A three-judge panel of the US Court of Appeals for the Fifth Circuit ruled on October 19 that the current funding mechanism for the Consumer Financial Protection Bureau (CFPB) is unconstitutional. Specifically, in Community Financial Services Association of America v. Consumer Financial Protection Bureau, the court held that the CFPB's independent funding through the Federal Reserve System violates the Appropriations Clause of the Constitution and the underlying separation of powers principles. On this basis, the court also invalidated the remaining portions of the CFPB's restrictions on lenders offering payday, auto title and other short-term, high-interest instalment loans.
The Dodd-Frank Act created the CFPB as an independent regulatory agency housed within the Federal Reserve System. Relatedly, the CFPB's funding scheme is unique across the independent executive agencies of the federal government in that the CFPB is not funded with periodic Congressional appropriations. Rather, the CFPB receives funding directly from the Federal Reserve System, which is itself funded outside the appropriations process. Each year, the CFPB simply requests an amount determined by the CFPB director to be "reasonably necessary to carry out" the agency's functions. The Federal Reserve must then transfer that amount so long as it does not exceed 12 percent of the Federal Reserve's "total operating expenses." For the first five years of its existence (i.e. 2010–2014), the CFPB was permitted to exceed the 12 percent cap by US$200 million annually so long as it reported the anticipated excess to the president and Congressional appropriations committees. The funds received by the CFPB, in effect, reduce amounts that would otherwise flow to the general fund of the Treasury, as the Federal Reserve is required to remit surplus funds in excess of a limit set by Congress.
The court found that Congress not only ceded direct control over the CFPB's budget by insulating it from annual or other time limited appropriations, but that Congress also ceded indirect control by providing that the [CFPB]'s "self-determined funding be drawn from a source that is itself outside the appropriations process" — a double insulation from Congress's control of federal agency funding "that is 'unprecedented' across the government." To further support its analysis, the court also highlighted how the CFPB maintains a separate fund – the Bureau of Consumer Financial Protection Fund – which is maintained and established at a Federal Reserve bank, and under the control of the CFPB director, rather than holding funds in a Treasury account as is the case with other independent agencies. In addition, the court noted how the Dodd-Frank Act explicitly states that "[f]unds obtained by or transferred to the Bureau Fund shall not be construed to be Government funds or appropriated monies." According to the court, the CFPB's express exemption from Congressional review of its funding "renders the [CFPB] 'no longer dependent and, as a result, no longer accountable' to Congress and, ultimately, to the people."
We note that the CFPB has been controversial from its inception and that as a result, following enactment of Dodd-Frank, the constitutionality of the CFPB has been heavily litigated. In Seila Law v. Consumer Financial Protection Bureau, the US Supreme Court determined in 2020 that the Dodd-Frank Act's presidential removal restriction violated the Constitution's separation of powers, but the Supreme Court did not then confront whether the CFPB's unique funding scheme does.
We further note that a handful of other agencies are also self-funded. For example, Congress has consistently exempted financial regulators from appropriations: the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the National Credit Union Administration (NCUA) and the Federal Housing Finance Agency (FHFA) all have complete, uncapped budgetary autonomy. However, the court found that even among these other self-funded agencies, the CFPB's "perpetual self-directed, double-insulated funding structure" is unique and goes beyond that enjoyed by the other agencies.
Implications of this decision
This decision could significantly impact the CFPB's ability to act and may hamstring its authorities - both within the Fifth Circuit and beyond. The CFPB is expected to seek an en banc review of the decision at the Fifth Circuit (which may or may not be granted). The case may also be brought before the Supreme Court at some point given the different conclusions reached by other courts (see PHH Corp. v. CFPB, 881 F.3d 75 (D.C. Cir. 2018) (en banc)) and the significant legal questions involved. Until that process is resolved, the CFPB should be expected to operate on a business-as-usual basis, meaning that Director Rohit Chopra should not be expected to rein in his robust enforcement and supervision policies. If the CFPB fails to get this decision overturned in an appeal, however, the agency could face a looming fight in Congress over funding and potentially be subject to Congressional appropriations, particularly if Republicans retake one or both houses of Congress in the upcoming midterm elections.