund the CFPB outside of annual spending bills,” CFPB spokesperson Sam Gilford said. “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.”
Sen. Elizabeth Warren, D-MA, who was instrumental in the agency’s creation in 2010, called the ruling “lawless and reckless.”
“[The CFPB] has returned billions of dollars to Americans by doing its job, and its funding is clearly constitutional,” she wrote on Twitter on Wednesday. “Extreme right-wing judges are throwing into question every rule the CFPB enforces to protect consumers and businesses alike.”
Warren warned the decision could prevent the CFPB from enforcing rules that protect consumers, such as from harassment from debt collectors and from banks opening fake accounts and charging “junk fees.”
The ruling is the latest win for Republicans, who have long accused the agency of pursuing a radical liberal agenda.
“Rather than operating as a tough, but fair and sensible regulator, the CFPB is again pursuing a radical and highly-politicized agenda unbounded by statutory limits,” Senate Republicans wrote in a letter to CFPB Director Rohit Chopra last month, accusing the agency of running a “smear campaign” against banks that charge customers overdraft fees. “It has adopted an arrogant regulatory ethos: the CFPB can do whatever it wants.”
The agency, which was created through the passage of the Dodd-Frank Act in the wake of the 2007-08 financial crisis, has faced a constitutional challenge to its structure before.
In 2020, the Supreme Court ruled 5-4 that the agency’s leadership structure was unconstitutional.
That case was brought by a California debt collection law firm, which argued it should not have to comply with a CFPB civil investigative demand because the bureau’s leadership, which could only be removed “for cause,” violated the Constitution’s separation-of-powers rule.
