NEW ORLEANS—The CFPB’s funding structure has been ruled unconstitutional by the Fifth U.S. Circuit Court of Appeals, which found it violates the Constitution because it receives funding through the Federal Reserve, rather than through the Congressional appropriations process.
That, the court stated, is a direct conflict to the Constitution’s checks and balances on government power.
When Congress created the CFPB through the 2010 Dodd-Frank financial overhaul law, it exempted the agency from the annual legislative appropriations process. Rather than having Congress review and vote on its budget, the bureau gets its money through transfers from the Federal Reserve, up to a certain cap. The Fed can’t turn down requests under that cap, noted the New York Times in its analysis.
In its ruling the court acknowledged the CFPB isn’t alone, and that a number of federal financial regulators, including NCUA, acquire funding independent of Congress. But the Fifth U.S. Circuit Court of Appeals drew a distinction between those agencies and the CFPB noting that the CFPB’s funding structure “double insulates”it from accountability to Congress and thereby gives the executive branch unchecked authority, in violation of the Constitution.
‘Unification of the Purse & the Sword’
“An expansive executive agency insulated (no, double-insulated) from Congress’s purse strings, expressly exempt from budgetary review, and headed by a single Director removable at the President’s pleasure is the epitome of the unification of the purse and the sword in the executive—an abomination the Framers warned ‘would destroy that division of powers on which political liberty is founded,’” wrote the judges.
The judges in the case also vacated the CFPB’s 2017 small-dollar lending rule, which the plaintiffs argued was issued unlawfully as the CFPB did not have the funds needed to issue it.
In addition, using the payday rule as an example, the Court agreed that the plaintiffs had clearly showed the unconstitutional funding of the CFPB has inflicted harm, NAFCU said.
The Court ruled that the payday lending rule issued by the CFPB is invalid not because the CFPB lacked the authority to write it, but because it was promulgated using unconstitutionally granted funds.
CFPB Responds
In a statement to the New York Times, CFPB spokesperson Sam Gilford disputed the reasoning behind the ruling, saying other federal financial regulators are funded outside annual spending bills, as are programs such as Medicare and Social Security. “The CFPB will continue to carry out its vital work enforcing the laws of the nation and protecting American consumers,” the spokesperson said.
The Bureau could ask all the active judges on the appeals court to reconsider the decision or it could seek review by the Supreme Court, the Times added.
“If this decision is not stayed, the result will be chaotic,” Deepak Gupta, who worked at the Consumer Bureau during its founding between 2011 and 2012, where he served as senior litigation counsel and senior counsel for enforcement strategy, told the Times. “It’s going to invite a proliferation of legal challenges to everything the Bureau has done.”
CUNA's Stance
“The court’s decision today is consistent with CUNA’s longstanding position that CFPB funding go through the standard appropriations process,” said CUNA President/CEO Jim Nussle. “It’s been clear this is the most appropriate avenue since the very start of the CFPB, as it would provide addition Congressional oversight and incentivize the Bureau to focus its attention on bad actors causing real harm to consumers.”
NAFCU Comments
NAFCU applauded the decision."We believe that federal regulators need accountability and checks and balances. The CFPB should be subject to annual appropriations by Congress, as well as governed by a bi-partisan Commission to ensure accountability as envisioned by the Constitution. NAFCU has long advocated for increased Congressional oversight of the CFPB to ensure efficient and transparent use of taxpayer dollars, and to prevent abuse of the substantial power that Congress granted the Bureau,” sand Dan Berger, NAFCU president and CEO