CFPB funding method found unconstitutional by Federal Appeals Court

WASHINGTON – A federal appeals court found that the US Consumer Financial Protection Bureau is funded through an unconstitutional method, a ruling that threw out the agency’s regulation of payday lenders and dealt a blow to how the agency operates.

The ruling, by a three-judge panel of the Fifth U.S. Circuit Court of Appeals in New Orleans, found that the CFPB’s funding structure violated the Constitution’s separation of powers doctrine, which establishes the authority of the three branches of government. Congress has sole power over the federal purse, and the agency’s funding structure undercuts that authority, the court said.

When Congress created the CFPB through the 2010 Dodd-Frank financial oversight law, it exempted the agency from the annual legislative appropriations process. Instead of having Congress review and vote on its budget, the agency gets its money through transfers from the Federal Reserve up to a certain cap. The Fed cannot deny requests below that cap.

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“Congress’s decision to abdicate its appropriations authority under the Constitution, i.e., surrender its purse strings to the agency, violates the Constitution’s structural separation of powers,” Judge Cory Wilson wrote for the court. All three judges on the panel were appointed by former President Donald Trump.

While other federal regulators like the Fed are also exempt from the annual appropriations process, the justices said the consumer agency’s funding structure “goes a significant step beyond that enjoyed by the other agencies.”

CFPB spokesman Sam Gilford disputed the reasoning behind the ruling, saying other federal financial regulators are funded outside of annual spending, as are programs like Medicare and Social Security. “The CFPB will continue to do its vital work of enforcing the laws of the land and protecting American consumers,” the spokesman said.

The bureau could ask all active appeals court judges to reconsider the decision, or it could request a Supreme Court review.

Some analysts said the ruling may have no immediate effect on the agency’s operations while the case moves through the courts. But the agency could see its activities significantly curtailed if it eventually becomes subject to the annual appropriations process.

“The scale and scope of its work could be significantly narrowed,” said Isaac Boltansky, director of policy research at financial services firm BTIG.

The CFPB has been politically polarizing since its inception, when former President Barack Obama tapped then-Harvard law professor Elizabeth Warren to create it to protect consumers from abusive financial industry practices on products like mortgages, student loans and credit cards.

Democrats have wanted a muscular CFPB to take on what they saw as financial industry excesses. Republicans and Wall Street have criticized the agency as an instrument of runaway government regulation, with too much power over a significant portion of the economy.

Consumer advocates and some former officials criticized Wednesday’s ruling, saying it would likely jeopardize other rules, guidelines and enforcement measures if allowed to stand.

“If this decision is not delayed, the outcome will be chaotic,” said Deepak Gupta, who worked at the consumer agency during its inception between 2011 and 2012, serving as senior trial counsel and senior enforcement strategy counsel. “It will invite a proliferation of legal challenges to everything the agency has done.”

Republican lawmakers cheered the ruling. “Congress should never have relinquished its appropriations authority when it established the CFPB,” Sen. Cynthia Lummis (R., Wyo.) said in a statement. She added that the agency should be funded through “the normal appropriations process, not through the Federal Reserve.”

The agency has largely survived repeated legal challenges to its creation. While a 2020 Supreme Court decision found the agency’s structure unconstitutional because its director had too much unchecked power, the court held that the solution was to allow the president to remove the director for any reason. The court rejected broader legal arguments that it should strike down the agency entirely.

The payday rule, finalized in 2017 when the agency was still under Obama-era leadership, cracked down on providers of small, short-term consumer loans that can charge interest rates as high as 400%, bringing the industry under federal oversight for the first time . The bureau later repealed a key provision of the 2020 rule that requires lenders to verify borrowers’ income to ensure they can afford to repay the loans.

As part of Wednesday’s ruling, the appeals court threw out the remainder of the wage restraints. While the court said the agency did not exceed its authority to write the payday requirements, it nonetheless struck down the rule as a product of the agency’s “unconstitutional funding scheme.”

Write to Andrew Ackerman at andrew.ackerman@wsj.com

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