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A Potentially Earth-Shattering CFPB Court Ruling


A monumental decision by the 5th Circuit Court of Appeals could significantly alter the CFPB.

It might not be an “October surprise” that will have an impact on the outcome of the midterm elections, but the financial services industry did get earth-shattering news last week. On October 19, a three-judge panel from the 5th U.S. Circuit Court of Appeals determined the way the Consumer Finance Protection Bureau (CFPB) is funded is unconstitutional.


As outlined under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB receives its funding through direct transfers from the Federal Reserve, rather than through the congressional appropriations process on which the vast majority of federal agencies must rely. Congress is therefore not in charge of setting the Bureau’s annual budget.


The ruling is a potentially serious win for the GOP and for financial institutions’ trade associations like the U.S. Chamber of Commerce. Since its creation, the CFPB’s leadership structure (a single director, not a commission) and funding framework have been frequent targets for criticism from industry groups and Capitol Hill Republicans.


While this judicial fight is far from over — and while the case is not likely to weigh heavily on voters’ minds — this month’s ruling could have major implications for CFPB regulations and enforcement and the legislative agenda over the next several months and beyond.


Where does the case go from here?

Right now, the ruling by the 5th Circuit Court of Appeals’ three-judge panel stands. That means the current funding structure for the CFPB has been deemed unlawful.


But you wouldn’t know that from what’s happening at the CFPB. Indeed, Bureau leaders have pledged to carry on. In a statement released after last week’s ruling, the CFPB said “there is nothing novel or unusual about Congress’s decision to fund the CFPB outside of annual spending bills.” A spokesperson also said the Bureau will continue its “vital work enforcing the laws of the nation and protecting American consumers.”


There are some legal analysts who believe that since the ruling did not consider the CFPB’s structure, it is “unlikely that this case will have any effect on the CFPB’s enforcement powers as a regulatory agency.” (More on this question below, however.)


Still, unless it is willing to be subject to the whims of congressional appropriators — something Director Rohit Chopra will not want — the CFPB will need to ask the court to suspend, or stay, last week’s ruling while the Bureau seeks an appeal. The CFPB is expected to do just that imminently.


Will the full 5th Circuit agree to a stay? Perhaps, but, as experts and Manatt, Phelps & Phillips, LLP noted, in a concurring opinion filed earlier this year, five 5th Circuit judges agreed the CFPB’s funding mechanism is unconstitutional. “As such, the Bureau may view further review by the full 5th Circuit to be a lost cause and proceed directly to the Supreme Court,” they concluded.


If the CFPB is not granted a stay, it will not be able to operate in the three states where the 5th Circuit has jurisdiction — Mississippi, Louisiana, and Texas — while an appeal proceeds.

As Bloomberg Law explained, that sets up an untenable situation — and one that both political parties might be eager to address.


When (not if) will Republicans take aim?

Lawmakers on Capitol Hill can bring up legislation at any time to change the funding structure of the CFPB. Indeed, GOP members of Congress have done just that in every congressional session since the CFPB was created in 2010. Enacting a bill to give lawmakers control over the Bureau’s purse strings would be a significant, albeit partial victory in Republicans’ 12-year crusade against the Bureau.


Under normal circumstances, there is little chance Democrats would ever agree to such a bill. To wit: Democrats have successfully blocked every GOP attempt to enact such legislation for more than a decade. But two weeks out from an election where we might see a turnover in congressional control is hardly normal circumstances.


If Republicans win both the House and Senate, Democrats might be forced to take a deal. In fact, it might be better for Democrats to consider this question even before judges have the chance to force the question. If the Supreme Court ultimately agrees with the three-judge panel from the 5th Circuit Court of Appeals, Congress will have to act. Democrats will have to consider whether it is better to act before January, when they still have some leverage on Capitol Hill, rather than wait.


Of course, if Democrats agree to this legislation, they will want some deal whereby Republicans agree not to zero out funding for the Bureau. If they do not get that, progressives, led by CFPB champion Sen. Elizabeth Warren (D-Mass.), will not hesitate to stop progress on all appropriations bills — and shut down the federal government — in order to keep the CFPB’s doors open and, to use Sen. Warren’s favorite description of the CFPB, keep “a cop out on the beat.”


A free for all on CFPB rulemaking?

More immediately, the 5th Circuit Court of Appeals’ ruling raises questions about the viability of several other CFPB rules in the 5th Circuit’s region. CFPB rules regarding mortgage loans, debt collection, credit card fees, and others are now likely to be challenged in Texas, Louisiana, and/or Mississippi.


As noted above, some legal experts have said CFPB enforcement is not likely to ease up any time soon — and we certainly believe the CFPB’s own statement that it will continue apace. But the 5th Circuit Court of Appeals’ ruling could call into question the validity of all regulations the CFPB has issued under its “unconstitutional” funding structure.


Indeed, experts from Manatt, Phelps & Phillips, LLP said, “Under the Fifth Circuit’s logic, all Bureau actions depend on this unconstitutional funding mechanism. The Bureau lacks constitutional funding to prosecute them and, to the extent they rely on Bureau-promulgated rules, the rules themselves are void.” Lawyers at Holland & Knight agreed. They said the ruling “calls into question every single rule, guidance and order that the CFPB has issued — as they all trace their origins to the CFPB’s unconstitutional self-funding structure.”


That would mean all “enforcement actions are vulnerable to challenge.” Any company under scrutiny by the CFPB, past and present, certainly could benefit from the 5th Circuit Court of Appeals’ ruling.


Sen. Warren certainly is aware of this. As The Wall Street Journal editorial board reported, the senator tweeted that the ruling could “stop the CFPB from enforcing rules that prevent debt collectors from harassing you” and “financial firms charging you outrageous junk fees.”


That may be wishful thinking, though. Even in 2020, when the Supreme Court ruled that the Dodd-Frank Act’s restriction on the president’s authority to remove the CFPB director was unconstitutional, it did not rescind the Bureau’s previous body of work.


Even Sen. Warren’s comments last week make it clear the worries about regulation and enforcement are prospective. As Banking Dive noted, she the senator 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.” (Emphasis added.)


And then there is this: as Bloomberg Law noted, “Even the industries the CFPB regulates don’t want” 12 years’ worth of rules, regulations, enforcement actions tossed out because the Supreme Court “took the maximalist approach.”


Perhaps, but the decision also has potential implications for other federal agencies that are funded via mechanisms other than appropriations.


As the team from Manatt, Phelps & Phillips said, we “could see similar constitutional challenges to other federal financial regulators” like the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Federal Housing Finance Agency, and even the Federal Reserve, all of which also receive their funding outside of the congressional appropriations process.


What will ultimately happen?

History may not be a great guide here.


Beyond its historical reluctance to undo federal agencies’ entire bodies of work, generally, in ruling on behalf of plaintiffs, as Bloomberg Law noted, “The Supreme Court has had the chance to eliminate the CFPB on constitutional grounds in the past. But it chose not to for fear of creating chaos in the financial markets. A decade’s worth of rules, regulations, enforcement actions would be tossed out if the court took the maximalist approach. Even the industries the CFPB regulates doesn’t want that.”


Bloomberg had a caveat, however: the ideological bent of the highest court in the land has changed in the last few years. The court less likely now than it was in 2010, when the CFPB was created, to agree to the constitutionality of the CFPB’s funding structure.

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