What's Going On: The Fifth Circuit and the CFPB
In the beginning of October we blogged about some spooky Consumer Financial Protection Bureau (CFPB) enforcement actions. Well, later that month the Fifth Circuit Court of Appeals (Fifth Circuit) issued a ruling that caused some to wonder whether or not the CFPB was soon to be a campfire story told to scare new compliance professionals. On October 19, 2022 the Fifth Circuit ruled that the CFPB was unconstitutional and that the 2017 Payday lending rule was therefore vacated. Since the ruling, the compliance team has heard about compliance professionals and credit unions questioning whether or not the CFPB would be abolished because of the ruling and how much weight they should give to CFPB rules/guidance.
What’s All the Fuss About
As I noted above, the Fifth Circuit ruled that the CFPB was unconstitutional. Specifically, the Fifth Circuit found that the funding structure for the CFPB was unconstitutional.
In order to fund the government, Congress has to pass a budget into law. This budget funds the various government agencies such as the Department of Defense, IRS, and the National Park Service. However, when Congress established the CFPB, they bypassed the congressional budget process and the CFPB was funded through the Federal Reserve and would continue to be funded without the need to be put into Congress’ “budget.” Sort of like setting up an automatic recurring payment, where instead of paying for Netflix, it’s a government agency.
The Fifth Circuit found that this bypassing of Congress’ budget was unconstitutional. Specifically, that is violated the Constitution’s Appropriation’s Clause and the Constitution’s underlying separation of powers. Because of this violation, the Fifth Circuit ruled that the CFPB was unconstitutional and by extension, the 2017 Payday Lending Rule.
What About the Supreme Court
The Fifth Circuit Court of Appeals is a step below the Supreme Court and one of the many circuit courts of appeals. As such, the Fifth Circuit’s ruling is unlikely to be the final word on this matter and will likely be taken up by the Supreme Court. While I cannot say how the Supreme Court will rule on this matter, I can look at previous cases. Specifically, Seila Law Llc V. Consumer Financial Protection Bureau (Seila).
In Seila, similar to today’s case, a law firm argued that the CFPB’s structure was unconstitutional and therefore the CFPB should be abolished. The question at heart was whether or not the statute creating the CFPB could forbid a president from firing the CFPB director. In Seila, the Supreme Court did find that prohibiting a president from firing the CFPB director was unconstitutional. However, instead of abolishing the CFPB in its entirety, the Supreme Court merely cut the offending provision from the statute and allowed presidents to fire CFPB directors.
Based on the Seila decision, it seems possible that the Supreme Court, even if it finds the funding structure unconstitutional, may not abolish the CFPB. Instead, the Supreme Court may just change the way the CFPB is funded, such as by requiring the CFPB’s funding to go through the congressional budget process. As such, credit unions may not want to bank on the abolishment of the CFPB or the bureau’s rules or guidance.
But What if the CFPB is Abolished
Let’s say you are convinced that the CFPB will be abolished along with its rules and guidance.
One thing you may want to note is that Supreme Court decisions do not always overturn past judgments. That is to say, if you violate a CFPB rule and final judgment is entered in court, the Supreme Court abolishing the CFPB and its rules does not necessarily mean that the final judgment will be thrown out.
As such, Credit unions may want to be careful regarding ignoring old and new guidance, as they may find themselves flatfooted should the CFPB stay intact. Ultimately, if credit unions are concerned about the Fifth Circuit’s ruling they may want to speak to an attorney.
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About the Author
Keith Schostag joined NAFCU as regulatory compliance counsel in February 2021. In this role, Keith assists credit unions with a variety of compliance issues.