Unconstitutional Ruling on CFPB Funding is Watershed Moment for Consumer Finance

This week the United States Court of Appeals for the Fifth Circuit ruled that the Consumer Financial Protection Bureau’s funding structure is unconstitutional because it violates the separation of powers. Although future rulings by the Supreme Court or courts of other jurisdictions could offer differing results, this monumental ruling fundamentally weakens the CFPB’s current authority to implement and enforce consumer protection laws. 

Congress created the CFPB when it passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203). Under the Dodd-Frank Act, the CFPB was granted authority to supervise, enforce, and regulate consumer protection laws that were originally attributed to several other federal financial regulators. Consumer financial products and services that the CFPB oversees includes, “deposit taking, mortgages, credit cards and other extensions of credit, loan servicing, check guaranteeing, collection of consumer report data, debt collection associated with consumer financial products and services, real estate settlement, money transmitting, and financial data processing.”

The Dodd-Frank Act also provided the director of the CFPB broad authority to fund the agency with a transfer of non-appropriated funds “from the combined earnings of the Federal Reserve System” to carry out the CFPB’s operations, subject to a cap of no more than 12 percent of the Fed’s operating expenses. 

The Fed itself does not receive Congressional appropriations and uses interest it receives on securities it owns to run its operations. This creates what the Fifth Circuit has called an unprecedented “double insulation from Congress’s purse strings.” 

The ruling further highlights that the CFPB is even less tied to Congress than the Federal Reserve because it is not required to “remit funds above a statutory limit” to the Treasury Department. 

Astonishingly, Congress enacted a provision in the Dodd-Frank Act that explicitly prohibited Congress from being allowed to review the “funds derived from the Federal Reserve System.”

The Fifth Circuit eviscerates the CFPB’s structure as being in contravention with the founding principles and laws of the United States:

An expansive executive agency insulated (no, double-insulated) from Congress’s purse strings, expressly exempt from budgetary review, and headed by a single Director removable at the President’s pleasure is the epitome of the unification of the purse and the sword in the executive—an abomination the Framers warned “would destroy that division of powers on which political liberty is founded.”

The CFPB is different from other independent executive agencies because of the extensive degree of separation of funding from Congress and the vast regulatory and enforcement power that it wields. The Fifth Circuit states that:

The Bureau’s perpetual self-directed, double-insulated funding structure goes a significant step further than that enjoyed by the other agencies on offer. And none of the agencies cited above “wields enforcement or regulatory authority remotely comparable to the authority the [Bureau] may exercise throughout the economy.”

According to Ballard Spahr, the ruling only applies to Texas, Louisiana, and Mississippi, which are under the Fifth Circuit’s jurisdiction: 

At present, the Fifth Circuit’s decision is only binding on federal district courts in Texas, Louisiana, and Mississippi.  However, because it is an appellate court ruling, it might be given weight by district courts outside of the Fifth Circuit considering challenges to CFPB enforcement actions and other CFPB activity based on an alleged Appropriations Clause violation.

The only way to ensure that a future ruling does not overturn the Fifth Circuit’s decision is to codify a new funding structure that subjects the CFPB to the traditional Congressional appropriations process. Rep. Andy Barr’s (R-Ky.) Taking Account of Bureaucrats’ Spending (TABS) Act of 2021 (H.R. 790) ropes the CFPB into Congress’s annual appropriations process. Sen. Bill Hagerty’s (R-Tenn.) similarly drafted bill, the Consumer Financial Protection Bureau Accountability Act of 2021 (S. 2790), is also vital to push forward after the midterm elections. 

The CFPB’s funding structure ostensibly preserved it from political machinations in Congress. This misguided attempt to protect the CFPB from partisan politics has instead subdued the agency in the political bias of the director that heads the agency. 

CFPB Director Rohit Chopra is an acolyte of Sen. Elizabeth Warren (D-Mass.) and strident opponent of free-market enterprise. Since he rose to the top of the CFPB, his requests for information and proposed rulemakings have done nothing but assail businesses without adequate statutory authority to do so.

The Fifth Circuit’s ruling could undermine the CFPB’s past, current, and future work.  

With Chopra at the helm, the CFPB has issued RFIs scrutinizing how banks, credit unions, and financial technology companies conduct their business. In particular, the CFPB has attacked businesses for credit card fees; credit reports; and overdraft fees. The CFPB is also stretched its authority to revise the Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) examination procedures. 

Director Chopra has also indicated that the CFPB will intervene in the crypto-asset market because “stablecoins may also be used for and in connection with consumer deposits, stored value instruments, retail and other consumer payments mechanisms, and in consumer credit arrangements.” 

The Fifth Circuit’s ruling will help ensure that Congressional action will be the deciding factor when it comes to applying consumer protection laws to the financial services industry. 

The Fifth Circuit’s ruling could also help stymie the gradual increase in power that the director of the CFPB has assumed over the years. Director Chopra sits on the board of the Federal Deposit Insurance Corporation (FDIC) along with acting chairman Martin Gruenberg, and acting comptroller of the currency, Michael Hsu. The FDIC board is designed to consider and deliberate the diverse opinions of board members from both political parties. Since Biden has been in office, the FDIC lost the only Republican board member and has been completely controlled by Democrats ever since. 

Although Biden has nominated two Republicans to serve on the FDIC board, the FDIC is moving forward with consequential decisions without a bipartisan viewpoint. For example, the FDIC recently made a decision to increase the fees banks must pay to the FDIC for deposit insurance on bank accounts. The FDIC also is moving forward with a new rulemaking process for bank resolutions. 

Fortunately, Sen. Tim Scott (R-S.C.) has introduced a bill to remove the CFPB director from the FDIC board. Depending on the outcome of the midterm elections, Sen. Scott is primed to serve as either ranking member or chairman of the Senate Committee on Banking, Housing, and Urban Affairs. 

Passing this legislation should be one of his top priorities as the top Republican on the Senate Banking Committee in the 118^th Congress. 

The Fifth Circuit’s decision, though likely to be challenged, should enable opponents of the CFPB and its domination of the inner workings of the FDIC to call into question any regulatory, supervisory, or enforcement actions the CFPB conducts while using the “double insulated” funding structure. 

The ruling will allow financial institutions to offer more avenues for allocating credit. U.S. Bank, Wells Fargo and four other retail banks are eager to fill the gap for the availability of small dollar loans.

The Fifth Circuit’s ruling should provide the confidence needed to move forward to ensure that the administrative state does not further absorb the power the Constitution clearly granted to the elected representatives in Congress. 

Now is the time for Congress to rein in the CFPB, codify the Fifth Circuit’s ruling–and subject the CFPB to Congress’s traditional appropriations process.