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On November 3, the U.S. District Court of Nevada granted a payday lender’s motion to stay a case brought by the CFPB, pending a SCOTUS’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau (see InfoBytes here and here). The CFPB issued a civil investigative demand (CID) in late 2022 to the lender, as part of an investigation into its lending practices. The lender complied with the CID initially, but later requested a stay due to the impending SCOTUS decision regarding the constitutionality of the CFPB’s funding structure, which could impact the CFPB’s enforcement authority. Although the CFPB opposed the stay by arguing that the extensive delay could hinder its ability to investigate the lender, the court granted the lender’s motion, in line with other district courts that have faced similar issues.
On October 3, the Supreme Court heard oral argument in CFPB v. Community Financial Services Association of America —a case presenting the most significant challenge yet to the constitutionality of the CFPB. As previously covered by InfoBytes, a panel of the U.S. Court of Appeals for the Fifth Circuit agreed with the plaintiff industry groups that the CFPB’s funding structure violates the appropriations clause. At oral argument, the U.S. Solicitor General observed that the lower court decision was the “first time any court in our nation’s history has held that Congress violated the Appropriations Clause by enacting a statute providing funding.” She noted that Congress has approved similar “standing appropriations” for agencies including the U.S. Customs Service, the U.S. Post Office, and the U.S. Mint.
Several conservative justices pushed back against the CFPB’s and Solicitor General’s stance. For example, Chief Justice Roberts called it “very aggressive view” of Congress’ authority, and Justice Alito emphasized that the CFPB’s funding mechanism was unique in that its funding comes from the Federal Reserve, which is itself not funded through normal appropriations. However, Justice Thomas challenged counsel for the industry groups, noting that “we need a finer point” on “what the constitutional problem is,” beyond the uniqueness of the funding mechanism. Justice Barrett, too, stated she was “struggling to figure out” what standard courts might use in determining whether a cap on an agency’s appropriation is too high.
Find continuing InfoBytes coverage on CFPB v. Community Financial Services Association of America here.
CFPB contests motions for preliminary injunctions to block enforcement of Small Business Lending Rule
On August 22, the CFPB filed an opposition to a motion made by a group of intervenors seeking to expand the scope of a preliminary injunction issued by the U.S. District Court for the Southern District of Texas, which enjoined the CFPB from implementing its Small Business Lending Rule. As previously covered by InfoBytes, the original plaintiffs in the litigation, a Texas banking association and a Texas bank, challenged the legality of the CFPB’s Small Business Lending Rule. After the American Bankers Association joined the case, the plaintiffs sought, and the court granted, a preliminary injunction enjoining implementation and enforcement of the rule against plaintiffs and their members. The intervenors, who consist of both banking and credit union trade associations, as well as individual banks and credit unions, seek a nationwide injunction that would apply beyond the parties to the case, or at least to the intervenors and their members. The CFPB’s opposition to this request for an expanded preliminary injunction argues that the intervenors fail to show that they would suffer immediate harm from enforcement of the Small Business Lending Rule.
In a related matter, on August 21, a group of Kentucky banks and a Kentucky banking association filed a motion for a preliminary injunction in the U.S. District Court for the Eastern District of Kentucky against the CFPB, seeking a preliminary injunction enjoining the CFPB from enforcing the Small Business Lending Rule against the plaintiffs and their members. Referencing the parallel Texas litigation, the Kentucky plaintiffs allege that they are entitled to an order enjoining enforcement of the Small Business Lending Rule against them for the same reasons that the Texas district court enjoined enforcement of the rule.
The most recent litigation activity follows a request from a group of trade associations to the CFPB to take administrative action to address the disparity in compliance dates that results from the district court’s injunction, a disparity that the trade associations argue is both unfair and disruptive to the market’s compliance efforts. The CFPB declined this request.
Both of these challenges to the Small Business Lending Rule point to a recent decision issued by the U.S. Court of Appeals for the Fifth Circuit in Community Financial Services Association of America v. Consumer Financial Protection Bureau, where the court found that the CFPB’s “perpetual self-directed, double-insulated funding structure” violated the Constitution’s Appropriations Clause (covered by InfoBytes here), as justification for why the final rule should ultimately be set aside.
