5th Circuit argues that CFPB funding mechanism is unconstitutional | PC Weiner Brodsky Kider

The Fifth Circuit Court of Appeals recently ruled that the CFPB’s new agency funding mechanism was unconstitutional, thus requiring the court to strike down the CFPB’s 2017 payday loan rule.

The case was brought by an industry trade group that represented payday lenders to challenge the payday loan rule. Among other challenges, the trade organization argued that the CFPB’s single funding mechanism was unconstitutional. Most government agencies are funded by annual appropriations from Congress, because the executive branch generally cannot spend money unless authorized by the legislature. The CFPB funding mechanism, however, allows the agency to require the Federal Reserve to grant the CFPB up to 12% of the Federal Reserve budget to fund the CFPB. Notably, the Federal Reserve’s budget is also not financed by direct appropriations from Congress, but is mainly financed by the interest on the government securities that it acquires in the course of its operations and by the contributions of the banks that it acquires. she oversees.

The court concluded that this procedure excludes Congress from the appropriations process for the agency and adds a double layer of insulation, since the CFPB receives its funds from another agency that is also not subject to the regular credits. Also, while the Federal Reserve is normally required to remit funds beyond certain amounts it receives to the Treasury, there is no comparable provision for the CFPB, further reducing the CFPB’s accountability to Congress. . And, while there were a few other agencies like the Federal Reserve that had self-funding mechanisms, the power of the CFPB to draw its own funding from any of these other self-funding agencies was unique. Combined with the significant legal authority of the CFPB, the court found that the CFPB’s one-of-a-kind funding mechanism was unconstitutional.

The court then considered what remedy to offer. The CFPB could not have taken the steps necessary to enact the disputed payday loans rule and had no other way to enact the rule except to have the funds unconstitutionally earmarked. The court therefore found that the plaintiffs had been wronged by the CFPB’s improper use of unrestricted funds to carry out the rulemaking at issue, and struck down the payday loan rule as proceeds of the scheme. unconstitutional funding of the Office.

Notably, the court dismissed several other challenges to the rule based on the Administrative Procedure Act, regulatory requirements, and whether the rule could be ratified after the protection against dismissal for cause. director was overturned by the Supreme Court. While the rule was otherwise generally valid and would have been within the CFPB’s power to enact, it could not be upheld due to the agency’s unconstitutional funding mechanism.

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