Court rules CFPB funding structure unconstitutional

A federal appeals court ruled that the Consumer Financial Protection Bureau's funding method is unconstitutional.

Ruling: The 5th U.S. Circuit Court of Appeals ruled that the CFPB’s funding structure—in which the agency receives funds through the Federal Reserve, rather than congressional appropriations—violates the U.S. Constitution’s separation of powers. “Congress’s decision to abdicate its appropriations power under the Constitution, i.e., to cede its power of the purse to the Bureau, violates the Constitution’s structural separation of powers,” the court said.

Potential Impact: The decision potentially raises compliance questions related to the prospect of consumer protection laws in place without valid enforcement, though the decision is likely to be stayed on appeal and could ultimately land at the U.S. Supreme Court.

Governance Question: The case could also renew the debate over whether the CFPB’s single-director governance should be replaced with commission-based leadership, as ICBA has long advocated to limit political interference and promote balanced supervision. The appeals court decision comes two years after the Supreme Court ruled that the CFPB's governance structure is unconstitutional and that the president must have the authority to remove the bureau head.

Small-Dollar Rule: The appeals court ruling also vacated a 2017 CFPB rule on small-dollar lending that bars lenders from attempting to withdraw funds from an account in which two consecutive attempts have failed unless consumers consent to further withdrawals. The decision follows a 2020 CFPB final rule rescinding the regulation’s mandatory underwriting provisions for determining borrowers' ability to repay small-dollar loans, including payday, auto-title, and balloon-payment loans.

ICBA Position: In a 2019 comment letter on the CFPB's effort to revise the small-dollar rule, ICBA called on the bureau to allow flexibility for banks to use their own reasonable underwriting guidelines and encouraged the agency to promote community banks as model small-dollar lenders.