On August 3, the CFPB filed a Reply Brief in support of its request to overturn the Fifth Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, in which the 5th Circuit found that the CFPB’s funding structure violated the Constitution’s Appropriations Clause (covered by InfoBytes here, here, and here, and in a firm article here).
In its Reply Brief, the CFPB argues that Congress did not violate the Appropriations Clause by failing to specify a specific dollar amount to fund the CFPB because “the Appropriations Clause contains no dollar-amount requirement.” In support of that argument, the CFPB points to the Founders’ appropriation of funds for the Post Office and the National Mint where they did not decide the specific amounts of annual funding, the funding structure for the OCC and the Federal Reserve Board, and to current federal appropriations for Social Security payments and unemployment assistance.
The Bureau then argues that even if there was a specific dollar amount requirement, that requirement is nonetheless satisfied because “Congress fixed the CFPB’s maximum annual funding.” According to the Bureau, the fact that it has the discretion to ask for less than the maximum authorized is commonplace and “[t]o this day, Congress routinely appropriates sums ‘not to exceed’ a particular amount;’ that phrase appears more than 400 times in the Consolidated Appropriations Act, 2022.”
The Bureau then aims to refute plaintiff’s arguments that the Appropriations Clause requires time-limited funding laws and imposes special rules for law enforcement agencies. The Bureau argues that the fact that the Constitution includes a specific restriction limiting Congress from funding the army for more than two years dictates that by negative implication there is no such prohibition of a standing appropriation for a different appropriation.
Finally, the Bureau argues that its combination of features is not as unique as CFSA contends, and that even if the Supreme Court ultimately finds the funding structure unconstitutional vacating the Payday Lending Rule is an inappropriate remedy because the 5th Circuit failed “to consider whether the defect it perceived could be cured by severing portions of Section 5497.”
On July 10, the West Virginia attorney general, along with 26 other states, filed an amicus brief in support of respondents in Consumer Financial Protection Bureau v. Community Financial Services Association of America, arguing that the CFPB’s funding structure violates the Constitution and that by operating outside the ordinary appropriations process states are often left “out in the cold.” In their brief, the states urged the U.S. Supreme Court to uphold the U.S. Court of Appeals for the Fifth Circuit’s decision in which it found that the Bureau’s “perpetual self-directed, double-insulated funding structure” violated the Constitution’s Appropriations Clause (covered by InfoBytes here and a firm article here). The 5th Circuit’s decision also vacated the agency’s Payday Lending Rule on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding.
Arguing that the Bureau is operating beyond the boundaries established by the Constitution, the states maintained that the current funding mechanism limits Congress’s ability to oversee the agency. “Even if the CFPB has done some good—and some would even dispute that premise—it wouldn't matter,” the states said, warning that “sidelining Congress can greenlight an agency to wreak havoc,” especially if the “agency wields broad regulatory and enforcement powers over the entire U.S. financial system, acts under the control of a single powerful figure, and lacks other protections from meaningful oversight.”
The appropriations process plays a crucial role in enabling states to influence agency actions indirectly, the states maintained, explaining that when an agency initiates a new enforcement initiative or significant rulemaking endeavor, it is required to publicly outline its projected work in order to secure the necessary funding to carry it out. “Disclosure on the front end of the appropriations process can empower affected parties—including the [s]tates—to take quick, responsive actions beyond lobbying their representatives (up to suing to stop illegal action, if need be).” In contrast, the Bureau’s insulation from this process has allowed it to hide its actions from public view, the states wrote. As an example, the Bureau has repeatedly declined to interpret or provide further clarity on how the provisions governing unfair, deceptive, or abusive acts or practices work.
The brief also highlighted examples of when Congress used funding cuts through the appropriations process to curtail agencies’ powers. Additionally, unlike the challenges of amending authorizing statutes, appropriations bills must be passed by Congress each year to avoid a government shutdown, which can be “a painful pill to swallow for the sake of standing up for an agency’s policy choice,” the states noted, adding that “[b]ecause appropriations involves both oversight committees and appropriations committees, agencies may have ‘less flexibility to ally themselves with executive branch officials or interest groups.’”
