The Consumer Financial Protection Bureau (CFPB), created by the Dodd-Frank Act with provisions to shield its director and funding mechanism against political headwinds, has found those safeguards to be ineffective against unsympathetic courts.
Under Dodd-Frank, the CFPB was structured to be funded through the Federal Reserve, not Congress. Agency executive directors were appointed to five-year terms, in part to prevent them from being targeted for dismissal when the presidency changed hands.
In 2020, the Supreme Court ruled the CFPB’s single-director structure violated the separation of powers between the executive and legislative branches and is unconstitutional. The ruling meant a president could dismiss a CFPB director “at will,” as opposed to needing a reason. The agency lost none of its regulatory authority with that decision.
A new ruling might have greater ramifications. On Oct. 19, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit in New Orleans found the CFPB’s funding mechanism to be unconstitutional. That decision favored a payday lender, but it could affect all lawsuits filed against the CFPB in the Fifth Circuit, legal experts said. Entities that have sued the CFPB—including a recent lawsuit by the U.S. Chamber of Commerce and others claiming the agency is operating beyond its statutory authority—now have solid grounds to win their cases based on the decision.
Seen more broadly, the ruling could affect the CFPB fundamentally.
“An agency cannot act without funding. You have a U.S. court of appeals saying their funding is unconstitutional. From a practical standpoint, it strikes at the heart of the agency’s ability to function,” said Rachel Rodman, a partner at law firm Cadwalader and a former enforcement attorney in the CFPB’s Division of Supervision. “It also calls into question anything it has ever done—all of it is subject to challenge.”
The ruling “affects the CFPB’s ability to do its job,” said Allen Denson, partner with law firm Stroock & Stroock & Lavan. “The bureau faces an uphill battle right now. It’s an existential threat.”
Now, the CFPB has two options. It can appeal to the entire Fifth Circuit court for a ruling by all the circuit’s appeals judges or file a petition with the Supreme Court. In the meantime, the bureau will continue doing its work, a spokesman said.
“There is nothing novel or unusual about Congress’s decision to fund the CFPB outside of annual spending bills,” the spokesman told Compliance Week. “Other federal financial regulators and the entire Federal Reserve System are funded that way, and programs such as Medicare and Social Security are funded outside of the annual appropriations process. The CFPB will continue to carry out its vital work enforcing the laws of the nation and protecting American consumers.”
The agency declined to answer further questions from Compliance Week.
“The bureau faces an uphill battle right now. It’s an existential threat.”
Allen Denson, Partner, Stroock & Stroock & Lavan
Republicans who have long called the CFPB unaccountable will likely relish pulling the agency down a peg in congressional hearings, particularly if they win control of the House of Representatives in next month’s mid-term elections.
“The CFPB has been an unconstitutional and unaccountable agency since its inception,” said Sen. Pat Toomey (R-Penn.), ranking member of the Senate Banking Committee, in an Oct. 19 statement. “I’ve long argued that the CFPB should be subject to Congressional appropriations. As the Constitution requires, the people’s representatives shall determine how their tax dollars are spent. I’m glad to see the court agrees.”
Companies have two options for responding to the ruling regarding compliance with CFPB regulations, Denson said. The first is to change little and keep the firm’s compliance operations in place.
“Things could go back the way they were with the stroke of a pen,” he said.
But let’s say your firm is in litigation with the CFPB, negotiating a settlement, or under the cloud of a potential enforcement action. Then it’s a different calculation, he said.
“What is the incentive to accept a settlement from them right now?” he asked. At the very least, companies might want to put a hold on settlement discussions while the CFPB’s likely appeal of the Fifth Circuit’s ruling is heard.
Since the bureau will continue business as usual, most firms will continue to comply with its regulations, Rodman said. And despite complaints from industries that the CFPB has overstepped its bounds in some areas, there is also value in the agency’s regulations, particularly in the mortgage industry.
“Industry doesn’t want the uncertainty of the CFPB becoming a phantom federal agency,” Rodman said. “There are a lot of benefits to industry from the structure that the CFPB provides.”