Payments 3.0: A Court Clouds the CFPB’s Future

The Consumer Financial Protection Bureau has been under fire since it was created. Now, though the bureau has survived a number of challenges, a recent court ruling has cast a cloud over its future.

In October, the Fifth Circuit Court of Appeals issued a ruling in Community Financial Services Association of America v. Consumer Financial Protection Bureau. In the decision, the court nullified the Bureau’s 2017 Payday Lending Rule because the Bureau’s funding method was unconstitutional.

“But one arrow has found its target: Congress’s decision to abdicate its appropriations power under the Constitution, i.e., to cede its power of the purse to the Bureau, violates the Constitution’s structural separation of powers. We thus reverse the judgment of the district court, render judgment in favor of the Plaintiffs, and vacate the Bureau’s 2017 Payday Lending Rule,” the court said in its ruling.

This is not the first challenge to the bureau’s constitutionality. In June 2020, the Supreme Court ruled in Seila Law LLC V CFPB that the CFPB’s structure violated the Constitution’s separation of powers doctrine. The Court gave the president the power to fire the director of the Bureau at will. Previously, the director could only be removed for cause.

The Fifth Circuit decision likely will wind up before the Supreme Court. While it is impossible to guess the outcome, the Seila Law decision shows the justices have had concerns with the CFPB in the past. (For more on the CFPB, see page 28).

In the short term, the Fifth Circuit’s opinion only applies to the Payday Lending Rule. To challenge the bureau’s other rules on the same grounds would require parties with standing to sue and make a similar argument—potentially in other courts that might see things differently. So, the payments industry should not behave as
though the bureau has been closed by the courts.

In the long term, there is another important aspect of the Fifth Circuit’s opinion. The decision says that the Payday Lending Rule itself rests on solid legal grounds. It found that the Consumer Financial Protection Act gave the Bureau the power to determine whether products and services are “unfair” and “abusive,” and rejects the plaintiffs’ arguments that consumers can reasonably avoid harm from payday loans.

The Court also rejects the idea that the Bureau acted capriciously, saying that its process was a good way to gather information to create rules.

In other words, the court seems to be saying—and this is my interpretation— that the Bureau did a good thing but with bad funding, so the rule needs to be vacated.

The bureau’s demise could lead to a worse regulatory environment for the industry. Since the rule itself was found to be legally sound, states could adopt it if they feel the federal government will not protect consumers. Inconsistent adoption could lead to a patchwork of regulations across multiple states, creating regulatory headaches for companies. We saw states create their own versions of the CFPB during the last administration, when they were afraid the CFPB itself would disappear.

The status of the bureau may hang in limbo as the Fifth Circuit case and others such as the PayPal case work their way through the courts. With a potentially divided Congress and no filibuster-proof majority
in the Senate, a bill to reform the CFPB is unlikely to come before the next Congress.

So, while the bureau’s future likely will be in flux until at least after the 2024 elections, payments providers should stay focused on consumer protection and keep their compliance programs current.

—Ben Jackson bjackson@ipa.org