On October 19, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit ruled that the Consumer Financial Protection Bureau’s (CFPB) funding mechanism is unconstitutional, and that the CFPB’s Payday Lending Rule is invalid because it was promulgated using unconstitutional funding. The substantive decision that the CFPB’s independent funding mechanism violates the Appropriations Clause is radical and unprecedented. But even more extreme is the decision that the remedy for this unconstitutional funding mechanism is that the CFPB’s Payday Lending Rule must be found invalid because it was promulgated using unconstitutional funding. This approach endangers numerous past and present CFPB actions, including all CFPB promulgated rules and rule amendments.
The CFPB has promulgated or amended far more rules than just the Payday Lending Rule. The CFPB has issued rules under the Fair Debt Collection Practices Act (Regulation F) and the Fair Credit Reporting Act (Regulation V). The agency has adopted extensive mortgage-related amendments and other changes to Regulation Z under the Truth in Lending Act, and a new set of rules governing prepaid accounts in Regulation E under the Electronic Funds Transfer Act, among many others.
Consumer law practitioners should anticipate that, whenever a consumer’s claim is based on a CFPB rule, the defendant will argue that the rule is invalid based on the CFPB’s allegedly unconstitutional funding mechanism. This article sets out approaches to respond to this serious threat to consumer law litigation.
The threat to CFPB rules impacts not only consumers but also industry players who rely on the certainty around which compliance systems are based, safe harbors in rules, exemptions for small entities, as well as interpretations of statutes that in some instances rule out other interpretations that could be more favorable to consumers. Theoretically, if all CFPB’s rules were gone, then consumers would be free to push for different interpretations of how, for example, mortgage lenders must consider ability to repay, or what is an acceptable substitute index for a loan with an adjustable rate based on the now-defunct LIBOR rate.
This is not to suggest that consumer lawyers challenge CFPB rules or reject their interpretations of the statute. But, as discussed below, if a court agrees that the CFPB’s funding is unconstitutional, the court should consider the wide-ranging impacts of holding that every CFPB rule is therefore invalid before adopting such a drastic remedy. The uncertainty in the marketplace that such a remedy would create is especially concerning as the country attempts to stave off a recession.
Community Financial Services Ass’n of America v. Consumer Financial Protection Bureau, ___ F.4th ___, 2022 WL 11054082 (5th Cir. Oct. 19, 2022), vacates the payment provisions of the CFPB’s Payday Lending Rule. (Those provisions limit the number of times bounced payments can be resubmitted; the rule’s ability-to-repay provisions were previously repealed under former CFPB Director Kraninger.) A federal district court had stayed the rule for some years but had finally rejected all challenges to the rule and ordered the rule to take effect 286 days after its order. See Community Financial Services Ass’n of American v. Consumer Financial Protection Bureau, 558 F. Supp. 3d 350, 368 (W.D. Tex. 2021).
Before the rule could take effect, it was stayed by the Fifth Circuit. Eventually, the Fifth Circuit panel affirmed all aspects of the lower court’s decision supporting the rule, except that it held that the CFPB’s funding mechanism violated the Appropriations Clause and that this was sufficient reason to vacate the rule.
The decision was foreshadowed by an earlier 2022 concurring opinion in the en banc decision in Consumer Financial Protection Bureau v. All American Check Cashing, Inc., 33 F.4th 218 (5th Cir. 2022). The five-paragraph per curiam decision in that case simply returned the case to the district court to reconsider its decision in light of the Supreme Court’s Seila Law ruling that the statutory limit on removal of the CFPB director was unconstitutional. But five Fifth Circuit judges took the opportunity to issue a lengthy concurring opinion arguing that the CFPB’s funding violated the Appropriations Clause.
Community Financial Services adds two more Fifth Circuit judges (the third panel member had already joined the concurrence in All American Check Cashing) who believe that the CFPB’s funding mechanism is unconstitutional. As a result, seven of the sixteen judges in the Fifth Circuit are now on record as to the Appropriation Clause violation—so it seems unlikely the en bancFifth Circuit would reverse the panel’s finding as to the constitutional issue if asked to do so.
