RESPA News listened in while Francis “Trip” Riley, partner at Saul Ewing, LLP and co-chair of the firms’ Consumer Financial Services Group, and James Milano, partner at McGlinchey Stafford, PLLC, gave attendees at RESPRO’s spring session a rundown on the case challenging the Consumer Financial Protection Bureau’s (CFPB) funding structure and the potential ramifications of the Supreme Court’s ruling.

In Community Fin. Serv. of America, LLC, et al. v. Consumer Financial Protection Bureau, plaintiffs challenged a portion of the bureau’s payday lending rule limiting a lender’s ability to obtain loan repayments via preauthorized account access. The plaintiffs made several arguments challenging the way the rule was promulgated, the substance of the rule, and whether the bureau had the authority to enact it.  As something of a “throw-away” argument the plaintiffs’ also challenged the rule by arguing that the bureau’s funding violated the appropriations clause of the U.S. Constitution and, therefore, none of its rules are enforceable.

The Fifth Circuit’s decision affirmed most of the district court’s holdings on this matter – that payday lenders may not obtain pre-loan authorization to make numerous withdrawals from consumer bank accounts; the CFPB director removal provisions were proper; and Congress’s provision granting broad enforcement authority to the CFPB was valid – but reversed the lower court’s determination that the bureau’s funding structure was constitutional. Instead, the three judge panel  held the bureau’s “dually insulated” funding by the Federal Reserve was an unconstitutional delegation of Congressional authority.

By reaching this conclusion, the court “not only struck down the rule as being a result of unconstitutional funding, but the ruling now throws into question everything that the CFPB had done over the last 12 or 13 years, since its inception,” Riley said.

In general, a federal agency’s funding is determined through appropriations made by Congress. To protect the bureau from the impact of political changes, the enacting legislation stated the CFPB would funded in a different manner. Instead, the agency’s director makes a budget request from the Federal Reserve. So long as the request is less than 12 percent of the Fed’s overall budget, the request is presumptively approved, and the money held in an account managed by a Federal Reserve Bank and separate from the Treasury. Unused funds are not returned at the end of the fiscal period; rather, they are maintained in the account.

By determining the funding structure is unconstitutional, Riley said, the court held that the bureau promulgated a rule with money not constitutionally appropriated. If upheld, this reasoning could apply to every rule, administrative action, investigation, and enforcement action taken by the CFPB.

The Fifth Circuit is currently the only circuit that has determined the funding is unconstitutional. Six other circuits have expressly held that the funding structure is appropriate.

“The Second Circuit, in a recent decision, expressly commented on the Fifth Circuit’s decision and concluded that that decision didn’t hold water, in their views,” Riley said. “It is worth noting that the Second Circuit is a prominent circuit court. The question is, how much weight is the Supreme Court going to give the Second Circuit? I don’t see how the Second Circuit’s decision can’t weigh heavily on their determination.”

Riley pointed out that after the Fifth Circuit handed down its opinion, the bureau had three options: let the opinion stand, significantly impacting the bureau’s actions within that jurisdiction and providing fodder for other circuits to come to a similar conclusion; appeal for a review of the decision by a full panel of the Fifth Circuit’s judges; or petition the U.S. Supreme Court for writ of certiorari. Ultimately, the CFPB appealed to the Supreme Court, which accepted the petition, and will hear the case on Oct. 3.

Riley noted the parties agreed to a stay of the Fifth Circuit’s decision, meaning the CFPB is free to continue with its actions in the states comprising that jurisdiction, at least until the Supreme Court hands down its ruling.

While the bureau’s opponents make the argument that its funding structure is unique, the bureau’s support brief noted multiple agencies, particularly those tasked with enforcing financial regulations, often are exempt from the appropriations process, for substantially the same reasons. Congress’ decision to insulate the bureau was intended to prevent political agendas from impacting the CFPB’s mission, as it was borne out of the 2008 financial crisis in an effort to prevent another.

“The CFPB is a different animal,” Milano said. “It was necessary to create an uber agency like this – a consumer financial protection agency – coming out of a mortgage meltdown. That’s what’s needed – an uber consumer financial agency that will protect consumers.”

When discussing the ramifications of this case, Riley said there is potential for a slippery slope scenario if the decision is upheld. Questions about how far the ruling would reach include whether the CFPB would still exist and what it would mean for agencies with similar funding structures.

The CFPB’s argument, Riley reminded, is the Constitution only requires Congress to outline how the funding for an agency is going to occur. The statute defining the bureau’s budget clearly states how the funding is structured and caps how much can be requested, and therefore is an appropriate funding provision. Alternatively, if the funding structure is impermissible, it should be severed from the statute (similar to how Seila Law v. CFPB concluded), allowing the CFPB to survive.

“The bureau does a good job of pointing out to the Supreme Court, ‘watch what you do, because it could have significant implications.’ Not just on consumers, generally, but the banking and lending systems,” Riley said. “…You can’t just strike down an entire statute and get rid of an agency that employs people and is now, after 13 years, integrally connected to everything.”

In the event the Supreme Court upholds the ruling, and it follows its decision in Seila Law, the funding provision could be severed from the bureau’s enacting statute, preserving the agency. The CFPB then would be subject to the typical appropriations procedure, where it would request its budget from Congress and any remaining funds would be returned to the Treasury at the end of the fiscal period.

Riley noted there is another case that threatens to result in limitations to the bureau’s scope of authority; the Supreme Court case of Loper Bright Enterprises v. Raimondo. This case the Supreme Court is considering whether the Chevron doctrine, which in 1984 set the precedent for courts to defer to federal agencies’ interpretation of the laws they enforce, should be upheld or recalibrated. Should Chevron be overturned, the deference to agencies will be pared back. If the Supreme Court wants to limit the CFPB’s reach, it would be with this case, not CFPB v. CFSA, et al, he said.

“If the Supreme Court determines that there’s some issue with the constitutionality of this funding, there’s no question that there’ll be a plethora of cases every time there’s a [civil investigative demand],” Riley said. “The Supreme Court isn’t going to say, ‘Well, because we made a decision on the CFPB’s spending, that means it affects all the other agencies.’ That’s not how the Court works.

“So, if you want to challenge one of the other agencies’ actions, you could ultimately use this as an avenue to slow the agency down.”

Riley ended by saying the industry should react to the case the same way the bureau is – as if it’s business as usual, waiting to see what happens with the Supreme Court before challenging similarly-funded agencies’ actions based on this argument.