| Of Interest

A&B Abstract:

On November 14, 2022, the Consumer Financial Protection Bureau (“CFPB”) filed a petition for a writ of certiorari in connection with the Fifth Circuit’s recent decision in Community Financial, which held that the CFPB’s funding structure violated the Constitution’s Appropriations Clause. (For a full discussion of the Community Financial decision, click here.)

The CFPB is asking that the Supreme Court set the case for argument this term during its April 2023 sitting.

The CFPB’s Petition

According to the CFPB, the Fifth Circuit’s ruling constituted an “unprecedented and erroneous understanding of the Appropriations Clause.” In the CFPB’s view, the Appropriations Clause requires only that “Congress enact[] a statute explicitly authorizing . . . [the] use [of] a specified amount of funds from a specified source for specified purposes,” which Congress did in establishing the CFPB’s funding. For support, the CFPB relied on the constitutional text, historical practice, and the Supreme Court’s precedent. And it argued that “[n]o other court has ever held that Congress violated the Appropriations Clause by passing a statute authorizing spending.”

The CFPB also asserts that the Fifth Circuit “compounded its error by adopting a sweeping remedial approach that calls into question virtually every action the CFPB has taken in the 12 years since it was created.” This remedy, the CFPB argues, “raises grave concerns not just for the CFPB and consumers, but for the entire financial industry,” as the vacatur of past CFPB actions could have “destabilizing consequences.”

The CFPB asked the Supreme Court to review the Fifth Circuit’s decision for several reasons. First, the Fifth Circuit held an Act of Congress violates the Constitution, and there is a strong presumption in favor of granting writs of certiorari to review decisions holding federal statutes unconstitutional. Second, the Fifth Circuit’s decision conflicts with the D.C. Circuit’s decision on the same issue, creating a circuit split that the Supreme Court should resolve. Third, the Fifth Circuit’s decision has “immense legal and practical significance” that should be addressed promptly because it “threatens the validity of all past CFPB actions,” which, if unwound, could result in harm to consumers and the “entire financial industry.”

For these reasons, the CFPB asked the Supreme Court to set the case for argument this term. Given what is at stake, the CFPB explained that it filed its petition “less than one month after the [Fifth Circuit’s] decision,” and “plans to waive the 14-day waiting period after the brief in opposition is filed,” so that the Supreme Court may “consider the petition at its January 6, 2023 conference and hear the case during its April 2023 sitting.”

Takeaways

The CFPB has acknowledged the significant existential threat that the Fifth Circuit’s Community Financial decision poses to its future, and has petitioned the Supreme Court for relief. Stay tuned for further updates on whether the Supreme Court grants the CFPB’s petition.

A&B ABstract:

In another existential challenge to the CFPB, last week the Fifth Circuit held in the Community Financial[1] case that the CFPB’s funding structure is unconstitutional. On this ground, it vacated the CFPB’s Payday Lending Rule. The decision’s rationale, however, is expected to have much further-reaching implications. Simply put, many believe that the Fifth Circuit’s analysis invalidates practically all actions the CFPB has taken since its inception.

The CFPB’s Unconstitutional Funding Structure

The CFPB is an executive agency with sweeping authority to issue regulations, conduct administrative hearings, wage civil litigation, and impose penalties on private citizens for a host of issues related to consumer finance. To exercise this authority, the CFPB requires funding, which it receives from a unique mechanism outside the Congressional appropriations process. By statute, the CFPB Director has the right to draw up to 12% of the Federal Reserve’s annual budget without seeking approval from Congress.

The Fifth Circuit held that this funding structure violated the Constitution’s Appropriations Clause, which requires that all expenditures of federal funds be approved by Congress. Specifically, the Fifth Circuit held that the CFPB’s extensive mandate combined with the inability of Congress to subject the agency to oversight via the appropriations process improperly concentrated the power of both “purse and sword” in the Executive Branch.

The Remedy

As important, unlike the challenge to the CFPB’s leadership structure in Seila Law, which led the Supreme Court to essentially rewrite the unconstitutional director-removal provision to salvage the CFPB’s ability to operate, the Community Financial decision held that there was no similar way to fix the Bureau’s unconstitutional funding. Fundamental to the Community Financial ruling was its interpretation of Collins v. Yellen, 141 S Ct. 171 (2021)—the Supreme Court’s most recent take on the proper remedy when an agency’s actions are tainted by an unconstitutional structure. Looking to Collins, the Fifth Circuit held that to obtain the holy grail of relief—vacatur of the agency action in its entirety—a party must show that: (1) a provision of the agency’s enacting statute is unconstitutional, and (2) the unconstitutional provision inflicted harm.