Whether the full Fifth Circuit would reverse the panel’s finding as to the appropriate remedy is perhaps a closer question. The potential implications of the panel’s remedial decision—that the unconstitutional funding mechanism could require invalidation of eleven years’ worth of CFPB rules and possibly enforcement actions, supervision examinations, and other actions undertaken with that funding—could cause chaos in the marketplace.
Consumer Law Rules Put at Risk by Community Financial Services
For consumer law practitioners, Community Financial Services puts at risk any litigation based upon CFPB regulations, including:
- Regulation B (ECOA);
- Regulation C (HMDA);
- Regulation D (alternative mortgage parity);
- Regulation E (EFTA);
- Regulation F (FDCPA);
- Regulation G (S.A.F.E. Mortgage Licensing Act);
- Regulation H (S.A.F.E. Mortgage Licensing Act);
- Regulation I (Disclosure Requirements for Depository Institutions Lacking Federal Deposit Insurance);
- Regulation J (Land Sales Act);
- Regulation K (Purchasers’ Revocation Rights, Sales Practices and Standards);
- Regulation M (Consumer Leasing Act);
- Regulation N (mortgage practices-advertising);
- Regulation O (mortgage assistance relief);
- Regulation P (Gramm-Leach-Bliley Act, Privacy of Consumer Financial Information);
- Regulation V (FCRA);
- Regulation X (RESPA);
- Regulation Z (TILA, HOEPA, and Fair Credit Billing Act);
- Regulation CC (Expedited Funds Availability Act) (joining with the Fed);
- Regulation DD (Truth in Savings Act).
The remainder of this article examines strategies for consumer practitioners when bringing litigation based upon one of these rules.
Fifth Circuit Order Applies Only to One Rule
The Fifth Circuit order in Community Financial Services is limited to vacating the CFPB’s Payday Lending Rule. There is little question that the rule cannot now go into effect unless that order is overruled by the en banc Fifth Circuit or the Supreme Court.
The order does not vacate or enjoin any other CFPB rule, and the validity of other CFPB rules will instead be fought out in courts nationwide, not just those in the Fifth Circuit. Challenges in the Fifth Circuit to CFPB rulemaking actions may likely be upheld, but Community Financial Services does not bind courts in other circuits. Even in the Fifth Circuit, the Community Financial Services decision on its face does not apply to other rules, and industry may not always challenge a rule’s constitutionality.
The Fifth Circuit Decision Is in the Minority
Community Financial Services does not bind courts in other circuits. The Fifth Circuit is the only court that has found the CFPB’s funding mechanism to be unconstitutional. The en banc DC Circuit and federal district courts in California, Indiana, Maryland, Montana, Pennsylvania, and Rhode Island have held the CFPB’s funding mechanism constitutional.
See PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75 (D.C. Cir. 2018), abrogated on other grounds, Seila Law L.L.C. v. Consumer Fin. Prot. Bureau, ___ U.S. ___, 140 S. Ct. 2183, 2187, 207 L. Ed. 2d 494 (2020); CFPB v. Citizens Bank, N.A., 504 F. Supp. 3d 39, 57 (D.R.I. 2020); CFPB v. Fair Collections & Outsourcing, Inc., 2020 WL 7043847 (D. Md. Nov. 30, 2020); CFPB v. Think Finance L.L.C., 2018 WL 3707911 (D. Mont. Aug. 3, 2018); CFPB v. Navient Corp., 2017 WL 3380530 (M.D. Pa. Aug. 4, 2017); CFPB v. D & D Mktg., 2016 WL 8849698 (C.D. Cal. Nov. 17, 2016); CFPB v. ITT Educ. Servs., Inc., 219 F. Supp. 3d 878 (S.D. Ind. 2015); CFPB v. Morgan Drexel, Inc., 60 F. Supp. 3d 1082 (C.D. Cal. 2014).
