A federal appeals court on Wednesday dealt a blow to the Consumer Financial Protection Bureau, ruling that Congress violated the Constitution when it delegated its financial authority to an executive agency.
The CFPB is funded directly by the Federal Reserve, not congressional appropriations, which violates the separation of powers, a three-judge panel of the 5th U.S. Circuit Court of Appeals said.
The 39-page ruling invalidates the payday loan rule, which came into effect in 2018. It restricted the ability of lenders to make loans to consumers unless they determined they had the ability to make them. repay under certain conditions, and also restricted a lender’s account. access to loan repayment.
The three-judge panel found Congress was appropriating funds through the appropriations clause — but handed that authority over when the CFPB was created, giving the agency unchecked power.
“Congress violated the separation of powers embodied in the appropriations clause,” Judge Cory T. Wilson, a Trump appointee, wrote for the court.
The CFPB was created during the Obama administration and has been a target of conservatives for years.
In 2020, the Supreme Court ruled that the CFPB structure described for the removal of the agency’s director also violated the Constitution, because at the time it did not authorize a president to remove the head of the agency without pattern.
Senator Ben Sasse, Republican of Nebraska, hailed the decision of the 5th US Circuit Court of Appeals as a victory for lawmakers.
“This is a victory for the basic proposition that laws should be written by people who can be hired and fired on Election Day. This decision is simple: the CFPB’s funding structure has created a fourth branch of government that is not accountable to Congress. That is simply not how self-government works. This direct decision is a victory for the rule of law,” he said.
Wednesday’s ruling contrasts with other federal appeals courts that have upheld the CFPB arrangement.
These other courts had declared that other federal agencies, such as the Federal Reserve and the Federal Housing Finance Agency, also had budgetary autonomy.
But the 5th Circuit said the CFPB is unique with its “double insulated” budget authority from Congress. And the regulatory power wielded by the CFPB far exceeds that of other agencies, Justice Wilson wrote.
“The Bureau’s funding apparatus cannot be reconciled with the appropriations clause and the basis of the clause, the constitutional separation of powers,” the judge said.
The new ruling does not overrule the agency, but does reverse the payday loan rule the CFBP issued in 2017.
This policy was intended to combat what the bureau considered predatory lending practices by payday lenders.
The 5th Circuit said that because this rule may be tied to the CFPB’s unconstitutional funding structure, the rule should be struck down.
The CFPB was created by Senator Elizabeth Warren, Democrat of Massachusetts, who at the time was a law professor at Harvard University.
He was intended to be insulated from political forces in order to give him the freedom to pursue powerful financial interests.
The power of the board was vested in a single director who was immune to dismissal by a president, except in cases of actual malfeasance. And it was given the autonomy to operate independently of the budgetary powers of Congress.
The Supreme Court has already ruled the sole director structure unconstitutional, concluding that a single director with such regulatory power must be accountable to the president.
But the judges did not address the issue of the office’s financial insulation.