Part 1 – The CFPB has no authority to investigate or sue Acima because, under Dodd-Frank and the appropriations Clause of the Constitution, it may only be funded out of combined earnings of the Federal Reserve System and there are only combined losses beginning in September 2022.
In a race to the courthouse, the Consumer Financial Protection Bureau and a Lease-to-own (“LTO”) company sued each other last week, with the CFPB alleging the company engaged in illegal lending designed to evade consumer financial protection laws, and the company alleging that the Bureau pursued an illegal and unconstitutional investigation beyond its authority that seeks to usurp the state regulatory framework which recognizes that LTO transactions are different from credit transactions.
In a complaint filed on July 23, 2024 in U.S. District Court for the Eastern District of Texas – Sherman Division, Acima Digital, LLC and Acima Holdings, LLC (collectively, “Acima”) seek declaratory and injunctive relief (1) declaring that the CFPB lacks legal authority to regulate Acima’s lease-to-own business, (2) declaring that Acima has not violated any provisions of the law over which the CFPB has authority, and (3) enjoining the CFPB from asserting its investigative powers or instituting litigation against Acima. Three days later, on July 26, 2024, the CFPB filed a complaint against Acima (and its founder and former CEO) in the U.S. District Court for the District of Utah, alleging that Acima’s “virtual rent-to-own” product was designed to mislead consumers and evade laws governing both credit and leases, leading to consumer harm and inaccurate credit reporting.
I will further discuss the claims raised in the lawsuits and the question of whether lease-to-own transactions are “credit” under the Truth In Lending Act subject to the CFPB’s jurisdiction in Part 2 of this blog, but want to address constitutional issues in Acima’s complaint, including one important issue that we have blogged about in the past, namely the constitutionality of the CFPB’s funding mechanism in light of the fact that the Federal Reserve system has no earnings out of which to lawfully fund the CFPB.
Count 2 of the Complaint, which seeks declaratory relief, is entitled “The CFPB’s Investigation is Unconstitutional.” The Complaint identifies “two independent constitutional infirmities with the CFPB’s investigation of, and threatened litigation regarding, Acima’s lease-to-own business, each of which supports declaratory relief.”
The Complaint describes the first constitutional infirmity as a violation of Acima’s due process rights by virtue of the CFPB not providing Acima with adequate notice that the CFPB had only a year ago concluded that Acima’s LTO transactions are subject to the enforcement jurisdiction of the CFPB.
The Complaint describes the second constitutional infirmity in Paragraphs 99-102 (including footnote 6) as follows:
99. Second, the CFPB’s investigation of Acima is unconstitutional because the CFPB’s funding mechanism is unconstitutional. The Supreme Court recently held that the Appropriations Clause only authorizes the Federal Reserve System to fund the CFPB so long as it “draw[s] funds from the combined earnings of the Federal Reserve System.” Cmty. Fin. Servs. Ass’n of Am., 601 U.S. at 435 (emphasis added).
100. The Federal Reserve has not made a profit or, stated otherwise, has not had earnings since 2022. When the Federal Reserve does not have earnings to fund the CFPB, the Bureau’s general operations, including its investigative and enforcement activity, are not within the scope of the Appropriations Clause. Where the agency’s actions are illegal, Acima is entitled to a declaratory judgment that the agency’s actions since 2022 are unconstitutional and invalid. This argument has found support within the academic community.6
101. Absent the Court’s intervention, Acima will continue to be subjected to the exercise of unconstitutional conduct by the CFPB. For each independent ground of unconstitutional action, Acima is therefore seeking to:
a. enjoin the CFPB from any further investigative procedures into Acima, whether in the pending investigation or any additional investigation;
-
b. enjoin the CFPB from initiating any civil action against Acima; and
c. enjoin the CFPB from seeking to exercise any other investigative, supervisory, enforcement, rulemaking or other regulatory authority over Acima or its lease-to-own transactions.
102. For the reasons stated herein, Plaintiffs are entitled to a judgment under the Federal Declaratory Judgment Act and Federal Rule of Civil Procedure 57.”
6 See Hal Scott, The CFPB’s Pyrrhic Supreme Court Victory, the Wall Street Journal (May 20, 2024), (“Since the Treasury no longer receives any surplus from the Fed, central-bank funding can no longer be considered ‘drawn from the Treasury.’ This means the agency can’t rely on the Appropriations Clause—or last week’s decision by the high court—to justify the legality of its continued operations.”).”
Although we have written several blogs about this “new” constitutional argument for the past two months (see here, here, here, here, here and here and have released two podcast shows (available here and here) on this subject, one of which was our interview of Professor Scott whose Wall Street Journal op-ed is mentioned in footnote 6 to Paragraph 100 of the Complaint, this lawsuit is the first time that the argument has been raised in a judicial proceeding.
For those of you who have not been reading all our blogs about this “new” constitutional argument, let me quote from our first blog on this subject:
On May 16, Justice Thomas issued the majority opinion in which the Supreme Court held, by a 7-2 vote, that the CFPB’s funding mechanism comported with the Appropriations Clause of the Constitution which states, in relevant part, in Article I, Section 9, Clause 7:
“No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law…”
Specifically, Justice Thomas held:
“Under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes. The statute that provides the Bureau’s funding meets these requirements.”
That resolves the constitutional challenge brought by the CFSA. Left untouched by the Supreme Court is the statutory question of whether the CFPB and the Federal Reserve Board complied with the requirements of Dodd-Frank in connection with the CFPB’s funding. The Dodd–Frank Act generally provides that the CFPB is funded through requested draws from the Board of Governors of the Federal Reserve System in an amount the agency’s director deems “reasonably necessary to carry out” the agency’s duties, subject to a statutory cap tied to the Federal Reserve System’s operating expenses.
Significantly, the Act only authorizes such draws to be made from “[combined] earnings” of the Federal Reserve System. Specifically, the relevant text of the Dodd-Frank Act is clear:
“Each year (or quarter of such year) . . . the Board of Governors shall transfer to the [Consumer Financial Protection] Bureau from the combined earnings of the Federal Reserve System, the amount determined by the Director to be reasonably necessary…”
Beginning in September 2022, the Federal Reserve System has had very large combined losses and thus no combined earnings out of which it could lawfully transfer any funds to the CFPB to pay for the CFPB’s operations. Indeed, at that point, the CFPB no longer had any earnings to pay over to the Treasury under Section 7 of the Federal Reserve Act. The combined losses of the Federal Reserve System have continued to grow each month since September 2022 and there is no “light at the end of the tunnel” insofar as when the Federal Reserve System will start generating combined earnings.
Not only is the funding of the CFPB in violation of the clear language of Dodd-Frank quoted above, that violation results in a violation of the Appropriations Clause of the U.S. Constitution since the funding of the CFPB was not “made by law.”
While the CFSA case before the Supreme Court involved a consideration of complex issues of constitutional law, this argument is predicated entirely on what the term “combined earnings of the Federal Reserve System” means. Since our prior blogs explain in detail why “combined earnings” means profits (revenues minus expenses) and not just revenues itself, I will not repeat those points here.
According to the Fifth Circuit CFSA opinion, any activities performed by the CFPB with the use of unlawfully obtained funds are invalid. Thus, the CFPB has had no right to investigate Acima beginning in September 2022 and continuing through the present day. Accordingly, the Court should grant the relief requested by Acima either in the case brought by Acima or in the case brought by the CFPB or both.
I would anticipate that this “new” argument will appear as a defense to other CFPB enforcement actions for the foreseeable future.
[View source.]
