Blue Flower

Per the Fifth Circuit Court of Appeals: the Consumer Financial Protection Bureau’s (CFPB) funding structure is unconstitutional, and the 2017 Payday Lending Rule, which was a direct result of this unconstitutional funding mechanism, must be vacated.

Does this mean that the CFPB itself is unconstitutional? What does this mean in the long run for the CFPB? And what does this bombshell decision mean for the ARM industry?

To assess where we are headed, here are three things you need to know about the October 19, 2022 Opinion in Community Financial Services Association of America v. CFPB (Case No. 21-50826, 5th Cir. 2022):

1. The Court said the CFPB’s funding structure was unconstitutional. Does that mean that the CFPB itself is unconstitutional? 


The Community Financial Services Association of America (CFSA) argued that the CFPB’s “vague and sweeping” rulemaking authority is too broad without guiding principles and therefore violates the Constitution’s separation of powers. The Court disagreed. Instead, it held that though the boundaries set for the CFPB’s rule-making authority are broad, they exist and are delineated. Further, because Congress’s grant of rulemaking authority to the CFPB was accompanied by a specific purpose, objectives, and definitions to guide its discretion, granting authority to the CFPB passes muster and is sufficient.

That said, though the CFPB has the authority to make rules, the Court held its funding structure was unconstitutional. Under the Appropriations Clause of the constitution, as part of our system of checks and balances, congress has the “power over the purse.” Most other executive agencies rely on annual appropriations for funding. The CFPB, however, is not required to rely on appropriations. Instead, it simply requests an amount from the Federal Reserve that the CFPB director determines is reasonably necessary to carry out the CFPB’s business. So long as that request doesn’t exceed 12% of the Federal Reserve's total operating expenses, the request must be granted. According to the Fifth Circuit, this “double insulation from congress’s purse strings,” is unconstitutional. 


Regarding the severity of the unconstitutional funding mechanism of the CFPB, the Court referenced an Alexander Hamilton quote and minced no words, stating, “ An expansive executive agency insulated (no, double-insulated) from Congress’s purse strings, expressly exempt from budgetary review, and headed by a single Director removable at the President’s pleasure is the epitome of the unification of the purse and the sword in the executive—an abomination the Framers warned 'would destroy that division of powers on which political liberty is founded.'”