A Federal Appeals Court Found the Consumer Protection Bureau’s Funding Structure is Unconstitutional

A federal appeals court deemed the consumer protection watchdog’s funding structure unconstitutional on Wednesday, prompting fierce reactions on both sides. 

A three judge panel for the U.S. Court of Appeals for the 5th Circuit ruled that the Consumer Financial Protection Bureau’s funding through the Federal Reserve instead of appropriations from Congress violates the U.S. Constitution’s separation of powers. The panel–all appointed by President Trump–also vacated the agency’s payday lending rule that advocacy groups who brought the case targeted. 

“Even among self-funded agencies, the bureau is unique,” Judge Cory Wilson wrote for the court. “The bureau’s perpetual self-directed, double-insulated funding structure goes a significant step further than that enjoyed by the other agencies on offer.” The agency— established in wake of the 2008 financial crisis by the Dodd-Frank Act and charged with protecting consumers in the financial sector—did not answer Government Executive’s question on whether or not it will appeal the decision. 

“There is nothing novel or unusual about Congress’s decision to fund the CFPB outside of annual spending bills,” a CFPB spokesperson told Government Executive. “Other federal financial regulators and the entire Federal Reserve System are funded that way, and programs such as Medicare and Social Security are funded outside of the annual appropriations process. The CFPB will continue to carry out its vital work enforcing the laws of the nation and protecting American consumers.”

Chris Peterson, law professor at the University of Utah, who previously served in senior roles at the CFPB and the Defense Department under the Obama administration, tweeted the decision was “unprecedented.” He said the panel also didn’t address various urgent questions, such as “what will happen to past and current law enforcement investigations paid for through the same funding mechanism as the payday lending regulation? Will scammers simply refuse to comply with bureau subpoenas.” Peterson, who also was the Democratic nominee for Utah governor in 2020, predicted this case will go to the Supreme Court. 

Sen. Elizabeth Warren, D-Mass., who helped create the CFPB, tweeted: “This is a lawless and reckless decision.” The agency “has returned billions of dollars to Americans by doing its job, and its funding is clearly constitutional,” she said. “Extreme right-wing judges are throwing into question every rule the CFPB enforces to protect consumers and businesses alike.”

Other Democratic lawmakers had similar reactions. 

Robert Weissman, president of the consumer advocacy nonprofit Public Citizen, said in a statement that the court’s ruling “ignores [the] long-established and long-accepted practice of funding financial regulatory agencies, and the prior review of many other courts, in order to decree that the funding mechanism of the CFPB is unconstitutional.” He called for the decision to be reversed. 

Jesse Van Tol, president and CEO of the National Community Reinvestment Coalition, said “ever since it was created, cynical and backward-thinking forces in our political and legal systems have been trying to tear the agency down.” The Fifth Circuit's ruling, “which ignores a century of precedent for insulating regulators from political gamesmanship, is just the latest episode in a decade-long political crusade to kneecap the agency so that the worst actors in our economic system can go back to preying upon working-class families.”

Many Republican lawmakers were happy with the decision. 

Sen. Pat Toomey, R-Pa., ranking member of the Senate Banking, Housing and Urban Affairs Committee, tweeted: “CFPB has been an unconstitutional and unaccountable agency since its inception.” He added that he has “long argued that the CFPB should be subject to congressional appropriations.” 

Similarly, Rep. Patrick McHenry, R-N.C., ranking member on the House Financial Services Committee, said in a statement that he was glad to see the ruling because, “As Republicans have said all along, the CFPB’s ‘double-insulated,’ independent funding mechanism is unconstitutional and makes it wholly unaccountable.” He added: “Bringing the CFPB under the appropriations process would make it more accountable to the American people through their elected representatives.” McHenry also called on his committee to take up the previously introduced Taking Account of Bureaucrats’ Spending Act that would do so. 

Additionally, Jeffrey Clark, top Justice Department official under the Trump administration, supported the ruling, tweeting, “it was good to see the Fifth Circuit rule that the funding mechanism for the CFPB was an unconstitutional attempt to circumvent Congress's powers of the purse.” 

This decision follows other recent challenges and issues at the agency, one of the most notable being the Supreme Court’s ruling in June 2020 that the removal protections for the CFPB director were unconstitutional. It said the president could remove the individual at will, but did allow the agency itself to stand.