Home Consumer debt After the Fifth Circuit decision, prepare for more challenges to the authority of the CFPB, is Reg F. next?

After the Fifth Circuit decision, prepare for more challenges to the authority of the CFPB, is Reg F. next?


On October 19, the United States Court of Appeals for the Fifth Circuit ruled that the federal Bureau of Consumer Financial Protection’s payday loan rule was invalid because it was enacted using a unconstitutional funding scheme.

The result of the decision of Community Financial Association of America v. CFPB is that, although the CFPB itself is validly organized, the three-judge panel concluded that the unique method of funding the CFPB’s activities violated the Appropriations Clause of the U.S. Constitution. Thus, any activity that used these ill-gotten funds “deprived the Bureau of the legal money necessary to fulfill these responsibilities”. Because there was no other way for the CFPB to have made the payday loan rule other than by using unconstitutional funding, the rule is invalid.


From its conception, the CFPB was criticized for its unique structure. After all, it was designed to be immune to political pressures while wielding enormous power over the country’s consumer financial services environment, consolidated in the hands of one person, its director.

Another interesting feature is the mode of financing of the CFPB. The Appropriations Clause of the Constitution grants Congress exclusive control over “the federal purse” and this control is a necessary apparatus of checks and balances between the three branches of the federal government. The appropriations clause is there to verify “the executive [branch] . . . to spend funds unilaterally,” and allowing Congress to keep control of the purse strings. The CFPB’s funding scheme takes those purse strings away from Congress and is therefore constitutionally flawed, the opinion argues.

Six other district courts as well as the DC Circuit Court of Appeals have reviewed the matter and found the funding program to be sound, the court noted. But the Fifth Circuit disagreed.

Unlike most other federal agencies, the CFPB does not seek funding from Congress. Instead, it obtains its funds by making a request to the Federal Reserve, and this request cannot exceed 12% of the Federal Reserve’s “total operating expenses”.

The Federal Reserve itself does not get funding from Congress, rather its expenditures are paid, according to the opinion, by assessments made on banking institutions. The Federal Reserve will tell you that its expenses are mainly paid from “interest on government securities it has acquired through open market operations”. After paying its expenses, the Federal Reserve remits the rest of its income to the US Treasury, so it is also sheltered from the appropriations clause. However, the opinion points out that because the Federal Reserve must return its excess funds to the Treasury, it remains “tethered” to the Treasury. And ever since the Treasury gets its appropriations from Congress, the “checks and balances” are at work.

Because the CFPB derives its funds from segregated Federal Reserve funds, the Fifth Circuit has concluded that it is not “tied” to the Treasury. The result, the opinion explains, is that the CFPB is “doubly insulated” from congressional control over its funding and removed from “checks and balances,” making it unique among all federal agencies. Admittedly, this funding scheme was intentional, is contained in Section 1017 of the Dodd-Frank Act that created the Bureau in 2010, and that is exactly what was explained to Congress in hearings in 2011: “Congress has provided the CFPB with a source of funding outside of the appropriations process. . .”


This decision poses a difficult challenge to the CFPB. Contrary to the decision of the Supreme Court of the United States in Seila Law, no easy solution is available to preserve the CFPB’s corporate activity during the period of unconstitutional funding, at least in the Fifth Circuit. The reasoning of the decision suggests that it is not at all possible to “unbundle” the funding regime as a possible solution that would preserve the past activities of the Office.

Rulings in similar cases, the Court wrote, consider whether the unconstitutional provision caused compensable harm. Although the Bureau had the authority to create the payday loan rule, it required “funding which would allow the exercise of this power. And because the funding came from an unconstitutional scheme, “without its unconstitutional funding, the Bureau had no other means of enacting the rule. The plaintiffs were thus harmed by the Bureau’s misuse of unrestricted funds to engage in the development of the rules at issue. »

A slew of new rules and changes to pre-Bureau rules were enacted under the invalidated funding scheme, including Regulation F, a unique federal rule covering consumer debt collection. CFPB’s other regulatory activities cover nearly every other aspect of consumer credit, from mortgages to credit reports. They are all subject to the same challenge in the courts sitting in the Fifth Circuit.

The CFPB also plays a law enforcement role and has ongoing prosecutions and investigations across the country. Similarly, in addition to rulemaking and enforcement, the Bureau conducts reviews of certain covered entities. These too are in question, at least in the Fifth Circuit, which covers Louisiana, Mississippi and Texas.

In other words, you can insert any of these activities into the Fifth Circuit decision and get the same result.


The decision creates significant confusion and risk for the Bureau, covered entities and consumers. Individuals subject to CFPB enforcement actions in the Fifth Circuit are likely preparing motions to dismiss lawsuits against them. And those on the Fifth Circuit who are responding to a CFPB investigation are likely to ask a court in the coming days to bar the Bureau’s investigations.

As for the rules, all we can say for sure is that the payday loan rule sucks in the Fifth Circuit. No other rules have been addressed, but there will be more challenges for other rules, and these are likely to be introduced in the Fifth Circuit.


The Bureau could request that the decision be reconsidered either by reconsideration or bench by all the Fifth Circuit judges. And of course, he could ask the Supreme Court of the United States to take the case – which he should do if he has any concern for avoiding the confusion and uncertainty resulting from this decision. Again, the Office could do nothing. Even then, another litigant who loses on the same issue in another circuit will likely ask the Supreme Court. Don’t expect Congress to fix this issue in the short term, so the likely outcome is that the matter winds up in the Supreme Court even though it’s not brought by this decision.

As for those outside of the Fifth Circuit, remember that the DC Circuit Court of Appeals found four years ago that “[t]he method of financing the CFPB is in line with the tradition of independent financial regulators. This decision was made in bench. But three justices filed lengthy dissents, one of which was written by Associate Justice of the United States Supreme Court Kavanaugh, who expressed serious concerns about the Bureau’s single-director structure, but did not not talked about its funding.