The Fifth Circuit’s CFPB Ruling Is Bad Logic And Worse Law. Here’s Why.

Three activist judges in Texas have issued a decision that undermines the American economy and exposes tens of millions of people to harm.

On October 19, the US Court of Appeals for the Fifth Circuit declared the Consumer Financial Protection Bureau’s (CFPB) funding structure unconstitutional. The decision reflects the faulty legal theories popular in the right-wing judicial echo chamber. The judges who issued the ruling are weaponizing those incorrect interpretations of the law to drag the country toward a place no one wants to go: A place where lenders cannot know for certain if their products are legal and monetary policy is made vulnerable to Congressional gridlock.   

A payday lending trade association sued the agency to invalidate its 2017 payday rule. The complaint in Community Financial Services Association of America v. Consumer Financial Protection Bureau made one brief reference to the CFPB’s structure but did not ask the Fifth Circuit panel to decide on the agency’s constitutionality.

Nonetheless, three Trump-appointed appellate judges chose to radically extend the scope of the case based on a legal argument raised for the first time in the appeal. They declared the CFPB unconstitutional because its funding structure violates the Appropriations Clause, which states, “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” 

The reasoning behind the argument requires a bit of mental gymnastics. 

Let’s start with the fact that the CFPB does not draw money from the Treasury. The agency gets its budget from a Congressionally determined set aside inside the budget of the Federal Reserve. Furthermore, no upstream connection to Treasury’s purse exists: The twelve regional Federal Reserve banks fund the Fed’s operating costs through the interest income they earn on loans they hold on their books

The panel characterized the CFPB’s funding as “double insulation” from appropriations which it held was unconstitutional. This novel legal theory is a fiction. It would create an administrative merry-go-round in which an agency that does not draw its resources from the Treasury – such as the Federal Reserve – must draw funds from the Treasury if Congress calls for it to fund a unit within its organization charter. 

Congress already decided in the Consumer Financial Protection Act (“Dodd-Frank”) that the CFPB would be financed through Federal Reserve resources to protect it from political interference. It’s hard to imagine annual Congressional debates over CFPB funding levels would be constructive – and they certainly wouldn’t help the agency do its job on behalf of American consumers. But if that’s what Congress wants, it has the option of amending Dodd-Frank, which it has not.

If the Fifth Circuit’s logic holds upon review, it could call into question the constitutionality of other federal banking agencies, as others are also separated from appropriations. The Office of the Comptroller of the Currency funds its work through assessments charged to its banks. Insured banks contribute to the Federal Deposit Insurance Corporation’s Deposit Insurance Fund. Paralyzing these agencies would undermine the financial stability of our banking system.

The ruling’s impact on the stability of the Federal Reserve poses even greater risks. The Federal Reserve, responsible for conducting our nation’s monetary policy, must operate without Congressional interference. Imagine what would happen if the Federal Reserve depended on Congress. The world’s economic and geopolitical order would hang in the balance every time Congress debated the debt ceiling or failed to deliver appropriations bills and fell back upon an eleventh-hour continuing resolution. 

For the CFPB, the ruling could establish grounds to undo its prior actions and make it impossible to fulfill its responsibilities in the Consumer Financial Protection Act. 

Several financial institutions have filed cases contesting the CFPB’s authority and asking courts to overturn the CFPB’s enforcement actions against their businesses. Within days of the ruling, four different companies the CFPB had caught cheating American consumers asked courts to honor the Fifth Circuit’s new get-out-of-jail-free card for financial swindlers. Their sins were flagrant in each case, ranging from duping people into paying for a service that was marketed as free to evading state laws curbing usurious lending to cheating active-duty military families with illegal high-cost pawn loans.

In each example, the Fifth Circuit’s decision could help a repeat offender evade punishment. These corporate recidivists have no new grounds to argue their treatment of consumers was legitimate – but the Trump-appointed judges have given them the legal equivalent of a getaway car. If bad actors can evade punishment when caught, then it is open season on American consumers.

These are specific examples of how the flawed legal attack on the CFPB could give a pass to lawbreakers. But those are not the only concerns. The ruling also threatens the entire established economic order. 

Financial institutions have invested time and money to ensure they understand how to comply with laws and regulations. The same financial institutions benefit from settled rules of the road incorporated in implementing regulations issued by the CFPB.

In passing Dodd-Frank, Congress strengthened laws to protect consumers. But lawmakers in Congress left it to the CFPB to write the regulations implementing those laws. CFPB rules touch nearly every key sector of American consumer finance: mortgage lenders, credit card issuers, debt collection firms, insured depositories, credit bureaus, loan servicers and money transmitters, among many other markets. The American economy needs these firms to function – and the firms need regulatory clarity to operate.

Rolling back the CFPB’s regulations doesn’t also roll back the laws financial firms must follow. It only leaves the markets previously covered by its regulations mired in uncertainty, unsure how to obey laws Congress wrote. 

The Fifth Circuit seems to have ignored that if the CFPB were to wither away, the Dodd-Frank Act would not. Its novel legal theory will damage markets and hurt people. The effects will go well beyond payday lending. Many of the federally-regulated financial institutions whose activities are covered in Dodd-Frank would be put at risk without clear instructions how that law is implemented.

Take the mortgage market for example: Dodd-Frank requires that banks ensure borrowers have an “ability to repay” their loans. The CFPB’s qualified mortgage (QM) rule established a safe harbor for lenders: Comply with this rule and you will not be sued under Dodd-Frank’s ability-to-repay provisions. Without that clarity, mortgage lenders may wonder if any underwriting method is defensible. Investors of mortgage-backed securities may have fears about new risks of litigation and stop investing in the mortgage market. These factors could lead to a contraction of secondary-market investors who provide the liquidity for mortgage lenders to make affordable home loans. This uncertainty around the QM rule would likely lead to corporate failures and higher interest rates charged to consumers to compensate the mortgage lenders who remain for taking on additional risk. How many doors to the American Dream of homeownership will close because of the 5th Circuit’s ruling?  

The ruling will have similar unintended consequences elsewhere that could cause the US economy to lock up entirely – or create a muddled world where the rules of business are different from one state to another.

Whatever the outcome of this fresh debacle, it is important to be clear about what motivated the Trump nominees who wrote the opinion. The CFPB is the only agency whose sole purpose is to protect consumers when they use financial services. It attracts controversy because it does its job. In its first ten years, the CFPB returned $14.4 billion to approximately 183 million consumers and consumer accounts. Knowing that an agency designed to protect consumers from harmful financial practices would provoke the ire of powerful interests, Congress wanted the CFPB to remain independent from political pressure. Now that carefully debated decision by hundreds of lawmakers directly elected by the citizens who benefit from the CFPB’s protection has been undercut by three radical judges without logic or law on their side. And in their zeal to smash up a consumer advocate that is anathema to free-market extremist ideologues, those judges have also dumped ice water on the basic flow of economic activity writ large.

The Supreme Court can and must bring the Fifth Circuit back to reality by finding that Congress’ method of funding the CFPB is constitutional. 

Adam Rust is a Senior Policy Advisor at the National Community Reinvestment Coalition.

Photo courtesy of Wally Gobetz on Flickr

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