Do questions about CFPB’s funding benefit community banks?
The decision puts into question every regulation issued and enforcement action taken by the CFPB since it came into effect in 2011.”
On October 19, the federal Fifth Circuit Court of Appeals issued a decision that vacated the 2017 Consumer Financial Protection Bureau’s (CFPB) 2017 Payday Lending Rule — essentially striking CFPB’s funding as unconstitutional. The three judge panel held that because Congress abdicated its appropriation power under the Constitution by funding the CFPB with monies from the Federal Reserve System, it violated the Constitution’s structural separation of powers. The decision puts into question every regulation issued and enforcement action taken by the CFPB since it came into effect in 2011. The CFPB is expected to ask for the case to be reheard en banc by all of the 25 justices on the appeals court. Even if the case is reversed by the entire appeals court, it is anticipated that the matter will ultimately be considered by the U.S. Supreme Court. Final resolution could take up to two years.
The CFPB is the brainchild of Elizabeth Warren. Before Warren became a United States Senator, she was a law professor who advocated the creation of a Consumer Products Safety Commission for financial products. Her idea found favor with the newly-elected President, Barack Obama, and the CFPB was created in Title X of the Dodd-Frank Act. This powerful independent agency was designed by Congress to be insulated from practically all outside influence. The Senate-confirmed Director could only be removed “for cause,” a provision that was held to be unconstitutional in a prior case.
The Dodd-Frank drafters’ boldest move was to severely limit Congressional oversight by taking the new agency out of the appropriations process. The CFPB is allowed to receive — without strings attached — up to 12% of the revenues of the Federal Reserve System. The agency received over $600 million from the Fed this year out of a possible $740 million. Federal regulators have to regularly appear before Congressional committees as part of the oversight process but, without the power of the purse, Congress can do little to rein-in a potentially rogue agency.
The separation of powers holding this case is an example of increasing conflicts in philosophies of Constitutional law that pit “originalists” against those that favor a more evolved interpretation of the Constitution as a “living” document. Originalists, such as the late Antonin Scalia and Clarence Thomas, used to be in the minority in most decisions but their approach has been embraced by a number of new Republican appointees in the district and appellate courts, as well as the Supreme Court.
The CFPB is undaunted. The credit rating firm, TransUnion, amended its response to a CFPB action with a claim based on the 5th Circuit holding. In a statement, the CFPB responded: “The Court should reject the Fifth Circuit’s analysis and instead join every other court to address the issue — including the en banc D.C. circuit — in upholding the Bureau’s statutory funding mechanism.” (It is worth noting that the D.C. Circuit has a preponderance of Democratic appointees that sit because of then Majority Leader Harry Reid’s action to do away with the filibuster.)
What happens if the Supreme Court decides that CFPB funding violates the separation of powers doctrine? There will be a mad scramble to provide Congressional appropriations to reinstate regulations and sanctions. If Democrats control both legislative bodies, funding will be provided without much strife. If Republicans control the House, the Senate or both, there will be an opportunity to exempt community banks from most of the onerous regulations that have been issued, including those, such as small business reporting and CRA, that are expected to be put in place next year.