Fifth Circuit’s Finding of Unconstitutionality Is Suspect
Under the Dodd-Frank Act, the CFPB is not funded by the congressional appropriations process, but instead receives an amount from the Federal Reserve that the CFPB Director determines is reasonably necessary to carry out its functions, up to a cap of 12% of the Federal Reserve’s operating expenses. The Fifth Circuit found that this funding structure violates the Appropriations Clause because that clause not only gives Congress the power of the purse, but also “takes away from Congress the option not to require legislative appropriations prior to expenditure.” Consumer Financial Services, supra, at *13 (quoting Kate Stith, Congress' Power of the Purse, 97 Yale L.J. 1343, 1349 (1988)).
Other courts have rejected this argument, however, and there are strong arguments that consumer practitioners can make before courts that have not yet ruled on the issue. Of course, it was Congress that determined the nature of the CFPB’s funding. The Appropriations Clause, moreover, provides only that monies cannot be withdrawn from the United States Treasury without a congressional appropriation. “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” The Federal Reserve accounts from which the CFPB draws its funding are not part of the United States Treasury, so the funding of the CFPB from that source does not run afoul of the constitutional prohibition on drawing unappropriated funds from the Treasury. See PHH Corp., supra, at 95–96.
Moreover, the CFPB’s funding structure is not unique. Congress has for decades authorized agencies to use funding streams that do not rely on appropriations. The CFPB receives its funding from the Federal Reserve—indeed, it is a bureau of the Fed—which is also outside of the appropriations process. Other financial regulators do not receive direct Congressional appropriations, including the FDIC, the Comptroller of the Currency (OCC), the National Credit Union Administration (NCUA), and the Federal Housing Finance Agency (FHFA), which all have complete, uncapped budgetary autonomy. Congress has determined “that the assurance of adequate funding, independent of the Congressional appropriations process, is absolutely essential to the independent operations of any financial regulator.” Senate Report No. 111-176, at 163 (Apr. 30, 2010).
Realizing a possible implication of its ruling—that all the other financial regulators are also unconstitutionally funded—Community Financial Services tries to distinguish the CFPB’s funding mechanism from the Federal Reserve’s. In particular, the panel attacked the CFPB’s so-called “double insulation” from Congress: the CFPB’s funding is not under Congress’s direct control, because the funds are not appropriated, and Congress also ceded “indirect control” by providing that the funding flows from a source outside the appropriations process.
But this is a distinction without a difference, and the panel did not explain why this funding flow gave Congress any less control than it has over other non-appropriated funding sources. Indeed, the CFPB is not only funded like the Federal Reserve, but it is the Federal Reserve: i.e., a bureau of the Federal Reserve. Congress, in funding the CFPB, exercised increased control over the Federal Reserve by directing how the Federal Reserve’s funds are spent and capping how much can go to the CFPB.
To try to distinguish the CFPB from the Federal Reserve, Community Financial Services also makes much of the fact that the Federal Reserve, unlike the CFPB, must each year turn over unused funding to the Treasury, while the CFPB can roll those funds over to the next fiscal year. But the ability to roll over unused funds merely reduces the amount of funding that the CFPB must draw from the Federal Reserve the following year—thus allowing the Federal Reserve to send more funds to the Treasury in the next year. In addition, the requirement that the Federal Reserve turn over unused funds to the Treasury Department—an executive branch agency—does not give the legislative branch any more control over how much the Federal Reserve spends.
Community Financial Services also supports the Appropriations Clause violation by citing to legislation specifying that Federal Reserve funding and thus the CFPB’s funding is not subject to review by Congressional appropriations committees. But obviously this applies to the Federal Reserve as much as to the CFPB.
Community Financial Services makes much of the CFPB’s broad authority, but again the same can be said of the Federal Reserve. Most observers would find that the Federal Reserve has a greater impact on the overall economy than the CFPB. As for the CFPB’s broad regulatory authority, the Federal Reserve also has extensive regulatory authority, and most of the CFPB’s rules were formerly issued by the Federal Reserve. The other self-funded federal financial agencies—FHFA, FDIC, NCUA, and the OCC—also have broad regulatory authority over the American economy. For example, the FHFA supervises both Fannie Mae and Freddie Mac, which guaranty a large portion of the nation’s home mortgages and have a huge impact on most of the nation’s home mortgage market.
