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The Fifth U.S. Circuit Court of Appeals Wednesday ruled that the CFPB’s funding structure is uniquely unconstitutional, stating that it violates the Constitution because it receives funding through the Federal Reserve, rather than through the Congressional appropriations process – a direct conflict to the Constitution’s checks and balances on government power. NAFCU has long advocated that the NCUA should be the sole regulator of credit unions, rather than the CFPB that promulgates and enforces a large number of rules that apply to credit unions.

The Court acknowledged that a number of federal financial regulators, including the NCUA, acquire funding independent of Congress, but drew a distinction between those agencies and the CFPB noting that the CFPB’s funding structure “double insulates” it from accountability to Congress and thereby gives the executive branch unchecked authority, in violation of the Constitution.

“An expansive executive agency insulated (no, double-insulated) from Congress’s purse strings, expressly exempt from budgetary review, and headed by a single Director removable at the President’s pleasure is the epitome of the unification of the purse and the sword in the executive—an abomination the Framers warned ‘would destroy that division of powers on which political liberty is founded,’” wrote the judges.

The judges in the case also vacated the CFPB’s 2017 small-dollar lending rule, which the Plaintiffs argued was issued unlawfully as the CFPB did not have the funds needed to issue it. In addition, using the payday rule as an example, the Court agreed that the Plaintiffs had clearly showed the unconstitutional funding of the CFPB has inflicted harm.

The Court ruled that the payday lending rule issued by the CFPB is invalid not because the CFPB lacked the authority to write it, but because it was promulgated using unconstitutionally granted funds. 

The CFPB in 2020 issued a final rule related to small dollar lending, which includes the rescission of mandatory underwriting requirements – including ability-to-repay (ATR) provisions – from the 2017 payday lending rule. NAFCU supported removing these requirements, but the association’s call for an expansion of the safe harbor for all iterations of credit unions' payday alternative loans (PALs) was not included in the final rule.

The case heavily quotes the U.S. Supreme Court’s decision in the lawsuit brought by Seila Law which determined that the CFPB’s single-director structure is unconstitutional. The case also quotes another decision by the U.S. Supreme Court that upheld part of a lower court ruling that the Federal Housing Finance Agency’s (FHFA) structure is unconstitutional.

NAFCU will continue to monitor this decision, next steps in the Federal court system, and its implications on credit unions and update credit unions via NAFCU Today.