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Unconstitutional Decision on CFPB Financing is Milestone for Consumer Finance

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This week, the United States Court of Appeals for the Fifth Circuit ruled that the Consumer Financial Protection Bureau’s financing structure was unconstitutional because it violated the separation of powers. While future decisions of the Supreme Court or courts of other jurisdictions may offer different results, this enormous decision fundamentally weakens the CFPB’s current authority to enforce and enforce consumer protection laws.

Congress created the CFPB when it passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (PL 111-203). Under the Dodd-Frank Act, the CFPB was given the power to oversee, enforce and regulate consumer protection laws that were originally attributed to many other federal financial regulators. Consumer financial products and services that the CFPB oversees include: “deposit taking, mortgages, credit cards and other loan extensions, loan service, check guarantee, consumer report data collection, debt collection associated with consumer financial products and services, real estate settlement, money transmission and financial data processing.”

The Dodd-Frank Act also gave the CFPB’s director broad authority to finance the agency by transferring unallocated funds from the “combined earnings of the Federal Reserve System” to run the CFPB’s activities. More than 12 percent of the Fed’s operating expenses.

The Fed itself does not receive Congressional appropriations and uses the interest it receives from the securities it owns to run its operations. This creates what the Fifth Circuit calls “an unprecedented double insulation from the purse strings of Congress.”

The resolution also highlights that the CFPB is even less dependent on Congress than the Federal Reserve because it is not required to “remit funds above a legal limit” to the Treasury Department.

Surprisingly, Congress enacted a provision in the Dodd-Frank Act that explicitly forbids allowing Congress to review “funding from the Federal Reserve System.”

The Fifth Circuit empties the structure of the CFPB in violation of the founding principles and laws of the United States:

A vast executive agency, isolated from the purses of Congress (no, double-isolated), clearly exempt from budget scrutiny, and run by a single Director who can be removed from office at the President’s request, is the epitome of combining purse and sword in the executive—an abomination that Framers warn is “on political freedom.” destroys the separation of powers on which it was founded”.

The CFPB differs from other independent executive bodies because of its broad separation of funding from Congress and its broad regulatory and enforcement power. The Fifth Circuit states:

The Bureau’s consistently self-directed, double-insulated financing structure goes a significant step further than what other agencies on offer have benefited from. And none of the aforementioned institutions have “executive or regulatory authority, remotely comparable to that authority. [Bureau] applicable throughout the economy.”

According to Ballard Spahr, the decision only applies to Texas, Louisiana, and Mississippi under the jurisdiction of the Fifth Circuit:

Currently, the Fifth Circuit’s decision is binding only for federal district courts in Texas, Louisiana, and Mississippi. However, as this is an appellate court decision, weight may be given by district courts other than the Fifth Circuit, taking into account appeals to CFPB enforcement actions and other CFPB activities based on an alleged violation of the Appropriations Clause.

The only way to ensure that a future decision does not overturn the Fifth Circuit’s decision is to codify a new funding structure that subordinates the CFPB to the traditional Congressional appropriations process. Representative Andy Barr’s (R-Ky.) Bureaucrats’ Spending Calculation (TABS) Act 2021 (HR 790) includes the CFPB in Congress’ annual appropriations process. The bill, similarly drafted by Senator Bill Hagerty (R-Tenn.), the Consumer Financial Protection Bureau Accountability Act of 2021 (P. 2790), is vital to moving forward after the midterm elections.

The CFPB’s funding structure ostensibly protected it from political intrigue in Congress. This misguided attempt to shield the CFPB from partisan politics instead subdued the agency to the political bias of the director who runs the agency.

CFPB Director Rohit Chopra is an aide to Senator Elizabeth Warren (D-Mass.) and a fierce opponent of the free market enterprise. Since rising to the top of the CFPB, requests for information and proposed rules have done nothing but attack businesses that do not have sufficient legal authority to do so.

The Fifth Circuit’s decision could undermine the CFPB’s past, present and future work.

The CFPB, of which Chopra is at the helm, has issued RFIs that examine how banks, credit unions and fintech companies conduct their business. Specifically, the CFPB attacked businesses for credit card fees; credit reports; and advance fees. The CFPB has also expanded its mandate to review Unfair, Deceptive or Abusive Actions and Practices (UDAAP) review procedures.

Director Chopra also stated that the CFPB will intervene in the crypto-asset market because “stable currencies can also be used for and in connection with consumer deposits, stored-value instruments, retail and other consumer payment mechanisms, and consumer loan arrangements.”

The Fifth Circuit’s decision will help ensure that Congressional resolution is the deciding factor when it comes to applying consumer protection laws to the financial services industry.

The Fifth Circuit’s decision may also help curb the gradual increase in power the CFPB director has undertaken over the years. President Chopra sits on the board of directors of the Federal Deposit Insurance Corporation (FDIC), along with Deputy Chairman Martin Gruenberg and currency attorney Michael Hsu. The FDIC board is designed to consider and evaluate the differing views of board members from both political parties. Since Biden took office, the FDIC has lost its only Republican board member and has been entirely controlled by Democrats ever since.

Although Biden nominates two Republicans to serve on the FDIC’s board, the FDIC moves forward with consequential decisions without a bipartisan perspective. For example, the FDIC recently decided to increase the fees that banks must pay the FDIC for deposit insurance on bank accounts. The FDIC is also moving forward with a new rulemaking process for bank decisions.

Fortunately, Senator Tim Scott (RS.C.) introduced a bill to remove the CFPB director from the FDIC board. Depending on the outcome of the midterm elections, Senator Scott is poised to serve as either a ranked member or chair of the Senate Banking, Housing and Urban Affairs Committee.

Passing this bill as the top Republican on the Senate Banking Committee in 118 should be one of his top priorities.pearl Congress.

The Fifth Circuit’s decision, although likely to be challenged, should enable the CFPB’s opponents and its dominance of the FDIC’s internal workings to question any regulatory, supervisory, or enforcement action the CFPB may take while using “double-insulated” financing. structure.

The decision will allow financial institutions to offer more avenues for loan allocation. US Bank, Wells Fargo and four other retail banks are keen to fill the gap in the availability of small dollar loans.

The Fifth Circuit’s decision should provide the confidence needed to move forward to ensure that the administrative state no longer assimilates the power the Constitution expressly grants to elected representatives in Congress.

Now is the time for Congress to rein in the CFPB and regulate the decision of the Fifth Circuit and subject the CFPB to Congress’ traditional appropriations process.