The states also urged the Court to “ignore doomsaying” about the consequences of finding the funding structure unconstitutional. Should the Court agree to invalidate the funding structure, Congress can pass a proper appropriations bill for the Bureau, the states explained, adding that “a rebuke from this Court would no doubt grease the sticky wheels of the legislative process and move them a bit faster.” Moreover, states could also fill any gaps should Congress somehow pare back the CFPB’s funding, the brief stressed.
Several amicus briefs were also filed this week in support of CFSA, including an amici curiae brief filed by the U.S. Chamber of Commerce and several banking associations and an amici curiae brief filed by 132 members of Congress, including 99 representatives and 33 senators, which urged the Court to uphold the 5th Circuit’s decision.
On July 3, the Community Financial Services Association of America (CFSA) and the Consumer Service Alliance of Texas filed their brief with the U.S. Supreme Court, urging the high court that the CFPB’s independent funding structure is “unprecedented and must be stopped before it spreads without limit.” Respondents asked the Court to affirm the U.S. Court of Appeals for the Fifth Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, where the appellate court found that the Bureau’s “perpetual self-directed, double-insulated funding structure” violated the Constitution’s Appropriations Clause (covered by InfoBytes here and a firm article here). The 5th Circuit’s decision also vacated the agency’s Payday Lending Rule on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding.
The Bureau expanded on why it believes the 5th Circuit erred in its holding in its opening brief filed with the Court in May (covered by InfoBytes here), and explained that even if there were some constitutional flaw in the statute creating the agency’s funding mechanism, the 5th Circuit should have looked for some cure to allow the remainder of the funding mechanism to stand independently instead of presuming the funding mechanism created under Section 5497(a)-(c) was entirely invalid. Vacatur of the agency’s past actions was not an appropriate remedy and is inconsistent with historical practice, the Bureau stressed.
In their brief, the respondents challenged the Bureau’s arguments, writing that the “unconstitutionality of the CFPB’s funding scheme is confirmed by both its unprecedented nature and lack of any limiting principle. Whether viewed with an eye toward the past or the future, the threat to separated powers and individual liberty is easy to see.” Disagreeing with the Bureau’s position that the Constitution gives Congress wide discretion to exempt agencies from annual appropriations and that independent funding is not uncommon for a financial regulator, the respondents stated that Congress gave up its appropriations power to the Bureau “without any temporal limit.” The respondents further took the position that the Bureau “can continue to set its own funding ‘forever’” unless both chambers agree and can persuade or override the president. Moreover, because the Federal Reserve Board is required to transfer “the amount determined by the Director to be reasonably necessary to carry out the [CFPB’s] authorities, . . . it ‘foreclose[s] the application of any meaningful judicial standard of review.’”
The respondents also argued that the Bureau’s funding structure is clearly distinguishable from other assessment-funded agencies in that these financial regulators are held to “some level of political accountability” since “they must consider the risk of losing funding if entities exit their regulatory sphere due to imprudent regulation.” Additionally, the respondents claimed that the fundamental flaws in the funding statute cannot be severed, reasoning, among other things, that courts “cannot ‘re-write Congress’s work’” and are not able to replace the Bureau’s self-funding discretion with either a specific sum or assessments from regulated parties.
With respect to the vacatur of the Payday Lending Rule and the potential for unintended consequences, the respondents urged the Court to affirm the 5th Circuit’s rejection of the rule, claiming it was unlawfully promulgated since a valid appropriation was a necessary condition to its rulemaking. “Lacking any viable legal argument, the Bureau resorts to fear-mongering about ‘significant disruption’ if all ‘the CFPB’s past actions’ are vacated,” the respondents wrote, claiming the Bureau “grossly exaggerates the effects and implications of setting aside this Rule.” According to the respondents, the Bureau does not claim that any harm would result from setting aside the rule, especially since no one has “reasonably relied” on the rule as it has been stayed and never went into effect. As to other rules issued by the agency, the respondents countered that Congress could “legislatively ratify” some or all of the agency’s existing rules and that only “‘timely’ claims can lead to relief” in past adjudications. Additionally, the respondents noted that many of the Bureau’s rules were issued outside the six-year limitations period prescribed in 28 U.S.C. § 2401(a). This includes a substantial portion of its rules related to mortgage-related disclosure. Even for challenges filed within the time limit, courts can apply equitable defenses such as “laches” to deny retrospective relief and prevent disruption or inequity, the respondents said.
