The Supreme Court has announced that it will hear a challenge to an October decision by a three-judge panel of the Fifth Circuit Court of Appeals holding that the CFPB’s funding mechanism is unconstitutional. The Court will take up the case during its next term, beginning in October, rather than during the current term as the CFPB had requested.

The case was brought by the Consumer Financial Services Association (CFSA) and the Consumer Service Alliance of Texas in 2019 as a challenge to the payday lending rule, which limited lenders’ ability to debit borrowers’ accounts for payments on covered payday, vehicle-title, and other short-term consumer loans.¹ Having concluded that the payday lending rule was a product of a flawed funding mechanism for the CFPB, the Fifth Circuit invalidated it. The decision casts doubt not only on the outcome of current enforcement actions but on the legitimacy of all rules the CFPB has issued since its formation and, to a lesser extent, preexisting rules the CFPB reissued upon its formation in 2011.² In addition to the central issue of the CFPB’s funding, the plaintiffs have requested that the Supreme Court review issues on which they received an unfavorable ruling, including claims that the payday rule’s payment provisions are arbitrary and capricious, that the rule exceeds the CFPB’s UDAAP authority, and that the CFPB’s rulemaking authority violates the non-delegation doctrine.

The Fifth Circuit based its holding on the CFPB’s funding primarily on what it referred to as the CFPB’s “double insulation” from Congress’s fiscal oversight. The CFPB does not have to participate in the periodic congressional appropriations process. Instead, the agency draws its funding from the Federal Reserve, which also obtains its funding outside the appropriations process.

The court also found that Congress attenuated the CFPB’s fiscal accountability in two additional ways. First, Congress allowed the agency to retain and roll over operating funds from year to year rather than returning the excess to Congress, as the Federal Reserve is required to do. Second, Congress specified that the CFPB’s operating funds are to be held in a Federal Reserve account under the sole control of the Director, are not to be considered “appropriated funds”, and are not subject to review by appropriations committees of the House or Senate.

The Fifth Circuit concluded that this “unprecedented” funding arrangement violated the Appropriations Clause of the Constitution, which provides that “No money shall be drawn from the Treasury except in consequence of Appropriations made by law.”³ The CFPB had argued that the Appropriations Clause was satisfied because Congress articulated the CFPB’s funding scheme in the Dodd-Frank Act. An Illinois district court accepted this argument in a November 18 opinion denying a motion to dismiss by TransUnion, which is the target of a CFPB enforcement action.⁴ The Fifth Circuit, by contrast, found that passage of a law did not constitute an appropriation sufficient to satisfy constitutional requirements.

The court likewise rejected two other CFPB arguments: (1) that Congress retained the requisite control because it could, theoretically, change the CFPB’s funding mechanism at any time; and (2) that the court should follow the reasoning of several other judicial decisions holding the CFPB’s funding constitutional. The Fifth Circuit found that the proffered decisions were based in part on determinations that the CFPB’s funding mechanism was similar to those of other financial regulatory agencies. The Court rejected the comparison, finding that those agencies did not wield authority comparable to that of the CFPB.

On the question of remedy, the court borrowed the analytical framework of Collins v. Yellen, 141 S. Ct. 1761 (2021), in which the Supreme Court considered the constitutionality of the FHA’s single-director-removable-only-for-cause leadership structure. In that case, the Court distinguished between a constitutional infirmity that results in an official’s lack of authority to take the challenged action and one that does not. The unconstitutional funding mechanism, the court found, fell into the second category. Plaintiffs therefore were not entitled to automatic invalidation of the payday rule; they had to show that they were harmed.

The Fifth Circuit quickly concluded that plaintiffs had demonstrated harm because “the funding employed by the Bureau to promulgate the Payday Lending Rule was wholly drawn through the agency’s unconstitutional funding scheme” which meant that there was a “linear nexus” between the constitutional infirmity and the challenged rulemaking. In other words, the court concluded that harm and causality were clear in the case of the payday rule.

Unlike claims based on the Administrative Procedures Act, which generally turn on the facts of the rulemaking at issue, the Fifth Circuit’s holding could be applied to all CFPB rulemakings and potentially its enforcement actions. If the Fifth Circuit’s reasoning is adopted by the Supreme Court (which has already held the CFPB’s leadership structure unconstitutional)⁵, a plaintiff would need only show that it suffered harm as a result of CFPB action paid for with funds obtained through the CFPB’s current funding scheme. Because the CFPB gets most of its funding in this way, this showing would be straightforward in many cases.

It is unclear what this might mean from a practical perspective. There are already two federal cases pending that raise issues before New York and Georgia district courts regarding the impact of the potential unconstitutionality of the CFPB’s funding on other CFPB activities, such as investigations and enforcements.⁶ In addition, the Chamber of Commerce, American Bankers Association, Consumer Bankers Association and others brought suit in September, 2022, to challenge recent CFPB guidance noting that it will use its UDAAP authority to enforce anti-discrimination principles, which lawsuit is pending in a Texas district court.⁷

The CFPB may have previewed some of the groundwork for its argument before the Supreme Court in connection with final administrative adjudication rules it issued on February 24, 2023. In the announcement accompanying the release, the CFPB cited two administrative law cases from the 1940s that speak to the importance of accumulated agency knowledge and expertise in addressing violations and crafting prospective standards. This may be an indication that the CFPB will rely on these cases to make the case that affirmance would cause widespread disruption to financial regulation. Additionally, the release may foreshadow a CFPB argument for expansive interpretation of its powers as a means to deflect plaintiffs’ arguments that the payday rule is flawed based upon the agency’s unconstitutional funding or that the CFPB’s making an anti-discrimination use of its UDAAP authority violates the non-delegation doctrine.

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1 The payday rule originally imposed an ability-to-repay underwriting requirement. The CFPB rescinded that part of the rule in 2020, leaving only the payments provisions that the Fifth Circuit decision invalidated.

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