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CFPB Asks SCOTUS To Overturn Appellate Ruling On Constitutionality

The Consumer Financial Protection Bureau has asked the U.S. Supreme Court to overturn an appellate ruling that declared the agency’s funding structure unconstitutional.

In a petition filed Monday, the CFPB challenged the U.S. Court of Appeals for the 5th Circuit’s ruling on Community Financial Services Association of America v. CFPB, which said the funding of the agency through the Federal Reserve Board — an executive agency — and not congressional appropriations violates the Constitution’s separation of powers doctrine.

The ruling, issued last month, dealt a significant blow to the CFPB’s regulatory capabilities, potentially hampering its ability to enforce many of the consumer protection rules it has implemented during the past decade.

The CFPB, which is being represented by U.S. Solicitor General Elizabeth B. Prelogar in its Supreme Court bid, argued that its funding mechanism was established by Congress as part of the Dodd-Frank Act of 2010. Because of this, the 5th Circuit’s ruling is without precedent, the petition argues.

“No other court has ever held that Congress violated the Appropriations Clause by passing a statute authorizing spending,” the CFPB wrote.

In CFSAA vs. CFPB, three justices on the 5th Circuit determined that the CFPB is “unique across the myriad independent executive agencies across the federal government” because “it is not funded with periodic congressional appropriations.” In light of this, the judges determined that rules created by the agency using nonappropriated funds were crafted illegally.

In the case at hand, the 5th Circuit determined that the CFPB’s rules about the types of payday lending in which CFSAA was involved could not be enforced.

The CFSAA could not immediately be reached for comment. The CFPB deferred comment on the case to the Justice Department and solicitor general’s office, which did not respond to inquiries Tuesday afternoon.

The consequences of the 5th Circuit ruling could be broad, the CFPB acknowledged in its petition, noting that it “threatens to inflict immense legal and practical harms on the CFPB, consumers and the nation’s financial sector.”

“Given the gravity of those consequences and the uncertainty that the court of appeals’ decision has already created, the United States is filing this petition less than one month after the decision below and respectfully submits that the Court should hear and decide the case this term,” the agency wrote.

Because the CFPB is a bureau of the Federal Reserve, its budget comes from the Fed’s earnings, the petition notes; it’s capped at up to 12% of the central bank’s total operating expense. In 2022, the agency’s maximum budget was $734 million.

The CFPB notes that other agencies are funded through similar standing allocations, including the Fed, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the National Credit Union Administration.

Sen. Elizabeth Warren, D-Mass., addressed the funding of these organizations during a Senate Banking Committee hearing on Tuesday, in which regulatory officials from the Fed, FDIC, OCC and NCUA testified.

“There is a good reason why Congress created independent funding structures for bank regulators,” Warren said. “Your agencies are the cops on that beat that ensure the safety and stability of the banking system. Your rules provide the guidebook for financial institutions to serve consumers while acting within the law.”

Warren called the 5th Circuit ruling “dangerous” and noted that if CFSAA vs CFPB is upheld, it could set a precedent that undermines every bank regulator, nullifying almost all of their enforcement actions on the grounds that they occurred without a congressional appropriation process.

“Even though this decision out of the 5th Circuit is not grounded in law, it could have real consequences for the stability of our financial system,” she said. “The Mortgage Bankers Association understands that risk. In 2019, they warned that if the CFPB were struck down, ‘the results could be catastrophic for the real estate finance industry.’”

The CFPB has already faced at least one other legal challenge based on the precedent set by the CFSAA case.

One day after the 5th Circuit’s decision was handed down, TransUnion filed a motion to dismiss charges brought by CFPB earlier this year. The agency accused the credit reporting bureau of violating a 2017 consent order related to inclusion of misleading information in its terms of use.

The CFPB opposed TransUnion’s claims on ground similar to those outlined in its Supreme Court petition, asking the U.S. District Court for the Northern District of Illinois’ Eastern Division to “reject the 5th Circuit’s analysis and instead join every other court to address the issue — including the en banc D.C. Circuit — in upholding the bureau’s statutory funding mechanism.”

Some parts of the financial sector have embraced the 5th Circuit ruling on CFSAA vs CFPB, arguing that the agency’s current funding mechanism is partisan and unaccountable.

“Funding through the congressional appropriations process for the CFPB will bring value to regulated entities and consumers in terms of greater transparency and following the existing rules to get better outcomes for the American public by involving all relevant parties in decision-making,” Scott Purcell, chief executive of ACA International, a trade group for the credit and collections industry, said in a written statement. “The congressional appropriations process was contemplated to create a strong balance of all stakeholders and, being that it’s a matter of constitutional law that is being decided, we respect the process that is about to unfold.”

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