On May 8, petitioner CFPB filed its brief with the U.S. Supreme Court, criticizing the U.S. Court of Appeals for the Fifth Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, where the appellate court found that the Bureau’s “perpetual self-directed, double-insulated funding structure” violated the Constitution’s Appropriations Clause (covered by InfoBytes here and a firm article here). The 5th Circuit’s decision also vacated the agency’s Payday Lending Rule on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding.
Earlier this year, the Bureau filed a petition for a writ of certiorari, which the Court granted (covered by InfoBytes here). The Bureau explained in its petition that the 5th Circuit’s decision would negatively impact its “critical work administering and enforcing consumer financial protection laws” and “threatens the validity of all past CFPB actions as well” as the decision vacates a past agency action based on the purported Appropriations Clause violation. Community Financial Services Association of America (CFSA) filed a conditional cross-petition, seeking review on other aspects of the 5th Circuit’s decision, including that the 5th Circuit’s decision does not warrant review because the appellate court correctly vacated the Payday Lending Rule, which, according to the respondents, has “multiple legal defects, including but not limited to the Appropriations Clause issue.” (Covered by InfoBytes here.)
In its opening brief, the Bureau expanded on why it believes the 5th Circuit erred in its holding. The Bureau argued that the text of the Appropriations Clause “does not limit Congress’ authority to determine the specificity, duration, and source of its appropriations.” The agency further explained that Congress has chosen similar funding mechanisms for many other financial regulatory agencies, including the FDIC, NCUA, FHFA, and the Farm Credit Administration (and agencies outside of the financial regulatory sector), where they are all funded in part through the collection of fees, assessments, and investments. The Bureau emphasized that the 5th Circuit and the CFSA failed “to grapple with the Appropriation Clause’s text, Congress’ historical practice, or [Supreme] Court precedent,” but instead asserted only that the funding mechanism was “unprecedented.” “Congress enacted a statute explicitly authorizing the CFPB to use a specified amount of funds from a specified source for specified purposes,” the Bureau emphasized. “The Appropriations Clause requires nothing more.” The 5th Circuit’s “novel and ill-defined limits on Congress’s appropriations authority contradict the Constitution’s text and congressional practice dating to the Founding.”
The Bureau also addressed the now-vacated Payday Lending Rule. Arguing that even if there were some constitutional flaw in 12 U.S.C. § 5497 (the statute creating the Bureau’s funding mechanism), the 5th Circuit should have looked for some cure to allow the remainder of the funding mechanism to stand independently instead of “adopting an unjustified and profoundly disruptive retrospective remedy” and presuming the funding mechanism created under Section 5497(a)-(c) was entirely invalid. The Bureau also stressed that vacatur of the agency’s past actions was not an appropriate remedy and is inconsistent with historical practice. Adopting a remedial approach, the Bureau warned, would inflict significant disruption by calling into question 12 years of past agency actions.
The Bureau urged the Court to at most grant only “prospective relief preventing the CFPB from enforcing the Payday Lending Rule against [CFSA] or their members until Congress provides the Bureau with funding from another source.” While such an approach could still “upend” the Bureau’s activities, “it would at least avoid the profoundly disruptive effect of unwinding already completed and concededly authorized agency actions like the Payday Lending Rule,” the Bureau wrote, adding that “[v]acatur of the CFPB’s past actions would be inappropriate in light of the significant disruption that such vacatur would produce.”
On April 26, plaintiffs, including a Texas banking association, sued the CFPB, challenging the agency’s final rule on the collection of small business lending data. As previously covered by InfoBytes, last month, the Bureau released its final rule implementing Section 1071 of the Dodd-Frank Act, which requires financial institutions to collect and provide to the Bureau data on lending to small businesses with gross revenue under $5 million in their last fiscal year. According to the Bureau, the final rule is intended to foster transparency and accountability by requiring financial institutions—both traditional banks and credit unions, as well as non-banks—to collect and disclose data about small business loan recipients’ race, ethnicity, and gender, as well as geographic information, lending decisions, and credit pricing.
