Court Ruling on CFPB Structure Raises Questions on Rulemaking Authority

Only 12 years into its existence, and the Consumer Financial Protection Bureau (CFPB) may face an existential threat — or at least some significant restructuring.

A three-judge panel via the Fifth U.S. Circuit Court of Appeals has ruled that the very design and structure of the CFPB is unconstitutional.

As detailed in the ruling itself, which was filed Wednesday (Oct. 19), the decision comes in the wake of a 2017 suit from the Community Financial Services Association of America and Consumer Service Alliance of Texas against the CFPB. That suit challenged the validity of the CFPB’s 2017 Payday Lending Rule.

As part of that same suit, the plaintiffs maintained that the agency was unconstitutionally structured because the director had/has “insulation” from removal and that Congress gave the CFPB broad delegation of authority. They also called into question the very funding of the agency itself. Most of the tenets in the suit were rejected by the District Court.

But it is the funding that has been ruled unconstitutional. Per the judges’ assertions, because the CFPB receives its funding through the Federal Reserve rather than through Congress, that action “violates the Constitution’s structural separation of powers. We thus reverse the judgment of the district court, render judgment in favor of the plaintiffs, and vacate the bureau’s 2017 Payday Lending Rule.”

The CFPB was created through the 2010 Dodd-Frank Act, and the question now is what happens to the agency; there’s the opportunity for the agency to appeal the decision. The judicial process can, at times, be glacial in pace, stretching out over years — even winding up in front of the Supreme Court.

There are ways that the structure of the CFPB can be fine-tuned, reshaped without dismantling the agency or its operations. We saw that two years ago when the U.S. Supreme Court ruled that the single-director leadership CFPB structure violated the separation of powers of the U.S. Constitution. The agency was left intact, but the director was made “removable” at the U.S. president’s will.

Now, if the fine-tuning is that funding winds up coming from Congress, it might be arguable, and argued, that the funding of the CFPB might be volatile, subject to partisanship.

Most immediately, the decision on the payday rule rests on the fact that, as the court found, “without its unconstitutional funding, the Bureau lacked any other means to promulgate the rule. Plaintiffs were thus harmed by the Bureau’s improper use of unappropriated funds to engage in the rulemaking at issue.”

The impact might be seismic in scope, opening the door to arguments that an agency whose very structure runs afoul of the Constitution, by its very nature, has made rules and levied fines that are legally suspect too.

Director Rohit Chopra, who has led the CFPB since Sept. 30, 2021, has handed down 15 enforcement actions since the start of this year and 19 since he was appointed.

Read more: CFPB Boss Racks up Enforcements as Second Year Begins