Corporate Accountability

CFPB Appellate Ruling Portends ‘Chaos’ in Financial System

A Fifth Circuit ruling that the Consumer Financial Protection Bureau’s funding stream is unconstitutional has left companies under its oversight in limbo about whether its actions still have teeth.

The US Court of Appeals for the Fifth Circuit’s Wednesday decision—which said the CFPB’s funding mechanism runs afoul of the US Constitution—is seen as a case that’ll likely end up in the US Supreme Court. But an eventual high court ruling could take more than a year. If the Supreme Court agrees with the Fifth Circuit, it will spark a political fight in Congress over how to fund the agency directly.

The uncertainty will likely throw the financial services sector into chaos, with companies left guessing about how to contend with the agency until its funding is resolved. A drawn-out fight over funding then could ultimately leave the agency weakened.

“The chaos is going to happen now, no matter what,” said Kathleen Engel, a professor at Suffolk University Law School.

The bureau is likely to ask for a stay of the ruling while it moves through the appeals process, including Supreme Court review, attorneys say.

“The effect of the Fifth Circuit’s decision is not to put us back in a world that existed before the CFPB, but into a world where the CFPB exists but doesn’t have the funding it needs to do its work,” Brianne Gorod, chief counsel at the Constitutional Accountability Center, a progressive advocacy and litigation group, said.

The Fifth Circuit didn’t issue a mandate for its ruling, in which it also invalidated the CFPB’s payday lending regulations. That means the agency’s funding is still in place for now.

The CFPB Thursday put out a new policy statement calling on consumer credit reporting firms like Equifax Inc., Experian PLC and Transunion to remove incorrect and inconsistent information from consumers’ credit reports.

But even the shadow of a constitutional battle is already causing confusion among companies the CFPB regulates, said Joann Needleman, the leader of Clark Hill PLC’s financial services regulatory and compliance practice.

What the Fifth Circuit has “done now is expose the entire financial system to incredible risk and uncertainty,” she said.

The high court may not have a tidy option for resolving the case if it agrees with the appeals court ruling.

A congressional battle over agency funding would pit its Democratic defenders against Republicans who could demand concessions and the elimination of some rules or other policies in exchange for keeping the agency’s lights on.

“If the CFPB is forced into the Congressional appropriations process, we would expect to see both a reduction in its top-line budget and legislative riders narrowing the scope of its ambitions, which, when combined, would produce a far less ambitious and active agency,” Isaac Boltansky, an analyst with BTIG, said in a note to clients.

Further Review

The bureau is widely expected to start its challenge to the Fifth Circuit panel decision with a bid for a full-court review of the case, Community Financial Services Association of America v. CFPB.

A majority of the circuit’s 16 judges would have to agree to rehear the case. Already seven Fifth Circuit judges have found the CFPB’s funding to be unconstitutional, either in the CFSA case decided Oct. 19 or an earlier case where the court declined to take a formal position on the CFPB’s funding.

That means the CFPB would have to convince all of the nine remaining judges to rehear the case, or get at least one judge who already stated their views to agree to a rehearing, said Alan Kaplinsky, senior counsel at Ballard Spahr LLP.

“I don’t think it’s all that likely that they’re going to get an en banc review, and the reason is the numbers are not in the CFPB’s favor,” he said.

No Neat Fix

The high court has already dealt with the question of the CFPB’s constitutionality in its June 2020 decision in Seila Law v. CFPB.

But Kaplinsky and other observers expect the justices to review the Fifth Circuit ruling.

The Supreme Court’s options are limited because of the nature of the dispute.

In the Seila Law case, the justices resolved the constitutional question by changing employment protections for the CFPB’s director. If the high court agrees that the agency’s funding mechanism is unconstitutional, all it can do is toss the question back to Congress.

“The neat little fix here, courts can’t do for a very formalistic reason,” said Todd Phillips, the director of financial regulation and corporate governance at the Center for American Progress, a progressive think tank.

That could give at least some justices pause. In the Seila Law case, Justice Brett Kavanaugh justified eliminating the for-cause removal provisions rather than eliminating the CFPB on constitutional grounds because he said he wanted to prevent chaos.

There may be enough justices either to overturn the Fifth Circuit, or craft as narrow a ruling as possible to prevent chaos, Gorod said.

“Walking down this path is something that should make the justices very nervous,” she said.

The banking industry, which has had a bumpy relationship with the CFPB and is currently suing the agency over a new anti-discrimination policy, would likely support that sort of cautious approach, Kaplinsky said.

“The banking industry I don’t think would like the agency to be thrown to the wolves. Nobody wants to roll the clock back 11 years or 12 years,” Kaplinsky said.