CRS Report: CFPB Appeals Court Ruling Could Upend Industry

Findings from Congressional Research Service warn of potential impact across financial services industry.

The federal appeals court ruling that found the CFPB’s funding mechanism unconstitutional threatens to wreak havoc on the financial services industry, the Congressional Research Service (CRS) said in a report released Wednesday.

“Casting doubt upon the legality of the many regulations the CFPB has issued to implement these laws could disrupt these markets, subject financial institutions to legal risks by unsettling legal responsibilities, and render statutory protections unenforceable,” the report stated.

The CRS added, “The decision also has the potential to create legal uncertainty in multi-trillion-dollar consumer financial markets that operate in accordance with the federal consumer financial laws implemented by the CFPB.”

Background

In October, a three-judge panel from the Fifth Circuit Court of Appeals ruled that the process for funding the CFPB was unconstitutional since the agency is not subject to the annual appropriations process. Instead, the agency draws its funding from the Federal Reserve.

In deciding that the funding was illegal, the appeals court also found that the CFPB’s payday loan rule—which was being challenged by the Consumer Financial Services Association—was likewise illegal. The CFSA represents the payday lending industry.

Inside the Report

The ruling, the CRS said, “appears to have broken new jurisprudential ground” by concluding that Congress itself can violate the appropriations clause of the U.S. Constitution. Past court cases have found that the Executive or Judicial branches, but not the Legislative Branch, may have violated the clause.

The CFPB and Biden Administration have asked the U.S. Supreme Court to take up the case. Many Republican lawmakers and credit union trade groups have said that Congress should enact a law subjecting the agency to appropriations. However, Democrats argue that in creating the bureau and its funding mechanism, Congress sought to insulate the bureau from political pressure.

The CRS added that while the Fifth Circuit decision only expressly affects the payday lending rule, it could “reverberate” beyond the regulation—calling into question the legality of every CFPB action.

“This would include myriad regulatory actions, such as dozens of rulemakings, enforcement actions, and examinations the Bureau has conducted over the past 12 years,” the report reads. “The ruling also could affect the CFPB’s day-to-day administrative actions necessary to further its statutory mission, like the payment of salaries to its approximately 1,500 employees, as well as its capital investments and procurements.”