On October 19, 2022, three judges in the Fifth Circuit Court of Appeals ruled that the funding mechanism of the Consumer Financial Protection Bureau (CFPB) is unconstitutional. Specifically, the court found CFPB’s receiving of funds upon the CFPB Director’s request to the Federal Reserve instead of through Congressional appropriations to violate the Appropriations Clause of the Constitution.

In the instant case, the plaintiffs challenged the validity of the payment provisions of the CFPB’s 2017 Payday Lending Rule (hereinafter, the “Rule”). The payment provisions of the Rule prohibit lenders from making payment transfers from consumers’ accounts after two consecutive attempts have failed due to insufficient funds unless the consumer authorizes any further attempt. The district court granted summary judgment in favor of the CFPB. On appeal, the plaintiffs challenged the CFPB’s promulgation of Rule, alleging that the Rule was promulgated by a director who was insulated from removal. The plaintiffs further alleged that the CFPB’s rule making is violative of the non-delegation doctrine, and that the CFPB’s means of receiving funds violates the Appropriations Clause.

In rendering its decision, ​​the Court of Appeals focused its analysis on the fourth allegation. In its reasoning, the Court of Appeals described the way the CFPB receives funds as providing the CFPB a “double insulation” from the Congressional appropriation power. The court opined that the CFPB Director requesting funds from the Federal Reserve in amounts the Director deems “to be reasonably necessary,” violates Congress’s appropriations power. Further, the court reasoned that the Federal Reserve itself falls outside of Congress’s appropriations power since it receives funds from bank assets that are not subject to review by the House or Senate Committee on Appropriations.

Ultimately, the Fifth Circuit Court of Appeals found that Congress’s authorization of the CFPB to promulgate the Rule was not unconstitutional, but the CFPB improperly used unappropriated funds to engage in the rule making process. In its reasoning, the court clarified that the CFPB lacked the ability to exercise the power to promulgate the Rule through constitutionally appropriated funds.

We do not believe that this ruling will have any impact on the structure of the CFPB. The focus of the court’s ruling is on the way in which the CFPB receives its funding, and its violation of the Appropriations Clause. Therefore, while this matter may be appealed to the United States Supreme Court, we believe it to be unlikely that this case will have any effect on the CFPB’s enforcement powers as a regulatory agency.