As word continues to spread about the Fifth Circuit case, more experts in the housing industry and other housing groups have speculated on what it may mean for the Consumer Financial Protection Bureau (CFPB), the agency’s enforcement actions, and what will happen should the issue be heard by the U.S. Supreme Court.
“[T]he Fifth Circuit chose to favor Wall Street over consumers,” U.S. Sen. Sherrod Brown (D-Ohio) said in a release. “After more than a decade of coordinated and sustained attacks on consumers, and repeated failures to weaken the CFPB, big corporations and anti-consumer interests have turned to the courts to incapacitate the only financial agency that specifically looks out for consumers.
“Congress deliberately ensured the independent funding of the CFPB, so that the consumer watchdog could protect consumers and help create an economy that centers on(?) working families. It is not a coincidence that, while other financial regulators like OCC, FDIC, NCUA, and the Federal Reserve all have independent funding structures, Wall Street chose to attack the one financial regulator charged with protecting consumers.”
Brown said he will be fighting to ensure the CFPB will keep the authorities granted by Congress.
Brian Levy, of counsel to Katten & Temple, LLP, said it is currently unclear as to whether the Supreme Court will hear the case. If it is ultimately heard by the court, it won’t happen for quite some time.
“While the court supported the substance and process of CFPB’s small dollar loan rulemaking itself, in what some might call a Federalist Society opinion masterpiece quoting heavily from the Federalist Papers themselves, the court took issue with the constitutionality of the agency’s funding source as violating the Constitution’s principals of separation of powers,” Levy stated. “The court noted the CFPB’s funding was ‘double insulated’ from Congressional appropriation oversight essentially because it is funded by the Federal Reserve, already an ‘insulated agency’ due to its funding source being the Treasury, and subject to no obligations to account to Congress for any unspent appropriations. The court said that violates the fundamental separation of powers concepts of the Constitution and specifically the appropriations clause.”
Levy said the opinion referred to issues other courts have had since the bureau’s inception, such as the breadth of its rulemaking, enforcement, and adjudicatory authority over the economy and its framework of a single director as opposed to a multimember board or commission. He also pointed out while the court took notice of concerns about the bureau’s ability to misuse its powers are not merely theoretical, it did not conclude the payment provision at issue was an abuse of that power.
“To me, the really confusing part of the decision is the rationale for the remedy,” Levy told RESPA News. “The Fifth Circuit seemed to be trying to offer a remedy only to the plaintiffs by vacating the CFPB’s small dollar loan rule, which is in the nature of an injunction, but clearly the implications of the decision will have a much wider impact if not overturned or stayed on appeal.
“The court’s discussion about why the remedy of vacating the small dollar rule – and nothing more or less – hinged on a distinction between the CFPB’s power and funding sources that is frankly, dissatisfying,” he continued. “That is, the court said while the CFPB had the power to make this rule, that the funding of its creation was unconstitutional so the rule must not stand. Why that would be the case just for one rule and not everything the CFPB has ever done is unanswered.
“Essentially, that leaves wide open the question about whether any other CFPB rule, enforcement action or other agency action could be challenged similarly by another plaintiff, in the Fifth Circuit or elsewhere.”
Mayer Brown Partner Ori Lev gave some insight into what may happen now the decision has been released.
“The decision essentially means that – for now – the CFPB lacks authority to act in the states covered by the Fifth Circuit,” Lev said. “That includes taking enforcement or supervisory action. CFPB actions in other states will also likely be subject to challenge.
“The next step will either be a CFPB request for the full Fifth Circuit to hear the case, which we think more likely, or to ask the Supreme Court to hear it and decide it this term. Ultimately, if the Supreme Court agrees, Congress will have to act to restructure the agency’s funding – and potentially make other changes as part of a political compromise.”
The National Fair Housing Alliance (NFHA) Executive Vice President Nikitra Bailey said her organization was deeply disappointed in the decision.
“NFHA was one of the key leaders that worked to create the CFPB after the housing crisis of 2008 ravaged communities of color and triggered the Great Recession, resulting in a loss of $1 trillion in wealth for Blacks and Latinos,” Bailey said in a release. “Because of the impact of the crisis, NFHA played a leading role in developing the CFPB’s Office of Fair Lending and Enforcement. Sadly, attacks from industry started even before the bureau was set up.
“This is because the CFPB is the first financial regulator in our nation’s history that is explicitly tasked with protecting the financial health and fair treatment of people and families, not only those of financial institutions,” she continued. “In 2017, payday lenders fought against a CFPB rule that would have held lenders accountable and protected consumers from predatory loans. Challenges against the bureau like this are a continuation of ongoing attacks to undermine the agency’s legitimacy and efficacy.”
Bailey highlighted the achievements the bureau has made, including holding financial institutions accountable and returning $13.5 billion back to consumers who have suffered financial harm.
“Furthermore, the agency’s funding structure is not unique for a banking regulator, and it was put in place to ensure that the agency’s ability to help consumers was not subject to political whims,” she said. “We must make sure it stays that way.”
John Coleman, partner at Buckley LLP, shared his preliminary take on the case in a special alert from the firm.
“If the Supreme Court ultimately upholds the bureau’s funding structure, the agency will have weathered its second significant constitutional challenge in its short history and eliminated another structural ground for challenging its actions,” he said.
“However, the consequences for the agency should the Supreme Court agree with the panel’s decision are more complex,” he added. “For example, it may not have the option of simply severing the unconstitutional provisions. In Seila Law, it was relatively straightforward for the court to sever the removal provision and simply fall back on the default presumption that the director of the CFPB is removable by the president at will. Here, there is no other funding mechanism to fall back on and the Supreme Court cannot create one, as that would likely present its own problems under the appropriations clause.
“Instead, the Court might stay its mandate to give Congress an opportunity to pass legislation to ‘cure’ the constitutional issue. There is some precedent for this. When the Supreme Court declared the Federal Election Commission unconstitutional in 1976 in Buckley v. Valeo, it afforded ‘de facto’ validity to past agency actions and stayed its mandate to allow Congress to repromulgate the statute in a manner that complied with the court’s holding. Of course, Congress would not be limited to simply ‘fixing’ any constitutional defect but would have plenary authority to revisit the agency’s structure, authorities, and very existence. Depending on the composition of the political branches, the CFPB that emerged from this process may be significantly different than the agency that exists now.”