Appeals Court Finds Consumer Bureau’s Funding Unconstitutional

A federal appeals court ruled on Wednesday that the Consumer Financial Protection Bureau, a leading financial regulator, has been unconstitutionally funded since its creation more than a decade ago, in a decision that vacated a bureau rule on payday lending and cast doubt over a vast swath of its regulations.

The consumer bureau is funded directly by the Federal Reserve, a structure that Congress created through the 2010 Dodd-Frank law to shield the independent agency from political whims. It has been a frequent target of ire from Republican lawmakers.

A three-judge panel of the New Orleans-based U.S. Court of Appeals for the Fifth Circuit said the funding method improperly ceded too much authority to the bureau and insulated it from being accountable to Congress and the American people.

“Wherever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it,” Judge Cory Wilson wrote in the ruling. All three judges on the panel were appointed by former President Donald J. Trump.

The case may pose the most significant legal challenge to the bureau’s authority since 2020, when the Supreme Court, in a 5-to-4 ruling, gave the president the power to fire the bureau’s director.

The ruling, if it stands, could upend every regulation and enforcement action undertaken by the bureau since its creation in 2011. The decision is widely expected to be stayed pending appeal. The consumer bureau can ask the full Fifth Circuit to reconsider the case, or it could appeal directly to the Supreme Court.

Sam Gilford, a spokesman for the consumer bureau, said there was “nothing novel or unusual” about its funding mechanism, citing other programs, like Medicare and Social Security, that are funded outside the annual appropriations process. The Federal Reserve itself is also independently funded, mainly through the interest it earns on government bonds.

Mr. Gilford said the bureau “will continue to carry out its vital work enforcing the laws of the nation and protecting American consumers.”

Alan Kaplinsky, a lawyer at Ballard Spahr who closely follows the consumer bureau, said he expected the Supreme Court to eventually take up the funding issue — and he thinks the bureau’s prospects there are grim.

“That court, as we all know, is dominated by very conservative Republicans who are very skeptical and leery of federal administrative agencies,” Mr. Kaplinsky said, citing the court’s recent move to sharply curb the Environmental Protection Agency’s authority to regulate power plant emissions.

The case before the Fifth Circuit was brought by two groups representing payday lenders, the Community Financial Services Association of America, which is now part of the trade group InFin, and the Consumer Service Alliance of Texas. They challenged a rule limiting the number of times lenders can try to withdraw funds from borrowers’ bank accounts.

The core of the bureau’s payday lending rule — which would have placed much stricter limits on the number of loans that lenders could make — was gutted in 2019 by Kathleen Kraninger, the bureau’s Trump-appointed director at the time. The ruling on Wednesday would eliminate the remainder of the rule.

Because the funding used to enact the payday rule “was wholly drawn through the agency’s unconstitutional funding scheme,” Judge Wilson wrote, the plaintiffs are entitled to have the rule “unwound.”

That reasoning is so expansive that it broadly threatens other bureau actions, including its regulation of the mortgage market.

“All C.F.P.B. rules are now potentially vulnerable to constitutional attack,” said Patricia McCoy, a law professor at Boston College and a former bureau employee who served as its assistant director for mortgage markets.

In the states covered by the Fifth Circuit — Texas, Louisiana and Mississippi — “legal uncertainty over damages exposure could breed chaos and paralysis in the home mortgage markets,” she said.

“This feels like we’re playing with matches,” said Dalié Jiménez, a law professor at the University of California, Irvine. “How does it not call into question literally everything the bureau has ever done?

“And what now?” she added. “Are they not supposed to send people — like bank examiners — out to do their jobs in Fifth Circuit states, because those people are paid through this funding?”

Senator Elizabeth Warren, the Massachusetts Democrat who championed the bureau’s creation, called the ruling “a lawless and reckless decision.” She wrote on Twitter that “extreme right-wing judges are throwing into question every rule the CFPB enforces to protect consumers and businesses alike.”

Mr. Kaplinsky thinks court challenges will eventually force Congress — in a move to preserve the consumer bureau — to switch its funding mechanism, he said.

“I would imagine that when the dust settles, within the next year or two, the C.F.P.B. will still be a live agency and it will be subject to congressional appropriations,” Mr. Kaplinsky said. “And there always are strings attached to that, depending upon what party is in power.”

Professor Jiménez cast the ruling as part of a larger conservative and judicial attack on the concept of the administrative state.

“For more than 200 years, that’s how we’ve run our society. Yes, it’s gotten bigger, but how do you unwind that — and is that really what we want?” she said. “This is madness. Some part of me never expected this to get this far, because the uncertainty it creates is just insane.”

Christian Vergonis, a lawyer at Jones Day who represented the trade associations in the lawsuit, said his clients were “pleased that the Fifth Circuit has vindicated our argument that the bureau’s insulation from Congress’s power of the purse violates the Constitution’s separation of powers.”