What if the CFPB Really Is Unconstitutional?

I have shocking news for you: The country is bitterly divided and, unfortunately, the divide is encroaching into the Judiciary.

The latest and best example of this trend is the reaction to the Fifth Circuit’s decision in Cmty. Fin. Servs. Ass’n of Am. v. Consumer Fin. Prot. Bureau, 51 F.4th 616, 643 (5th Cir. 2022), which the Supreme Court decided to review last week. To critics of the decision, it’s an example of originalism run amok. To supporters of the decision, it’s an example of a welcome return to the plain text of the Constitution. No matter which side you’re on, however, it’s important to understand just how consequential it may be. After all, the credit union industry is the most heavily regulated financial services industry in the country, and at its core, this debate is about how much power should be given to agencies and how much direction they must be given by Congress.

First, let’s take a look at what the Fifth Circuit decided. This litigation was started in response to regulations proposed by Richard Cordray (remember him?) that placed limits on payday loans, which included strict underwriting standards and a limit on the number of times a creditor could have automated access to a borrower’s bank account without their permission. By the time the case got to the Court of Appeals for the Fifth Circuit, Joe Biden was president and the only issue left to be litigated was the account access issue. While this litigation was pending, the Supreme Court ruled in Seila Law LLC v. Consumer Fin. Prot. Bureau, 140 S. Ct. 2183, 2187 (2020) that the Dodd-Frank Act violated the Constitution by putting the CFPB under the control of a single director who could only be removed by the President for cause.

Against this backdrop, the Fifth Circuit reached three important conclusions. First, it ruled that the bureau acted within its statutory authority when it promulgated the payday lending rule.  But, second, it ruled that the bureau’s actions were nonetheless unconstitutional because of the way the bureau was funded. Under the Dodd-Frank Act, the bureau is authorized to withdraw up to 12% of the Federal Reserve’s “total operating expenses” without congressional approval. This, the Court ruled, violated the appropriations clause of the Constitution (Article I, Section 9, Clause 7), which grants Congress the exclusive authority to appropriate funds. Finally, since the bureau “lacked the wherewithal” to exercise its regulatory powers “via Constitutionally appropriated funds,” it lacked the authority to promulgate the payday lending rule.

The decision’s critics have a point when they question the Court’s appropriation clause analysis; after all, a lot has changed since the Constitution was drafted, including the growth of a regulatory state, which can only have happened with the approval of the Supreme Court. But whether you agree or disagree with the Fifth Circuit’s rationale, by taking this case, the Supreme Court could continue to put the brakes on the growth of the administrative state. There is now a majority on the Supreme Court that is openly skeptical of the amount of power that Congress has delegated to administrative agencies.

For instance, just last year, the Supreme Court invalidated regulations promulgated by the Environmental Protection Agency, West Virginia v. EPA, 142 S. Ct. 2587, 2592 (2022), using the previously little used “major question doctrine.” Under this approach, the more expansive a regulation is, the more strictly the Courts should review the statute that authorizes the agency to promulgate it in the first place. In other words, the Court is putting the onus on Congress to say what it means more precisely. An agency that implements 19 federal laws and has expansive enforcement powers would seem to be a prime candidate for such a review particularly since its enacting legislation, the Dodd Frank Act, reads like a vaguely defined regulatory to-do list.

No matter what rationale it uses, if the Court concludes, as the Fifth Circuit did, that the CFPB acted unconstitutionally in promulgating the payday lending rule, what should be the appropriate remedy? If the payday lending regulation is void because of how the CFPB is funded, then isn’t every other action ever taken by the CFPB also void? I’m inclined to think the Court would bend over backwards not to invalidate the bureau, but if it does, or even if it limits its powers, the effects would be enormous. Blue States such as New York would rush to fill the void, as would the remaining independent agencies. After all, Chairman Todd Harper has indicated that the NCUA will be taking a closer look at how credit unions comply with consumer protection laws.

This raises one more issue. If the CFPB’s funding mechanism is unconstitutional, then where does this leave all of the other independent agencies, such as the NCUA, which are not subject to an annual congressional appropriation? Expect that litigation to start almost immediately after the Supreme Court’s decision comes out.

Where does all this uncertainly leave credit unions? Potentially with a lot of open questions about precisely who can regulate them and under what circumstances. It makes for an interesting debate among Constitutional scholars, but the Fifth Circuit has effectively opened a can of worms, which would have been better left undisturbed.

Henry Meier is the former General Counsel of the New York Credit Union Association, where he authored the popular New York State of Mind blog. He now provides legal advice to credit unions on a broad range of legal, regulatory and legislative issues. He can be reached at (518) 223-5126 or via email at henrymeieresq@outlook.com.