Even More Suspect Is the Finding of Harm and Associated Remedy for the Perceived Unconstitutionality
Even if a court were to join Community Financial Services in holding the CFPB’s funding mechanism unconstitutional, consumer practitioners should explain to the court that it should not adopt the Fifth Circuit’s radical remedy of invalidating CFPB rulemaking actions. Even Community Financial Services recognizes that to obtain a remedy for what it finds to be the CFPB’s unconstitutional funding mechanism, the party challenging the CFPB’s action “must show that that ‘the unconstitutional …[funding] provision inflicted harm.’” Community Financial Services, supra, at *18 quoting from Collins v. Yellen, 141 S. Ct. 1761, at 1788–89 (2021).
Following this approach, Community Financial Services holds that the CFPB’s unconstitutional restriction on the power of the President to remove the CFPB director, in effect at the time the Payday Lending Rule was issued, is not a basis for striking down the Payday Lending Rule. Instead, the challenger “must show a connection between the President’s frustrated desire to remove the actor and the agency action complained of.” Community Financial Services, supra, at *9. Although the CFPB director who enacted the Payday Lending Rule had acknowledged in a book that the President wanted to remove him, the court held that there was not sufficient evidence of a connection between the unconstitutional limit on the President’s removal power and the issuance of that specific rule:
the record before us plainly fails to demonstrate any nexus between the President's purported desire to remove Cordray and the promulgation of the Payday Lending Rule or, specifically, the Payment Provisions. In short, nothing the Plaintiffs proffer indicates that, but for the removal restriction, President Trump would have removed Cordray and that the Bureau would have acted differently as to the rule.
Community Financial Services, supra, at *10.
But when it came to the funding mechanism that the Community Financial Services court found unconstitutional, the court’s analysis of the harm to the challenger was less specific and far looser. The court held that, merely because the CFPB could not have acted without funding, the challenger was harmed when the CFPB acted in the absence of a valid funding mechanism.
But the alleged unconstitutional harm is not that the CFPB has funding allowing it to act, but rather that its funding is through a specific mechanism. Thus, there should be a showing that the specific funding mechanism harmed the challenger.
Certainly, the CFPB would have existed and would have been able to issue rules without the allegedly unconstitutional funding structure. Congress created the agency and wanted it to be funded. If the Fifth Circuit’s decision had been in place before the Dodd-Frank Act was passed, Congress would have appropriated funds or found another constitutional funding mechanism. Congress transferred to the CFPB numerous important pre-existing rulemaking and other authorities that it wanted to continue, including the authority over unfair and deceptive practices used to adopt the Payday Lending Rule.
The plaintiff also made no showing that the CFPB would not have adopted the Payday Lending Rule had it been funded through appropriations. Indeed, Congress told the CFPB to pay particular attention to payday lenders, by itemizing payday loans as one of the few financial markets over which the CFPB had immediate supervision authority without adopting a larger participant rule. Contrary to the panel’s finding, there is no “linear nexus between the infirm provision (the Bureau’s funding mechanism) and the challenged action (promulgation of the rule).” Community Financial Services, supra, at *18.
When other CFPB rules are challenged, consumer lawyers should insist that the challengers show that the specific funding mechanism itself caused injury and that the injury would not have occurred if funding were appropriated. The hypothetical possibility that the CFPB would not have adopted a rule if its funding had been appropriated should not suffice. That “but for” nexus is lacking in any claim that other regulations would not have been adopted if the CFPB’s funding at the time had been appropriated.
Courts also may find a host of other reasons to limit the remedy, even if they find the funding mechanism unconstitutional. The CFPB received $200 million appropriated by Congress in fiscal years 2010–2014. See 12 U.S.C. § 5497(e)(2). A challenge to a CFPB action in those years should have to show that the action was not taken with these appropriated funds.
Other courts may view a proper remedy to be prospective only and draw a distinction between invalidating a rule that is not yet in effect, such as the Payday Lending Rule, and rules that have been issued and have been relied upon by consumers as well as industries that have adapted their business systems to those rules. There may also be a distinction between rules that are still within the Administrative Procedure Act timeframe for a challenge and those that are not.
