Court of Appeal ruling threatens to dismantle Consumer Financial Protection Bureau

A federal appeals court’s severe blow to the Consumer Financial Protection Bureau is poised to chill the agency’s financial watchdog and possibly jeopardize much of the work it does. has already done.

The court rejected one of the agency’s key rules cracking down on payday lenders and questioned the legitimacy of the CFPB, which was the brainchild of far-left champion Senator Elizabeth Warren of Massachusetts.

“The ruling is a big deal in that it would suggest the CFPB cannot take enforcement action unless and until Congress fixes its funding. This is another blow to the CFPB,” said Jonathan Adler, professor of constitutional law at Case Western University.

The 5th United States Circuit Court of Appeals ruled that Congress acted in violation of the Constitution when it delegated its financial authority to an executive agency.

Established in 2011, the CFPB was granted independence in its leadership and source of funding to shield it from political forces and give it the freedom to pursue powerful financial interests. By funding it directly from the Federal Reserve, and not through the congressional appropriations process, it defied the separation of powers, a three-judge panel ruled.

The 39-page ruling struck down the payday loan rule, which came into effect in 2018. It restricted lenders’ ability to make loans to consumers unless they determined they could repay them under certain conditions. The rule also restricted lenders’ account access to repay loans.

The justices held that Congress was appropriating funds through the appropriations clause – but handed over that authority when the CFPB was created, giving the agency unchecked power.

“Congress violated the separation of powers embodied in the appropriations clause,” Trump-appointed Judge Cory T. Wilson wrote for the court.

According to Mr. Petersen, the decision could block the agency’s investigations into possibly illegal activities. He has conducted hundreds of thousands of investigations into abusive debt collection practices, mortgage loan scams and customer complaints against financial banks. It extracted more than $12 billion for 29 million consumers in refunds and canceled debts, according to the agency’s website.

He said people in the CFPB’s crosshairs can now challenge the agency’s investigations under the 5th Circuit’s ruling, arguing that staff, paralegals and even computers used to draft a complaint were paid with a unconstitutional funding.

The cloud of uncertainty would also hang over existing CFBP policies, such as its safe harbor mortgage rule, which protects consumers who take out mortgages they cannot afford. A lender could now challenge the rule, making the same argument that it was created with unconstitutional funds.

“There is going to be a bit of chaos that will follow if this decision is upheld,” Mr Peterson said. “I think there will be a lot of uncertainty and pressure on Congress to do something.”

It is unlikely, however, that Congress will act, at least in the short term. Most lawmakers are campaigning in their constituencies ahead of the Nov. 8 midterm elections.

The CFPB has been the target of conservatives since its creation. Republican lawmakers will likely stay on the sidelines as a possible appeal of the 5th Circuit’s decision winds through the courts. They have long sought to dismantle the CFPB, calling it a “rogue agency” because it is not accountable to Congress.

Critics say the agency has hurt consumers because it has made it harder for middle-class Americans to get mortgages and the enforcement action has prompted banks to raise fees charged to customers.

“As Republicans have always said, the CFPB’s ‘double-insulated’ independent funding mechanism is unconstitutional and makes it totally irresponsible,” said Rep. Patrick McHenry of North Carolina, the top Republican on the Financial Services Committee. . “I am happy to see the 5th Circuit recognize this fact. Bringing the CFPB under the appropriations process would make it more accountable to the American people through its elected representatives.

Senator Dan Sullivan, Republican from Alaska, tweeted that the CFPB was flawed from the start.

“This decision deals yet another blow to an agency that should never have been created and which, at a minimum, must operate under congressional oversight as required by the Constitution,” he wrote.

Democrats warned the decision would hurt consumers.

Sen. Sherrod Brown, an Ohio Democrat who chairs the banking committee, criticized the decision.

“If Wall Street and the payday lenders get what they want, they will gut the only agency charged with protecting consumers,” he said on Twitter. “It’s unprecedented, it’s extremist, and it will make Americans much more vulnerable to financial harm.”

Ms. Warren envisioned the agency when she was a law professor at Harvard University and saw it become a reality under President Obama, who appointed her as a special adviser to the CFPB when it was established in 2010. She won his Senate seat two years later.

She called the appeals court’s decision “anarchic”.

“This is an anarchic and irresponsible decision. @CFPB has returned billions of dollars to Americans doing its job, and its funding is clearly constitutional. Far-right judges question every rule the CFPB enforces to protect consumers and businesses,” Ms. Warren tweeted.

It is unclear what legal remedies remain for the CFPB. He will likely seek a hearing before all of the 5th Circuit judges, known as a panel en banc, but that would include the judges who made the decision on Wednesday.

Taking the case to the Supreme Court would likely mean certain defeat due to the conservative majority in the High Court.

A CFPB spokesperson said the agency “will continue to carry out its vital work enforcing the nation’s laws and protecting American consumers.”

The statement did not say whether the agency would request an appeal.

In 2020, the Supreme Court ruled that the CFPB structure described for the removal of the agency’s director also violated the Constitution because at the time, it did not allow a president to remove the agency’s head without cause. .

This week’s ruling contrasts with other federal appeals courts that have upheld the CFPB arrangement.

These other courts had declared that other federal agencies, such as the Federal Reserve and the Federal Housing Finance Agency, also had budgetary autonomy.

The 5th Circuit said the CFPB is unique with its “double insulated” budget authority from Congress. The regulatory power wielded by the CFPB is far greater than other agencies, Justice Wilson wrote.

“The Bureau’s funding apparatus cannot be reconciled with the appropriations clause and the basis of the clause, the constitutional separation of powers,” the judge said.

The new ruling did not overrule the agency, but overruled the payday loan rule that the CFPB issued in 2017.

This policy was intended to combat what the bureau considered predatory lending practices by payday lenders.

The 5th Circuit said that because this rule may be tied to the CFPB’s unconstitutional funding structure, the rule must be struck down.

The power of the board was vested in a single director who was immune to dismissal by a president, except in cases of actual malfeasance. It was given the autonomy to operate independently of the budgetary powers of Congress.

The Supreme Court has already ruled the sole director structure unconstitutional, concluding that a single director with such regulatory power must be accountable to the president.

The judges had not addressed the issue of the financial insulation of the office.

Stephen Dinan contributed to this report.

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