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Financial Services Law Insights and Observations

5th Circuit: CFPB enforcement may proceed but funding questions remain

Courts CFPB Enforcement Fifth Circuit Appellate Single-Director Structure Payday Lending CFPA UDAAP Seila Law

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On May 2, the U.S. Court of Appeals for the Fifth Circuit issued an en banc decision vacating a district court’s interlocutory decision denying the plaintiff payday lenders’ motion for judgment on the pleadings, and holding that the CFPB can continue its enforcement action against a Mississippi-based payday lending company subject to further order of the district court. As previously covered by InfoBytes, the CFPB filed a complaint against two Mississippi-based payday loan and check cashing companies for allegedly violating the CFPA’s prohibition on unfair, deceptive, or abusive acts or practices. In March 2018, a district court denied the payday lenders’ motion for judgment on the pleadings, rejecting the argument that the structure of the Bureau is unconstitutional and that the agency’s claims violate due process. The 5th Circuit agreed to hear an interlocutory appeal on the constitutionality question. And, prior to the U.S. Supreme Court’s ruling in Seila Law LLC v. CFPB, a divided panel held that the CFPB’s single-director structure is constitutional, finding no constitutional defect with allowing the director of the Bureau to only be fired for cause (covered by InfoBytes here).

The 5th Circuit voted sua sponte to rehear the case en banc and issued an opinion in which the majority vacated the district court’s opinion as contrary to Seila Law. The majority did not, however, direct the district court to enter judgment against the Bureau because, though the Supreme Court had found that the director’s for-cause removal provision was unconstitutional, it was severable from the statute establishing the Bureau (covered by a Buckley Special Alert). The majority determined that the “time has arrived for the district court to proceed” and stated it “place[s] no limitation on the matters that that court may consider, including, without limitation, any other constitutional challenges.”

In dissent, several judges issued an opinion arguing that the case should be dismissed because the agency’s funding structure violates the Constitution’s separation of powers and “is doubly removed from congressional review.” The dissenting judges explained that the Bureau is not subject to the Congressional appropriations process for its budget, unlike most federal agencies, but rather receives its funding directly from the Federal Reserve Board. This budgetary process was intended to ensure full independence from Congress and prevent future congresses from using budget cuts to influence the Bureau’s agenda and priorities. The dissenting judges argued, however, that such a structure violates the Appropriations Clause of the Constitution. “The CFPB’s double insulation from Article I appropriations oversight mocks the Constitution’s separation of powers by enabling an executive agency to live on its own in a kingly fashion,” the dissent stated. “The Framers warned that such an accumulation of powers in a single branch of government would inevitably lead to tyranny. Accordingly, I would reject the CFPB’s novel funding mechanism as contravening the Constitution’s separation of powers. And because the CFPB funds the instant prosecution using unconstitutional self-funding, I would dismiss the lawsuit.”

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