On November 14, 2022 the CFPB filed a petition for a writ of certiorari with the United States Supreme Court, seeking to overturn the Fifth’s Circuit opinion in Community Financial Services Association of America (CFSA) v. CFPB, which vacated the 2017 Payday Lending Rule “as the product of the Bureau’s unconstitutional funding scheme.”
We have received several inquires regarding the current effect of the CFSA decision on the structure of the CFPB as well as its rules and supervisory and enforcement actions. Given these questions and the CFPB’s appeal to the Supreme Court, we thought it helpful to provide a brief FAQ:
What did the Fifth Circuit Opinion Hold?
The CFPB is not funded via the normal periodic congressional appropriations process. Instead, the Bureau receives funding directly from the Federal Reserve, which itself is not funding via congressional appropriations, but by bank assessments. Each year the Bureau requests an amount “determined by the Director to be reasonably necessary to carry out the” Bureau’s functions. The Federal Reserve must then meet the request so long as it does not exceed 12% of the Fed’s total operating expenses.
In CFSA v. CFPB, the plaintiffs challenged the Bureau’s Payday Lending Rule under several theories, including an argument that the Bureau’s “unique, double-insulated funding mechanism” was unconstitutional.
The three-judge panel of the Fifth Circuit agreed, holding that the CFPBS’s funding scheme violates the Appropriations Clause of the Constitution, which provides that “no money shall be drawn from the Treasury, but in Consequence of Appropriation made by Law.” Because the court found that the Payday Lending Rule was the product of the Bureau’s unconstitutional funding scheme, the Court vacated the Rule. Therefore, should the judgment become effective, the provisions of the Payday Lending Rule will have no effect and may not be enforced by any person or governmental entity within the Fifth Circuit, which includes Texas, Louisiana, and Mississippi.
The opinion did not hold the CFPB itself to be unconstitutional nor did it invalidate any other CFPB rulemaking, or supervisory or enforcement actions. However, because the CFPB has relied upon the same source of funding the court ruled unconstitutional to promulgate the Bureau’s other rules—as well as to fund its supervisory and enforcement actions—the decision represents a potential existential threat to the Bureau.
Has the Fifth Circuit’s Judgment Become Effective?
No. The court’s judgment takes effect when the “mandate” is issued. The court has set the mandate issue date in this case as December 12, 2022. However, the CFPB’s petition filed with the Supreme Court automatically stays the issuance of the mandate until the petition is ruled upon, unless the court directs otherwise. Because this case involves a fundamental question as to the constitutionality of a government agency, we do not expect the stay to be lifted until the Supreme Court rules on the CFPB’s petition.
What Happens Next?
The Supreme Court is not under any obligation to hear the CFPB’s appeal. However, given the national importance of the lower court’s decision, we believe it is likely the Court will grant the writ and agree to hear the case and decide it this term. The timing of any such decision is ultimately up to the Supreme Court, as they are under no obligation to grant or deny the petition, or reach a decision within any set timeframe.
If the Supreme Court denies the petition, then the Fifth Circuit’s decision would stand, the mandate would be issued, and the decision vacating the Payday Lending Rule within the Fifth Circuit would become effective. As a practical matter, other parties subject to CFPB authority would file suit and press claims both within the Fifth Circuit and other courts seeking to vacate other CFPB actions under the logic of the CFSA decision.
If the Supreme Court grants the petition and affirms the Fifth Circuit’s ruling, it would likely find it difficult to craft a solution that does not throw consumer financial regulation into chaos. The Court likely lacks the authority under the Appropriations Clause to reform the CFPB’s funding structure itself, but one option previously used by the Court is to provide de facto validity to past Bureau actions, and offer Congress a chance to pass legislation to cure the funding issue before its ruling becomes effective.
If the Supreme Court grants the petition and holds that the CFPB’s funding mechanism is constitutional, thereby reversing the lower court’s ruling, challenges to other CFPB actions based on allegations of unconstitutional funding mechanism would be dismissed, including those under the Payday Lending Rule.
If you have further questions about the CFSA decision and its potential impact on the CFPB and/or your business operations, please reach out to one of our attorneys at: https://www.mortgagelaw.com/people.