In a major decision released October 19, a three-judge panel of the Fifth Circuit Court of Appeals found the funding mechanism for the Consumer Financial Protection Bureau (CFPB or Bureau) to be unconstitutional. Specifically, the court in Community Financial Services Association of America, Ltd. v. Consumer Financial Protection Bureau held the CFPB’s funding violates the Constitution because the Bureau does not receive its funding from annual congressional appropriations like most executive agencies, but instead receives funding directly from the Federal Reserve based on a request by the Bureau director. The court rooted its decision in the foundational precepts of the Federalist Papers and the Federal Convention of 1787, at one point quoting George Mason in support of its decision: “The purse & the sword ought never to get into the same hands.”


Plaintiffs Community Financial Services Association of America and Consumer Service Alliance of Texas challenged the validity of the CFPB’s 2017 Payday Lending Rule (Rule), specifically the payment provisions, which prohibits lenders from initiating additional payment transfers from consumers’ accounts after two consecutive attempts have failed for insufficient funds unless the consumer authorizes additional payment transfers. The district court granted summary judgment in favor of the Bureau. The plaintiffs appealed on multiple grounds including: (1) the Rule’s promulgation violated the APA; (2) the Rule was promulgated by a director unconstitutionally insulated from presidential removal; (3) the Bureau’s rulemaking violates the nondelegation doctrine; and (4) the Bureau’s funding mechanism violates the Constitution’s appropriations clause. The Fifth Circuit affirmed the district’s court’s entry of summary judgment in favor of the Bureau on each of the first three issues. But importantly, the court found “Congress’s cession of its power of the purse to the Bureau violates the Appropriations Clause and the Constitution’s underlying structural separation of powers” and reversed on that issue, invalidating the Payday Lending Rule.

The Decision

The court focused on what it characterized as the Bureau’s double insulation from Congress’s appropriation power. Not only does the Bureau receive its funding via request by the director to the Federal Reserve, but also the Federal Reserve itself falls outside the appropriations process by receiving its funding by way of bank assessments. Moreover, funds derived from the Federal Reserve System are not subject to review by the House or Senate Committee on Appropriations. As the court found, “[T]he Bureau’s funding is double-insulated on the front end from Congress’s appropriations power. And Congress relinquished its jurisdiction to review agency funding on the back end.” The court found this relinquishment to be even more problematic given the agency’s expansive authority. “An expansive executive agency insulated (no, double-insulated) from Congress’s purse strings, expressly exempt from budgetary review, and headed by a single Director removable at the President’s pleasure is the epitome of the unification of the purse and the sword in the executive … .”

Ultimately, the court held that while Congress properly authorized the Bureau to promulgate the Rule, the CFPB lacked the wherewithal to exercise that power via constitutionally appropriated funds. The plaintiffs were thus harmed by the Bureau’s improper use of unappropriated funds to engage in the rulemaking at issue and were entitled to a “rewinding” of the Bureau’s action.

Going Forward

The case is not over and is expected to be appealed to a full Fifth Circuit hearing, and after that, it has a good chance of heading to the Supreme Court.

While it stands, this holding renders all CFPB actions from inception of the Bureau, as well as its current activities, vulnerable to challenge — because, like the 2017 Payday Lending Rule, none of the CFPB’s actions from rulemaking to enforcement could have occurred absent the unconstitutional funding. This same appropriations argument is being made in a number of other litigation matters involving the CFPB, including several enforcement cases pending in courts in the Fifth Circuit and elsewhere, as well as in the U.S. Chamber of Commerce case challenging the CFPB’s authority to prohibit discrimination under its UDAAP authority, which is also pending in a district court in the Fifth Circuit (see prior post here).

Troutman Pepper will continue to monitor this case — and all CFPB-related decisions — for future developments, and we will offer commentary about the long-term fallout of this decision in future blog posts.