Today, the Supreme Court of the United States granted the petitions for writs of certiorari filed in CFPB et. al. v. Com. Fin. Services Assn., where a panel of the United States Court of Appeals for the Fifth Circuit ruled that the Consumer Financial Protection Bureau (CFPB)’s funding mechanism is unconstitutional, and ultimately invalidated the payday lending rule at issue in that case. The Community Financial Services case is the latest in a long line of challenges to the Bureau itself that could have a wide ranging impact on businesses and entities subject to the CFPB’s authority.
Indeed, while the Fifth Circuit only invalidated the payday lending law at issue in that case, the reality is that the underlying rationale would support similar challenges to various rules promulgated or amended by the CFPB, including but not limited to: the Fair Debt Collection Practices Act (FDCPA, also known as Regulation F), the Fair Credit Reporting Act (FCRA, also known as Regulation V), Regulation Z under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA), and a new set of rules governing prepaid accounts in Regulation E under the Electronic Funds Transfer Act (EFTA).
In its petition, the CFPB argued that the Fifth Circuit clearly got it wrong and conflicts with the United States Court of Appeals for the District of Columbia Circuit’s decision in the 2017 PHH Corporation v. Consumer Financial Protection Bureau ruling, which found the funding mechanism constitutional. Most district courts that have considered the issue have likewise come to the conclusion that the CFPB’s funding mechanism passes constitutional muster. The CFPB’s petition also focused on the proverbial “parade of horribles,” noting that the Fifth Circuit’s ruling potentially undermines any and all rules amended or promulgated by the CFPB, calls into question any enforcement actions it has undertaken, and throws the economy into uncertainty and instability. As evidenced by the CFPB’s request that the Supreme Court hear the case this very term, the CFPB clearly views Community Financial Services as an existential threat to its very existence.
In response to the CFPB’s petition, Community Financial Services filed a cross-petition asking the court to consider two antecedent questions if it were to accept the CFPB’s petition:
- whether the payday lending rule should still be invalidated because it was implemented by a director who, at the time it was enacted, was shielded from removal by the Executive Branch, which the Court subsequently held was unconstitutional; and
- whether the rule should be invalidated because the prohibited conduct falls outside of the definition of unfair or abusive.
Otherwise, Community Financial Services objected to the Court accepting the case and objected to the expedited review requested by the CFPB. Since Community Financial Services was decided, proponents and opponents of the CFPB have taken strikingly different positions as to its applicability and reach throughout the United States. Specifically, proponents have raised many of the following arguments, all of which should now be decided in one way or another by the Supreme Court:
- Only one rule: The order does not vacate or enjoin any other CFPB rule, and the validity of other CFPB rules will instead be fought out in courts nationwide, not just those in the Fifth Circuit. Challenges in the Fifth Circuit to CFPB rulemaking actions may likely be upheld, but Community Financial Services does not bind courts in other circuits.
- Minority position: The Bureau and consumer plaintiffs have also argued that Community Financial Services does not bind courts in other circuits. The Fifth Circuit is the only court that has found the CFPB’s funding mechanism to be unconstitutional. The en banc D.C. Circuit and federal district courts in California, Illinois, Indiana, Maryland, Montana, Pennsylvania, and Rhode Island have held the CFPB’s funding mechanism constitutional.
- Suspect rationale: It was Congress that determined the nature of the CFPB’s funding. The Appropriations Clause, moreover, provides only that monies cannot be withdrawn from the United States Treasury without a congressional appropriation. The Federal Reserve accounts from which the CFPB draws its funding are not part of the United States Treasury, so the funding of the CFPB from that source does not run afoul of the constitutional prohibition on drawing unappropriated funds from the Treasury. Moreover, the CFPB’s funding structure is not unique. For decades, Congress has authorized agencies to use funding streams that do not rely on appropriations. Other financial regulators do not receive direct Congressional appropriations, including the Federal Deposit Insurance Corporation (FDIC), the Comptroller of the Currency (OCC), the National Credit Union Administration (NCUA), and the Federal Housing Finance Agency (FHFA).
- Focus on the harm: Even Community Financial Services recognizes that to obtain a remedy for what it finds to be the CFPB’s unconstitutional funding mechanism, the party challenging the CFPB’s action “must show that that ‘the unconstitutional …[funding] provision inflicted harm.” But the alleged unconstitutional harm is not that the CFPB has funding allowing it to act, but rather that its funding is through a specific mechanism. Thus, there should be a showing that the specific funding mechanism harmed the challenger. In other words, when other CFPB rules are challenged, consumer lawyers have argued that the challengers must show that the specific funding mechanism itself caused injury and that the injury would not have occurred if funding were appropriated.
- Policy considerations: Proponents have also turned to policy arguments to support the constitutionality of the CFPB, arguing that it provides clear standards for financial service providers upon which the providers rely. Rules tell providers how they must comply with the law, clarify ambiguous statutory provisions, provide model disclosures, exempt small entities from statutory requirements, offer safe harbors for providers, or otherwise clarify that certain practices are allowed. Providers build business models, software infrastructure, and compliance regimes around regulations. Capital markets depend on the certainty provided by regulations to decide in which ventures to invest. If all regulations that the CFPB has adopted for the last eleven years are thrown out, all that certainty and all those market expectations disappear and are replaced by confusion and uncertainty.
Conversely, financial service providers subject to the CFPB have been able to utilize the Community Financial Services decision and subsequent cert. petition as grounds to stay pending litigation with the CFPB. Likewise, financial services entities in litigation with the CFPB have also raised Community Financial Services as grounds to dismiss the action against them.
Ultimately, a decision by the Supreme Court to affirm the Fifth Circuit’s opinion would have significant impact on any business or entity subject to the CFPB’s rulemaking or enforcement authority and could conceivably impact other regulatory agencies’ funding in a similar manner to the CFPB. We’ll be watching to see exactly how it all plays out.