As described more fully in the next section, courts should understand that CFPB rules do not just protect consumers but offer clear standards for financial service providers. Rules offer safe harbors for providers or otherwise clarify that certain practices are allowed. For example, before Regulation F, the debt collection industry was discouraged from using emails and texts to contact consumers because it was uncertain how such contacts could comply with the FDCPA.
A court may also find relevant that the CFPB’s rules are subject to review by the Financial Stability Oversight Council, which consists of federal agencies that are all presumably constitutionally funded—a significant check on the what the court terms the Bureau’s “vast” authority.
Warning Courts of the Economy-Wide Impact If Eleven Years of CFPB Actions Are Subject to Challenge
Practitioners, in arguing for a narrow remedy should another court find the CFPB’s funding structure to be unconstitutional, should explain that CFPB rules do not just protect consumers. They offer clear standards for financial service providers upon which the providers rely. Rules tell providers how they must comply with the law, clarify ambiguous statutory provisions, provide model disclosures to use, exempt small entities from statutory requirements, offer safe harbors for providers, or otherwise clarify that certain practices are allowed. Providers build business models, software infrastructure, and compliance regimes around regulations. Capital markets depend on the certainty provided by regulations to decide in which ventures to invest.
If all regulations that the CFPB has adopted for the last eleven years are thrown out, all that certainty and all those market expectations go out with the bathwater. There will be wildly divergent views on how to implement consumer legislation. Regulations at risk include those that Congress specifically directed the CFPB to enact to fill in details that Congress wanted filled. Consumers will be at liberty to argue for more aggressive interpretations than those adopted in CFPB regulations. Risks for industry include:
- Lenders would be subject to claims for violating the TILA ability-to-repay requirement for loans that currently garner the presumption of compliance under the CFPB’s Qualified Mortgage regulations.
- Consumers who struggle to repay a mortgage could argue that the lender failed to adequately consider the borrower’s ability to repay in cases currently exempted by the CFPB’s Qualified Mortgage regulations promulgated under the Dodd-Frank TILA provisions.
- Lenders could potentially violate either TILA or RESPA if they comply with the TILA RESPA Integrated Disclosure Rule (TRID), which resolved conflicts between those two statutes that impact mortgage disclosures.
- The $1.4 trillion in adjustable-rate consumer loans tied to the now-defunct LIBOR index would not be protected by the CFPB rules that dictate which alternative index can be substituted for the LIBOR in consumer contracts.
- Over 90% of banks and credit unions are exempt from the Dodd-Frank remittances provisions under an exemption which is only in the regulations, not in the statute. If the regulations were struck down, these banks and credit unions could be liable if they fail to comply with the statutory remittance requirements. In addition, people sending remittances abroad could challenge banks whose estimates of the amount to be received turn out to be incorrect.
- Credit card late fees that meet safe harbor amounts that the CFPB has increased to reflect 10 years’ worth of inflation—but that the CFPB more recently has indicated may be excessive—could be viewed as violating TILA’s “reasonable and proportional” requirement.
- Debt collectors that were reluctant to use voicemails, emails, and texts to contact consumers because they were uncertain how such contacts could comply with the FDCPA could find themselves in violation of the law even if they are complying with Regulation F.
The risks are not just to individual providers and markets, but to the whole economy. Risks to the mortgage market are especially worrisome. The housing market has already slowed down considerably, and many fear a potentially deep recession. Any uncertainty that impacts mortgage and other lending markets could help to tip us into that recession.
Most CFPB Rule Provisions Still Apply Even in the Fifth Circuit
Even if a court in the Fifth Circuit or elsewhere were to strike down CFPB rules, most consumer protection regulations should still survive such a ruling. With few exceptions, the CFPB’s current rules were transferred wholesale from other agencies (most commonly the Federal Reserve) to the CFPB when the CFPB’s doors opened in 2011. While changes to those rules since 2011 were promulgated using CFPB funding, the CFPB’s funding structure had nothing to do with rules that were adopted before then.
The overwhelming majority of consumer protection regulations that the CFPB administers are unchanged since 2011, although a number of significant provisions have been added or amended. If a court were to invalidate a rule provision that the CFPB has amended, the provision would revert to its original 2011 language.
