Banking and Finance Law Daily Wrap Up, CONSUMER FINANCIAL PROTECTION BUREAU—‘R Street’ offers analysis of CFPB constitutionality, payday lending case before Supreme Court, (Apr 25, 2023)

By Donielle Tigay Stutland, J.D.

With the Supreme Court agreeing to hear the case regarding the constitutionality of the funding of the CFPB as it relates to the Payday Lending Rule, R Street gives opinions on three possible outcomes.

With Community Financial Services Association of America v. Consumer Financial Protection Bureau now on the Supreme Court’s docket, the Supreme Court will be tasked with addressing the constitutionality of the Consumer Financial Protection Bureau’s funding mechanism. Given that the case raises concerns not only about the Bureau’s Payday Lending Rule, but also about issues of the constitutionality of all rules created since the CFPB’s inception, R Street Institute, a non-profit think tank, offers its analysis for three possible scenarios of what could happen as the case advances in the High Court.

Background. In February 2023, the Supreme Court agreed to hear the case of Community Financial Services Association of America v. Consumer Financial Protection Bureau regarding the constitutionality of the funding structure of the CFPB. In October 2022, the U.S. Court of Appeals for the Fifth Circuit found in favor of a group of trade associations representing the payday loan industry challenging the Bureau’s “Payday, Vehicle Title, and Certain High-Cost Installment Loans” final rule (Payday Lending Rule).

The associations alleged that the Bureau’s payday lending rule was a constitutionally defective rulemaking and later ratification could not cure the defect. They also argued that the Bureau is unconstitutionally structured, challenging the Bureau Director’s insulation from removal, Congress’s broad delegation of authority to the Bureau, and the Bureau’s unique, double-insulated funding mechanism. The district court rejected these arguments. However, the Fifth Circuit agreed with the associations’ argument in one area—that the Bureau’s independent funding mechanism violates the Constitution’s structural separation of powers. As a result, the appellate court reversed the judgment of the district court on this issue and vacated the Bureau’s 2017 Payday Lending Rule (Community Financial Services Association of America v. CFPB, Oct. 19, 2022, Wilson, C.; see Banking and Finance Law Daily, Oct. 20, 2022).

The Supreme Court has previously heard a case addressing the constitutionality of the Bureau. In Seila Law vs. Consumer Financial Protection Bureau, in 2019, the Supreme Court held that the for-cause removal of the CFPB director was unconstitutional, and argued that the funding structure “further aggravates” the constitutionality by adding additional challenges to the president’s ability to “take care that Laws be faithfully executed” as outlined in Article II Section 3 of the Constitution. However, that case had a narrow ruling, and it ultimately only altered the removal process of the CFPB’s director, but kept the funding structure, and the rest of the CFPB, in place.

Supreme Court overrules Fifth Circuit. The analysis first looks at the scenario of the Supreme Court overruling the Fifth Circuit. This would affirm the constitutionality of the Bureau’s funding. R Street notes that this is not necessarily an impossible outcome, but R Street suggests that the current House of Representatives is “hungry to rein in what it views as an ever-growing bureaucratic behemoth with insufficient oversight,” so it may not be satisfied with this outcome and may still attempt to make changes with the agency’s leadership structure.

Supreme Court upholds Fifth Circuit, strikes down Payday Lending Rule. In the second scenario, the Supreme Court could agree with the reasoning of the Fifth Circuit, but only as it applies to the Payday Lending Rule. R Street posits that this scenario is unlikely because it will still leave the door open to questions about the constitutionality of the creation of the Bureau and its funding. However, it is suggested this type of opinion could spur Congress to act on a new funding structure and more oversight. This type of decision could have implications in the courts however, as there are numerous other challenges to the CFPB’s authority in the courts; at least one federal court has stayed an enforcement proceeding pending the ruling from the Supreme Court.

Supreme Court upholds Fifth Circuit, strikes down funding structure, rulemaking, and enforcement. Finally, R Street addressed the possibility that the Supreme Court finds that the CFPB is unconstitutionally funded. If the Supreme Court takes this approach, it would call into question all rulemaking and enforcement by the CFPB since its inception. Argues R Street, “this would also have significant ramifications across the financial industry, as rules from the bureau would effectively no longer need to be followed, albeit with legal challenges likely coming from every direction.” Not only would this impact the Payday Lending Rule, but the Truth in Lending Act is implemented by the CFPB. Not only would this outcome have significant implications across the industry, R Street indicates this scenario would pose the greatest challenge for Congress. Congress would have to “either do away with the CFPB, restructure its funding through appropriations or in a manner more similar to agencies such as the Federal Reserve, create laws based on its rules or some combination therein.”

Companies: Community Financial Services Association of America; R. Street Institute

IndustryNews: CFPB ConsumerCredit DoddFrankAct FederalReserveSystem Loans SupremeCtNews TruthInLending