The plaintiffs’ goal of invalidating the final rule is premised on the argument that it will drive from the market smaller lenders who are not able to effectively comply with the final rule’s “burdensome and overreaching reporting requirements” and decrease the availability of products to customers, including minority and women-owned small businesses. Plaintiffs argued that the Bureau “took the original three pages of legislation and the 13 reporting data points required by [Dodd-Frank] and turned them into almost 900 pages of rulemaking—a new [f]inal [r]ule that requires banks to develop and implement new software and compliance mechanisms to comply with over 80 reporting requirements that have been exponentially grown by the CFPB since the Act requiring this [r]ule was passed.”
The plaintiffs further pointed to a decision issued by the U.S. Court of Appeals for the Fifth Circuit in Community Financial Services Association of America v. Consumer Financial Protection Bureau, where the court found that the CFPB’s “perpetual self-directed, double-insulated funding structure” violated the Constitution’s Appropriations Clause (covered by InfoBytes here and a firm article here), as justification for why the final rule should be set aside. The plaintiffs also pointed out certain aspects of the final rule that allegedly violate various requirements of the Administrative Procedure Act, and claimed that a recent data breach involving sensitive information on numerous financial institutions and consumers indicates that the agency is unprepared “to adequately assess the security and privacy impacts of its massive § 1071 data collection on small businesses.” The complaint seeks a court order finding the final rule to have been premised on the same unconstitutional grounds as found in CFSA, preliminary and permanent injunctions to set aside the final rule, and attorney fees and costs.
On April 13, the U.S. District Court for the Northern District of Illinois denied a credit reporting agency’s (CRA) bid to stay litigation filed by the CFPB alleging deceptive practices related to the marketing and sale of credit scores, credit reports, and credit-monitoring products to consumers. The Bureau sued the CRA and one of its former senior executives last April (covered by InfoBytes here), claiming the defendants allegedly violated a 2017 consent order by continuing to engage in “digital dark patterns” that caused consumers seeking free credit scores to unknowingly sign up for a credit monitoring service with recurring monthly charges.
The CRA requested a stay while the U.S. Supreme Court considers whether the Bureau’s funding mechanism is unconstitutional. Earlier this year, the Court agreed to review next term the 5th Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, where it found that the CFPB’s “perpetual self-directed, double-insulated funding structure” violated the Constitution’s Appropriations Clause. (Covered by InfoBytes here and a firm article here.) While acknowledging that a ruling against the Bureau may result in the dismissal of the action against the CRA, the court concurred with the Bureau that consumers may be exposed to harm during a stay. “Were I to grant the requested stay, it could last more than one year, depending on when the Supreme Court issues its opinion,” the court wrote. “In that time, if the Bureau’s allegations bear out, consumers will continue to suffer harm because of defendants’ unlawful conduct. That potential cost is too great to outweigh the resource preserving benefits a stay would confer.”
On March 31, plaintiffs CFPB and the New York Attorney General moved the U.S. District Court for the Southern District of New York to lift its stay order in their litigation against a remittance provider in response to a recent U.S. Court of Appeals for the Second Circuit decision upholding the CFPB’s funding structure under the Constitution’s Appropriations Clause. (Covered by InfoBytes here.) The plaintiffs argued that the 2nd Circuit’s binding opinion has now “answer[ed] the question at the heart of this Court’s stay order: whether the Bureau’s statutory funding mechanism violates the Constitution.”
As previously covered by InfoBytes, the district court had originally paused the proceedings at the defendant’s request when the Supreme Court was considering whether to hear an appeal in a different matter relating to the Bureau’s funding structure. The district court continued the stay after the Supreme Court agreed to review the 5th Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, where it found that the CFPB’s “perpetual self-directed, double-insulated funding structure” violated the Constitution’s Appropriations Clause. The Supreme Court is scheduled to review the 5th Circuit’s decision next term (covered by InfoBytes here).
The agencies argued primarily that (i) the 2nd Circuit “expressly considered and rejected the Fifth Circuit’s contrary view in CFSA;” (ii) it “did so notwithstanding that the Supreme Court will consider the same issue next Term”; and (iii) “[g]rants of certiorari do not change the law, and a district court remains bound by circuit precedent until the Supreme Court or the court of appeals changes that precedent.”
On April 7, the court issued an order denying the Bureau's request and electing to keep the stay in place while the Supreme Court resolves the circuit split on this issue.