On October 19, in Community Financial Services Association of America, Limited v. Consumer Financial Protection Bureau, a three-judge panel in the Fifth Circuit unanimously found the CFPB’s funding structure to be unconstitutional, holding that it violates the U.S. Constitution’s Appropriations Clause. This decision followed a challenge by the CFSA to the CFPB’s “payday rule,” which prohibits lenders from withdrawing loan payments from consumer accounts after multiple failed attempts due to insufficient funds.

The Appropriations Clause provides, in pertinent part, that “no money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” The Fifth Circuit found that the CFPB exercises broad authority over the economy, and held that its funding mechanism has “double insulation from Congress’s purse strings,” in that it:

  • obtains its funds from the Federal Reserve and not the Treasury; and
  • receives its funds through requests to the Federal Reserve, rather than through the Congressional appropriations process, and thus the Appropriations Committee does not have authority to review the CFPB’s expenditures.

The Fifth Circuit found that the CFPB could not have affected the challenged “payday rule” without the unconstitutional funding and vacated the rule. Therefore, lenders do not need to comply with the rule, and effectively, compliance will continue to be delayed until the parties’ appeals have been exhausted.

Putting It Into Practice: With the likelihood of further appeals, the material effects of this ruling will likely be delayed by the continued court process. As a result, companies may wish to continue to comply with CFPB regulations as they stand until an unappealable decision is issued. Note that other federal appeals and district courts have issued contrary rulings, so the Fifth Circuit opinion may be of limited value outside of the Fifth Circuit states (Mississippi, Louisiana, and Texas).

If the decision was to be upheld in its present form by the U.S. Supreme Court, it would have extraordinary implications on all of the CFPB’s actions, including rules and guidance, as they are all dependent on the CFPB’s access to and use of funds. Further, the CFPB would likely need to become subject to the Congressional appropriations process, which could significantly alter the CFPB’s authority, guidance, and approach.

There are also other federal agencies funded outside of the Congressional appropriations process, whose funding may be in dispute following this litigation. The Fifth Circuit distinguished other agencies funded outside of the appropriations process, finding that the CFPB’s “double-insulated funding structure” goes further than other agencies, but it is unclear what the implications of this distinction are.