According to the Fifth Circuit Court of Appeals: the funding structure of the Consumer Financial Protection Bureau (CFPB) is unconstitutional, and the 2017 payday loan rulewhich resulted directly from this unconstitutional financing mechanism, must be cancelled.
Does this mean that the CFPB itself is unconstitutional? What does this mean in the long term for the CFPB? And what does this explosive decision mean for the ARM industry?
To gauge where we’re headed, here are three things you need to know about the October 19, 2022 advisory in Community Financial Services Association of America vs. CFPB (Case No. 21-50826, 5th Cir. 2022):
1. The Court declared that the funding structure of the CFPB was unconstitutional. Does this mean that the CFPB itself is unconstitutional?
The Community Financial Services Association of America (CFSA) argued that the CFPB’s “vague and sweeping” regulatory power is too broad without guiding principles and therefore violates the Constitution’s separation of powers. The Court disagreed. Instead, he argued that while the limits set for the CFPB’s regulatory authority are broad, they exist and are bounded. Further, because Congress’ grant of regulatory power to the CFPB was accompanied by specific purpose, objectives, and definitions to guide its discretion, the grant of power to the CFPB goes the extra mile and is sufficient.
That said, although the CFPB has the power to make rules, the Court ruled that its funding structure was unconstitutional. Under the appropriations clause of the constitution, under our system of checks and balances, congress has “power over the purse.” Most of the other executive agencies rely on annual appropriations for their funding. However, the CFPB is not obliged to resort to credits. Instead, it simply requests an amount from the Federal Reserve that the CFPB Director deems reasonably necessary to carry out CFPB business. As long as this request does not exceed 12% of the Federal Reserve’s total operating expenditures, the request must be granted. According to the Fifth Circuit, this “double insulation of the Congressional purse strings” is unconstitutional.
Regarding the seriousness of the CFPB’s unconstitutional funding mechanism, the Court referenced a quote from Alexander Hamilton and did not mince words, stating: “An expansive executive agency isolated (no, double-insulated) from the cords of the congressional purse, expressly exempt from budget review, and headed by a single director removable at the pleasure of the president is the epitome of the unification of the purse and the sword in the executive – an abomination whose framers have warned that it would “destroy that division of powers on which political liberty is founded”.
2. If the CFPB was funded inappropriately, does that mean that all CFPB rules are invalidated?
Not yet. Jits decision does not mean that every rule created by the CFPB since its inception is automatically invalidated. The Court explicitly stated that although it ruled that the CFPB’s funding structure was unconstitutional, the ACSA was not entitled to a mandatory strike down of the payday loans rule.
Instead, the Court explained that cancel the rule, ACSA must demonstrate that the unconstitutional funding provision caused harm. That said, the Court found that in this case the harm inflicted was straightforward, as a report by the CFPB shows that it spent over nine million dollars on “research, markets and regulation” over the course of the fiscal quarter in which the rule was published. From CFPB lacked other means to promulgate the rule without its unconstitutional funding, ACSA showed sufficient prejudice and the rule was struck down.
3. So what does this mean for the CFPB payday loan rule? If the Bureau had been properly funded, would the rule have survived?
The Court did not say the payday loan rule was unconstitutional or that the CFPB lacked the power to create it.
The Consumer Financial Protection Act (the Act) provides the CFPB with the power to make rules prohibiting “unfair, deceptive or abusive” acts or practices in connection with consumer financial products or services. There are specific definitions in the Act that govern when an act or practice may be considered “unfair” or “abusive”. Under the Act, an act or practice meets the definition of “unfair” if the CFPB has a reasonable basis to conclude that (1) the act or practice causes or is likely to cause substantial harm to customers; (2) is not reasonably avoidable by consumers; and (3) is not outweighed by countervailing benefits to consumers or competition.
As explained in more detail here, the payday loan rule regulates payday loans, vehicle titles, and high-cost installment loans. Its provisions include a ban on attempting to debit an account again after two unsuccessful attempts. While ACSA did not dispute that consumers may suffer injuries from failed payment attempts, it argued that lenders were not the cause of these injuries since the consumer’s bank decides to charge a fee or to close the account. Since lenders do not charge fees for attempted withdrawals, ACSA argued that attempting to withdraw funds repeatedly does not meet the definition of “unfair” and therefore the CFPB does not have the authority to regulate this practice.
The Court disagreed with the CFSA. He concluded that the definition of “unfair” was satisfied because consumers would not be harmed without the repeated initiation of unsuccessful takedown attempts. Although the NSF charge comes from a third party (namely the consumer’s financial institution), the role played by the lenders in causing the harm cannot be erased. The court also rejected ACSA’s arguments that consumers could reasonably avoid fees if they fund their accounts properly or choose not to use these financial products.
You can read the full review here.
Legal Advisory Council Reflections
Joanne NeedlemanMember, Clark Hill, PLC – “Even though the industry didn’t like the CFPB, I don’t think after a decade it was ever about its existence, but how it went about regulating the market for consumer financial services. Financial services regulators are nothing new. It was the sheer scale of power and irresponsibility that was a concern. Because of his irresponsibility, he lost his credibility. was also about its attitude that the only way to protect consumers was to take a totalitarian approach. No one ever believed it was an “independent” agency, and that was certainly true under the law. previous administration when you saw how Congress reacted when they didn’t have “their” person in the CFPB. Since its inception, the CFPB has been political football and the financial services industry just can’t function in this type In the future, I hope the changes s brought to the CFPB will bring more collaboration, more opportunities to build consensus, and more measured approaches so that consumers can get the most out of the benefits of the CFPB’s work. The time has come to bring a commission to the CFPB.”
Brit SuttelShareholder, Barron & Newburger, CP. – “I think the decision is fascinating and the industry will definitely feel the ripple effects. I think right now the focus continues to be on the 5th circuit because it’s the only circuit where the ruling has precedent effect. The outfit will likely be a priority in the case that has been filed against the CFPB by various professional organizations regarding the update of the UDAAP exam regarding fair lending and discrimination. I believe also that it is very likely that it will end up in the Supreme Court.
Stefanie JackmanPartner, Troutman pepper -“An appeal is very likely. Many believe the Fifth Circuit has gone further than necessary with its remedy. If the Supreme Court agrees that the funding process is unconstitutional, but agrees that it is not possible to unwind more than a decade of activity, the easiest solution for the Court might be to simply delete the wording from Dodd-Frank exempting the CFPB from the appropriations process. This should by default be funded by appropriations and would also be in line with Chief Justice Roberts’ position that the Court should not legislate or rewrite the law. »
John Bedard, Bedard Law Group, PC-“I am so happy to see the courts finally listening to the arguments about the [un]constitutionality of the CFPB. Hopefully, this ruling will make other courts across the country think twice before cavalierly dismissing constitutional challenges against the CFPB.”
Only time will tell what the long-term effects of this case will be. The CFPB did not put a “closed for business” sign on its door when the notice was issued. It is also important to note that had the CFPB been properly funded, the payday lenders rule would have survived. With that in mind, it would be unwise to untangle compliance procedures or assume that the CFPB will disappear anytime soon. However, this case may be the catalyst for some change at the CFPB and certainly gives people inside and outside the Fifth Circuit Court of Appeals a reason to move to dismiss the actions of the CFPB.