Fifth Circuit Rules CFPB Funding Mechanism is Unconstitutional
Commentary by Steven Lofchie
The U.S. Court of Appeals for the Fifth Circuit ruled that the CFPB's independent funding process which runs through the Federal Reserve rather than through congressional appropriations violates the Constitution's separation of powers clause, as it diminishes the authority of the legislative branch.
In the ruling, the Fifth Circuit stated that the CFPB's funding provisions were unique among federal regulatory agencies, including those funded without appropriations. For example, the Federal Reserve, which is funded in part by assessments charged to banks, has to turn funds above a prescribed limit over to the Treasury Department.
The ruling has the effect of nullifying the CFPB's restrictions on the lenders offering payday, auto title and other short-term loans.
Senator Pat J. Toomey (R-PA) said that he was glad to see the court affirm his longstanding opinion that the CFPB should be subject to congressional appropriations and taxpayers should determine how their money is spent. Senator Toomey also said that "[t]he Fifth Circuit's decision to invalidate the CFPB's payday lending rule because it is the product of an unconstitutional funding scheme calls into question the validity of all of the agency's actions to date."
Senator Elizabeth Warren (D-MA) called the decision "reckless and lawless," and warned that the decision may significantly hinder the CFPB's ability to carry out its duties and protect consumers from corporate malpractice.
Commentary
This is the second major constitutional defeat for the CFPB. Previously, the Supreme Court ruled in Seila Law LLC v. CFPB that the CFPB's structure was unconstitutional, in that it gave significant executive power to a single individual who generally cannot be removed by the president. The constitutional flaws in the creation of the agency were obvious from the get-go. (See, in particular, Paragraph VII from our 2012 analysis.)
These two rulings are ultimately the result of Senator Elizabeth Warren's failure to draft the legislation in a manner that respects the role of Congress as provided under the Constitution. At the time the legislation to create the CFPB was adopted, Senator Warren may have hoped or expected to be made chair of the agency and be afforded the unchecked unconstitutional power that was granted to it by Dodd-Frank. As it turned out, she did not have the political support necessary to become Chair of the CFPB. For now, both Senator Warren and her creation have been thwarted by the Constitution.