Cases & Deals

Trade associations successfully challenge CFPB's unique funding scheme as unconstitutional

Clients Community Financial Services Association of America and the Consumer Service Alliance of Texas

On behalf of two trade associations of consumer lenders, Jones Day successfully challenged the Consumer Financial Protection Bureau's funding mechanism before the U.S. Court of Appeals for the Fifth Circuit, which held that Congress's delegation of its appropriations power to the Bureau violates the Constitution's structural separation of powers and, accordingly, vacated the Bureau's 2017 Payday Lending Rule.

Jones Day filed the lawsuit in 2018 on behalf of the Community Financial Services Association of America and the Consumer Service Alliance of Texas. Among other claims, the lawsuit challenged the Bureau's unique funding scheme, under which the Bureau enjoys unchecked power to set its own budget up to 12% of the Federal Reserve's total operating expenses and demand funds directly from the Federal Reserve without any review by Congress's appropriations committees. The Fifth Circuit explained that this unprecedented funding mechanism means that Congress not only ceded direct control over the Bureau's budget by exempting it from annual or other time-limited appropriations or review, but also ceded any indirect control by "providing that the Bureau's self-determined funding be drawn from a source that is itself outside the appropriations process." Therefore, "the Bureau's funding structure violates the Appropriations Clause of the Constitution and the separation of powers principles enshrined in it."

The court concluded further that because the Bureau promulgated the Payday Lending Rule using unconstitutionally requisitioned funds, vacatur of the Rule was the appropriate remedy: "without its unconstitutional funding, the Bureau lacked any other means to promulgate the rule."

The consequences of this decision are significant. The decision is the first to hold that the Bureau's funding mechanism violates separation of powers, a constitutional error that only Congress can remedy. The Court's decision not only will assist others challenging the Bureau's past actions, but also calls into question all the Bureau's current and future actions unless and until Congress fixes this structural infirmity. Given the Bureau's recent and repeated efforts to increase collaboration with state attorneys general, it is also possible that the Bureau may lean even more heavily on states to take investigative and enforcement action until this issue is resolved.

Community Financial Services Association of America Ltd. v. Consumer Financial Protection Bureau, No. 21-50826 (5th Cir.)