The CFPB is headed to the Supreme Court. Here are some possible outcomes.
In late February 2023, the Supreme Court agreed to take up a case regarding the constitutionality of the funding structure of the Consumer Financial Protection Bureau (CFPB). The Fifth Circuit ruled in an October 2022 case, Community Financial Services Association of America vs. Consumer Financial Protection Bureau, that the funding structure of the CFPB is unconstitutional. Separately, a panel of the Second Circuit upheld a lower court’s ruling in favor of the CFPB, stating that the funding is constitutional and rejecting the Fifth Circuit’s findings. Regardless, the case in question will be heard before the Supreme Court, which may mean major changes are coming to the bureau.
Created as part of the Dodd-Frank Act, the CFPB has been a target for Republican legislators since its inception in 2010. The purpose of the agency, the creation of which is largely attributable to Sen. Elizabeth Warren (D-Mass.), is to act as a consumer watchdog in the financial sector. The CFPB is tasked with the rulemaking, enforcement and adjudication of consumer financial services with jurisdiction covering banks, credit unions, payday lenders, mortgage servicers, debt collectors and other financial companies in the United States.
Since its inception, the CFPB has been criticized by businesses, politicians and industry groups who claim the bureau goes too far in its mandate. It is often accused of overburdensome regulations, which many argue ultimately harm the consumer. Recently, under the leadership of Director Rohit Chopra, the CFPB has gotten far bolder. The agency is now taking aim at items outside of its stated mandate, including hotel resort fees and concert ticket fees. The CFPB refers to these as “junk fees”—a broad term with no stated definition.
The CFPB is currently funded outside of regular congressional appropriations and instead through the Federal Reserve combined earnings pursuant to 12 U.S.C. 5497. The Fifth Circuit case was an attempt to both challenge the constitutionality of the funding structure of the CFPB as well as a specific rule, which the plaintiff argued was invalid due to the funding structure. The argument regarding the rule in question, the 2017 Payday Lending Rule, was ultimately rejected by the Fifth Circuit. However, the court did agree that the CFPB is funded in an unconstitutional manner. Per the court, the CFPB violates Article 1, Section 9 of the Constitution, which requires congressional appropriation for all money “drawn from the Treasury.” This, in turn, led the court to invalidate the Payday Lending Rule entirely as it was created by an agency with an unconstitutional funding structure.
It is important to note the CFPB has faced questions of constitutionality in the past, including with rules surrounding the appointment and removal of its director. Under the original structure of the CFPB, the director served a five-year term and could only be removed for-cause, as opposed to serving at the pleasure of the president. A 2019 case before the Supreme Court, Seila Law vs. Consumer Financial Protection Bureau, ultimately ruled that the for-cause removal of the CFPB director was unconstitutional, and argued that the funding structure “further aggravates” the constitutionality by adding additional challenges to the president’s ability to “take care that Laws be faithfully executed” as outlined in Article II Section 3 of the Constitution. However, the Seila case only altered the removal process of the director and kept the funding structure, and the rest of the CFPB, in place.
The Fifth Circuit’s ruling did not state that the unconstitutional funding could be cured by severing the funding structure from the CFPB, similar to the Seila case. It instead expressly stated that the Payday Lending Rule would not have been possible without the unconstitutional funding structure, and therefore cannot be remedied by severing. This of course raises questions about any and all rules created since the CFPB’s inception. If the Payday Lending Rule is invalid due to the funding structure, it is reasonable to conclude that all other rules are invalid as well. The upcoming case before the Supreme Court may very well seek to remedy this major question.
Here, we describe several scenarios to determine what may happen with the CFPB as it heads to the nation’s highest court, and where things may head as a result.
Supreme Court overrules the Fifth Circuit
It is possible that the Supreme Court overrules the Fifth Circuit, affirming the constitutionality of the CFPB funding and allowing it to continue to operate as is. Given the new jurisprudential ground broken by the Fifth Circuit’s decision, this is not necessarily an impossible outcome. However, this will not quell the appetite of a House of Representatives hungry to rein in what it views as an ever-growing bureaucratic behemoth with insufficient oversight. This ruling would give the legislature the least mandate for change, but may allow space for changes such as transitioning away from being governed by a single director.
Supreme Court upholds the Fifth Circuit and strikes down the Payday Lending Rule
The Supreme Court may agree with the reasoning of the Fifth Circuit and strike down only the Payday Lending Rule, the rule in question for the case brought to the Fifth Circuit. However, given the questions this would leave as to the constitutionality of the rest of the bureau and its funding, this scenario seems unlikely. If the Supreme Court were to uphold the Fifth Circuit’s decision, Congress would be forced to likely act by restructuring to allow for more oversight and a new funding structure. Since the decision by the Fifth Circuit, myriad other suits have been brought against the CFPB to challenge other rules based on the same premise of unconstitutional funding. At least one federal court has stayed an enforcement proceeding pending the ruling from the Supreme Court. As it stands now, this has left too many question marks around the CFPB and would be unlikely for the Supreme Court to decide the case without clearing up some of the haziness. However, this would give Congress a significant mandate to take major actions, but would be challenging given the current legislative makeup.
Supreme Court upholds the Fifth Circuit and strikes down the entirety of the funding structure and history of rulemaking and enforcement
The Supreme Court may look at the case and ruling in question, and agree with the premise that the CFPB is unconstitutionally funded. This may lead them to decide that any and all rulemaking and enforcement by the CFPB since its inception is unconstitutional, effectively striking down all efforts made in the past 12 years. This would also have significant ramifications across the financial industry, as rules from the bureau would effectively no longer need to be followed, albeit with legal challenges likely coming from every direction. Certain rules, including behemoths such as the Truth in Lending Act which is implemented by the CFPB, would require significant legislative intervention to maintain. Congress would perhaps have the most significant heavy lifting in this scenario: to either do away with the CFPB, restructure its funding through appropriations or in a manner more similar to agencies such as the Federal Reserve, create laws based on its rules or some combination therein.
The CFPB case before the Supreme Court will have major implications, regardless of the ruling, that are likely to necessitate significant action from lawmakers. There are serious legal and constitutional technicalities at play, and this presents a complex case given the singularly unique structure of the CFPB. Not only is the structure and existence of the CFPB in question, the vast rulemaking and authority of the agency could have major impacts on the financial industry and consumers. While businesses and financial institutions are unlikely to make any changes until a ruling is made, other legal challenges are already mounting in the wake of the Fifth Circuit’s decision. This is likely to further motivate Republicans in Congress to act should the outcome be unfavorable to them, though as noted their mandate would not be as strong and action would be challenging in the current legislative makeup. The Supreme Court will not hear arguments until the next term begins in October, meaning a decision is unlikely to come down this year.