The Fifth Circuit then found that making the showing Collins required was “straightforward” in the case before it because “the funding employed by the Bureau to promulgate the Payday Lending Rule was wholly drawn through the agency’s unconstitutional funding scheme.” From the court’s perspective, this created “a linear nexus between the infirm provision (the Bureau’s funding mechanism) and the challenged action (promulgation of the rule). In other words, without its unconstitutional funding, the Bureau lacked any other means to promulgate the rule.”

The Implications

Problematically for the CFPB, the logic of this “linear nexus” between the CFPB’s funding mechanism exists for practically all of the agency’s actions. Pursuant to the Dodd-Frank provisions that created the CFPB, all of its operations have been funded out of the “Bureau Fund” into which quarterly draws from the Federal Reserve are deposited. That is the funding mechanism the Fifth Circuit rejected as unconstitutional. Indeed, while Dodd-Frank also created the agency’s Civil Penalty Fund, the CFPB cannot by statute use those monies other than for limited purposes having to do with victim compensation and financial literacy.

There’s lots of speculation about what will happen next. The CFPB has not indicated whether it will seek en banc review, try its luck with the Supreme Court, or perhaps seek a legislative fix. None of these routes is without substantial risk for the Bureau. Seven of the sixteen judges on the Fifth Circuit who would hear the case en banc have already authored or joined opinions concluding that the CFPB’s funding structure is unconstitutional. The Supreme Court, which already invalidated the CFPB’s leadership structure in Selia Law, now has an even more solid majority that appears poised to closely scrutinize federal agencies on these very issues. And voters have yet to decide the makeup of the 118th Congress.

Takeaway

Given this, covered persons under the CFPB’s regulatory umbrella may consider striking while the iron is hot.

Parties subject to rules issued by the CFPB may consider challenging the CFPB’s activity as the invalid product of the agency’s constitutionally infirm funding structure. Any such challenge has the greatest likelihood of success in the Fifth Circuit: where Community Financial is binding, but as yet stands as the only circuit court to have held the CFPB’s funding structure unconstitutional. While the D.C. Circuit addressed the issue several years ago in In re PHH,[2] numerous questions remain about the viability of its prior ruling. Not only was the majority’s decision there regarding the director-removal provision abrogated by the Supreme Court in Selia Law, many observers believe that its brief, cursory treatment of the appropriations issue cannot be relied upon. Indeed, as the Fifth Circuit also noted, if anything, the subsequent Selia Law cure for the director-removal provision, which vests even more power in the Executive Branch, only exacerbated the separation of powers problem presented by the CFPB’s self-funding mechanism. And while several district courts have also upheld the CFPB’s funding structure, including the Districts of Rhode Island, Maryland, and Montana, the Middle District of Pennsylvania, the Southern District of Indiana, and the Central District of California, none dealt directly with the post-Selia Law issue or meaningfully grappled with the separation of powers arguments that carried the day in the Fifth Circuit.

Similarly, Parties currently subject to CFPB investigation may consider whether to object on the grounds that the investigation is improvidently funded. Some parties engaged in enforcement litigation with the CFPB, both within and even outside the Fifth Circuit, have already pressed for dismissals based on the Fifth Circuit’s decision.

In short, parties should consider their options. While no one can say as yet that the Fifth Circuit’s decision in Community Financial will become law nationwide, it is clear that the decision has exposed a significant threat to the very existence of the CFPB.

[1] Cmty. Fin.l Servs. Ass’n of Am., Ltd. v. Consumer Fin. Prot. Bureau, No. 21-50826 (5th Cir. Oct. 19, 2022), available at http://www.ca5.uscourts.gov/opinions/pub/21/21-50826-CV0.pdf.

[2] PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75, 95 (D.C. Cir. 2018) (en banc), overruled in part by Seila Law LLC v. Consumer Fin. Prot. Bureau, 140 S. Ct. 2183 (2020).

5th Circuit