By Trent Lauridson, Garfield & Hecht, P.C.
Since being created as a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Consumer Financial Protection Bureau (“CFPB”) has been a wellspring for strong emotions. To many, the CFPB is seen as the federal agency best positioned to protect and advocate for consumers in unequal financial and commercial marketplaces. To others, the CFPB is seen as possessing excessive powers and improperly being outside executive and legislative oversight. It is those latter beliefs that has led to the constitutionality of the CFPB being recently assessed by the United States Supreme Court.
In general, the CFPB is the agency charged with developing and enforcing federal regulations regarding consumer financial products and services.[1] Practically, that means the CFPB develops and implements regulatory schemes under the wide variety of federal laws that touch the consumer financial marketplace, and the CFPB brings administrative enforcement actions against entities that violate such laws and regulations. Among other laws, the CFPB enforces the Real Estate Settlement Procedures Act of 1974[2] and the Truth in Lending Act.[3] Thus, if you financed a home purchase in the last decade, you have likely been a party to a transaction regulated by the CFPB.
More recently, the CFPB’s regulatory efforts have addressed payday lending.[4] A payday loan is a small, short-term loan that carries high interest rates and costs.[5] Often, a payday loan must be paid in full at the time the borrower receives her or his next paycheck.[6] In 2017, the CFPB adopted comprehensive rules that regulate, among other things, the ability of a payday lender to charge fees related to payday loans (the “Payday Lending Rule”).[7] The Community Financial Services Association and the Consumer Service Alliance of Texas, payday lender trade associations (the “Petitioners”), challenged the Payday Lending Rule in court. As part of that effort, the Petitioners asserted the Payday Lending Rule is arbitrary and capricious and alleged the CFPB’s funding mechanism violates the United States Constitution.[8]
[1] 12 U.S.C. § 5491(a).
[2] 12 U.S.C. §§ 2601 et seq.
[3] 15 U.S.C. §§ 1601 et seq.; see What laws does the CFPB enforce?, CFPB (reviewed December 15, 2021), https://www.consumerfinance.gov/ask-cfpb/what-laws-does-the-cfpb-enforce-en-2121/#:~:text=Federal%20Deposit%20Insurance%20Act%2C%20Section,applies%20to%20Section%20501(b).
[4] See generally Institutions subject to CFPB supervisory authority, CFPB, https://www.consumerfinance.gov/compliance/supervision-examinations/institutions/#:~:text=We%20supervise%20a%20range%20of,as%20well%20as%20their%20affiliates (last visited October 5, 2023) (providing that the CFPB has “supervisory authority over . . . payday lenders….”).
[5] See What is a payday loan?, CFPB (reviewed January 17, 2022), https://www.consumerfinance.gov/ask-cfpb/what-is-a-payday-loan-en-1567/.
[6] Id.
[7] See 12 CFR 1041.1 et seq.
[8] See Comm’n Fin. Serv. Assoc. of Amer. v. Consumer Fin. Prot. Bureau, 51 F.4th 616, 625-26 (5th Cir. 2022).
Most federal agencies are funded through annual appropriations[9] from Congress. The CFPB is directly funded by the United States Federal Reserve (the “Federal Reserve”). Every year, the CFPB requests funds from the Federal Reserve at an amount determined by the CFPB’s director as “reasonably necessary to carry out” the CFPB’s functions.[10] However, the CFPB is statutorily barred from requesting or receiving more than 12% of the Federal Reserve’s annual operating budget.[11]
It is this funding structure that Petitioners claimed runs afoul of the Constitution’s Appropriations Clause, which provides “[n]o money shall be withdrawn from the Treasury, but in Consequences of Appropriations made by Law.”[12] Petitioners claimed that the CFPB must be funded by appropriations from Congress rather than through requests to the Federal Reserve. The United States Firth Circuit Court of Appeals ultimately agreed, concluding that the CFPB’s funding structure violates the Appropriations Clause. Based on that conclusion, the Fifth Circuit vacated the Payday Lending Rule.[13]
The Supreme Court accepted an appeal of the Fifth Circuit’s decision and heard oral arguments on October 3, 2023. The result the Supreme Court reaches could have drastic, far-reaching impacts on the federal government. If the Supreme Court agrees with the Fifth Circuit, the entire CFPB may be in jeopardy as an unconstitutional agency. That could result in all consumer regulations drafted by the CFPB being invalid and unenforceable. More broadly, if the CFPB fails because of its funding structure, other federal agencies that are not funded through congressional appropriations – such as the Federal Reserve itself[14] – could also be found to be unconstitutional agencies. A decision from the Supreme Court is expected in 2024.
The information provided in this article does not, and is not intended to, constitute legal advice. Rather, this article has been published for general informational purposes only. The information in this article may not constitute the most up-to-date legal or other information. For more information on the CFPB or the regulations applicable to the banking and finance sectors, please contact:
Ronald Garfield (garfield@garfieldhecht.com or (970) 925-1936 x200)
Kursten Canada (kcanada@garfieldhecht.com or (970) 949-0707)
Jason Buckley (jbuckley@garfieldhecht.com or (720) 971-9057)
Trent Lauridson (tlauridson@garfieldhecht.com or (720) 798-5189)
[9] An “appropriation” is “[a] law of Congress that provides an agency with budget authority. An appropriation allows the agency to incur obligations and to make payments from the U.S. Treasury…..” See Glossary of Terms, U.S. House of Representatives, https://www.house.gov/the-house-explained/open-government/statement-of-disbursements/glossary-of-terms (last visited October 5, 2023).
[10] 12 U.S.C. § 5497(a)(1).
[11] Id. at (a)(2)(iii).
[12] U.S. Const., art. I, § 9.
[13] Community Fin. Serv. Assoc. of Amer., 51 F.4th at 635.
[14] The Federal Reserve is generally funded through bank assessments. See Seila Law LLC v. CFPB , 591 U.S. ––––, 140 S. Ct. 2183, 2194, 207 L.Ed.2d 494 (2020).