The rule provisions that are at greatest risk are those that added significant new provisions not existing in 2011, such as Regulation Z’s mortgage servicing provisions, Regulation F on debt collection, or the recent rule helping creditors transition from the LIBOR index that will no longer be calculated.
There is some risk to pre-2011 rules, as the CFPB re-codified pre-existing rules in new sections of the Code of Federal Regulations. However, in most cases the previously codified versions still survive, administered by the Federal Reserve. Most notably, the Federal Reserve has retained its version of:
- Regulation B (ECOA), 12 C.F.R. part 202.
- Regulation E (EFTA), 12 C.F.R. part 205.
- Regulation M (Consumer Leasing Act), 12 C.F.R. part 213.
- Regulation V (Fair Credit Reporting Act), 12 C.F.R. part 222 (which has also been retained by the Federal Trade Commission and other agencies).
- Regulation Z (Truth in Lending Act), 12 C.F.R. part 226.
Even in the absence of an extant CFR version of a rule also recodified by the CFPB without substantive change, a challenger would be hard pressed to argue that they were injured by a simple change in the citation number.
Claims Should Focus on Statutory Violations, Not Violations of The Statute’s Implementing Regulations
Even if a court were to hold that a CFPB rule provision is invalid and subject to vacatur, the consumer practitioner often can base the same claim not on the rule, but on the underlying statute. Any ruling on the CFPB’s funding has no impact on the underlying statute. Thus, claims should be framed as statutory violations, with citations to regulations being used to explain what the statute itself requires.
Citing to both the rule and the statute should preserve the consumer’s claim and may even avoid the court’s consideration of the validity of a CFPB rule. For example, CFPB Regulation F, 12 C.F.R. § 1006.14(h) prohibits debt collectors from contacting a consumer if the consumer has requested that the collector not contact the consumer in that manner. Even if Regulation F were invalidated, the same conduct would still be a violation of a related Fair Debt Collection Practices Act (FDCPA) provision, 15 U.S.C. § 1692d, that prohibits conduct that harasses, oppresses, or abuses a consumer.
A court that considers a CFPB rule to be no longer in effect should still find the same analysis that led the CFPB to issue the rule to be persuasive as to the meaning of the underlying statute. In the case of a consumer who told a collector to stop texting, the analysis is found in the CFPB’s section-by-section analysis for its rule found at 85 Fed. Reg. 76,734, starting at 76,741 (Nov. 30, 2020) and 86 Fed. Reg. 5766, starting at 5771 (Jan. 19, 2021). Alleging a violation based on the statutory provision, with Regulation F cited to explain what that provision means, may dissuade a court from even contemplating the constitutional question. Similarly, other FDCPA provisions prohibit unfair practices or deceptive practices and much conduct that is a Regulation F violation can also be alleged to be unfair or deceptive in violation of the statute.
UDAP and Other State Statutory and Common Law Claims as Alternatives
The CFPB’s analysis in the supplemental information accompanying a rule provision may indicate why a practice is unfair, deceptive, or abusive. This same analysis may prove convincing to a court that the practice violates a state deceptive practices (UDAP) statute. Every state has enacted a UDAP statute that prohibits deceptive and often unfair practices, and some have added a prohibition on abusive or unconscionable conduct. UDAP statutes were designed to be liberally and expansively interpreted. They typically provide for enhanced damages and attorney fees. See NCLC’s Unfair and Deceptive Acts and Practices.
Many CFPB rule violations thus independently may be viewed as state UDAP violations. While the Dodd-Frank Act’s federal UDAAP prohibition does not have a private right of action, states may enforce it (states do not receive funding from the CFPB), and it may also be privately enforceable as incorporated into contracts through the implied covenant of good faith and fair dealing.
Other state statutory claims may also be an alternative to claims under a CFPB rule. Adding state law claims to a federal claim based upon a CFPB rule may allow a case to proceed without requiring a determination of the CFPB rule’s constitutionality if the court finds the state claims to be sufficient. Courts try to avoid determining constitutional issues where possible. A defendant will also have trouble arguing that a CFPB rule preempts a state statute while the defendant is simultaneously arguing the CFPB rule is invalid.