February 8, 2023

Volume XIII, Number 39

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February 07, 2023

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February 06, 2023

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THE CFPB IS DEAD (FOR NOW)!: Fifth Circuit (Correctly) Holds the CFPB’s Funding Was Unconstitutional–Strikes Down Pay Day Lending Rules (and A Lot More)

This will probably be my favorite blog to write of the year.

So little known fact–the Czar was a political science major at Berkeley. My emphasis of was political theory. I love talking political theory, especially the philosophy underlying the law and our political systems.

While I rarely get to discuss most of these, my favorite, topics on the blog as one of the nation’s best known constitutional law scholars I do, on occasion, get to share a nugget or two here and there.

But the truth is very few legal decisions, even by the Supreme Court, delve into political theory, or the underlying structure of our Government. What its bones look like as a whole. Sure the Court might analyze, a finger or a toe, but a rigorous full body scan o the entire enterprise of government just isn’t within the call of duty of most courts.

And truth be told, the Fifth Circuit’s new ruling in Community Financial Services Association of America vs  Consumer Financial Protection Bureau, et al.-(CFSAA)-available here–doesn’t get all the way there either. But it comes closer than most. And that makes for a fun and nerdy blog.

Get ready. 

To understand the ruling you’ll have to understand basic principles of constitutional law. To really understand the ruling, however, you’ll have to understand some not-so-basic tenets of political theory. (And I applaud the Court for not shying away from those in its analysis.)

We’ll walk through some of this together–including why the modern political party system is corrupt and anti-constitutional–but first, the punchline:

The Fifth Circuit Court of Appeals has struck down the CFPB’s payday lending rule–and essentially everything else the CFPB has ever done– on the grounds that the funds used to draft the bill were unconstitutionally obtained.

SO, stated again in smaller font that looks less hysterical, in the Fifth Circuit, at least, the payday lending rule is dead. And what’s more ALL CFPB rulings and actions are likewise dead because the CFPB did not draw life–i.e. money–but through the unlawful appropriation mechanism that was challenged in CFFSA. 

Now that does not mean the CFPB is dead all across the country–just in Texas, Louisiana and Mississippi. (Not Alabama!) Yet another unique feature of the American government is we have courts divided into “circuits” that essentially decide what the law is for certain groups of Americans and not others.

Its actually insane if you think about it.

But either way, the CFPB has essentially be stripped of all power to Act by one circuit, although it is fully empowered to Act everywhere else. In essence, at least for now, the CFPB can carry on operation in 47 states but it cannot take judicial action in 3 states. And that’s just as crazy as it sounds.

But now that you have the punchline(s), let’s tell the joke. And it is, sadly, a bit of a joke.

Our beloved constitution (is it still?) has several really cool elements. The one we’re discussing today is the “separation of powers” concept, and the underlying “checks and balances” that the various forms of government are supposed to exercise over each other.

In creating the Constitution the framers envisioned that Congress, the President and the Courts would all be fighting with each other for power.  So they devised a way to assure that all three of thee branches had only limited power and could each check one another–“ambition would check ambition” as the framers hoped.

Indeed, the framers of the Constitution were HORRIFIED that the three branches would somehow come together and work in unison. In particular the idea that the legislative and executive branches might work together was deemed “TYRANNY ITSELF” by the framers.

Pause.

Many of you not steeped in social theory are probably wondering what I’m talking about. I mean, obviously the president and Congress do fight with each other. But only when they are of different political parties. When they are both controlled by the same party they don’t fight. They work together. Sort of like as a conspiracy, to control the government, to make it do whatever the one party or the other want it to do.

And you’re correct! The political party system, indeed, completely destroys the “checks and balances” the framers intended. But the system goes on just the same. For now at least.

Eventually I will fun for office and upend (disrupt?) the entire political system in this nation and fix (literally) everything but–for now at least–I will stay in my lane and work to stop unwanted robocalls by the billions while breaking down esoteric legal doctrine to help everyone understand the law.

I like my job.

But now back on task.

One of the “checks and balances” the constitution maintains is that Congress–and Congress only–has the power of the “purse.” And what that means–according to the constitution–is that Congress must LITERALLY PASS A LAW every time something needs to be funded. The government cannot operate without this happening.

Pause again.

A lot of you probably wonder why the government “shuts down” from time to time. Well, this is why. Congress literally has to pass a law to keep it open every once in a while. And when the parties are fighting–ugh–sometimes they decide not to pass the law. And then government shuts down. And federal workers don’t get paid and you can’t visit Yellowstone (or, you know, get a passport or whatever.)

Pause one more time.

You may recall back in 2011 there was this huge financial crisis when one party–that will remain nameless–decided it would be super cool to not pay our national debt because it would make  the president–who was of the other party–look bad and our entire nation was “downgraded” by a sovereign debt scorer resulting in havoc in the markets.

Both of these ridiculous scenarios arise due to the power of the purse that Congress–and only Congress–wields. And when the political parties decide to use that power to wage war against one another–instead of in furtherance of all Americans as a whole–some really nasty and awful stuff happens.

But CFSAA isn’t about what the political parties actually do in abusing the power of the purse, it is about what the CFPB–and other independent agencies– might do with a perpetual grant of money that lives outside of Congressional control.

And that, at long last, brings me to the weird CFPB funding mechanism that was scrutinized in CFSAA. Congress passed a law allowing the CFPB’s director–who was himself unconstitutionally shielded from government oversight per a recent Supreme Court ruling–to set the agency’s budget and draw the money directly from the Treasury without seeking authority for Congress. Plus Congress wasn’t allowed to question where the money was going since the funding was deemed not an appropriation.

Now, in fairness, the federal reserve money that the CFPB was drawing was actually being taken from the regulated banks and entities the CFPB oversees and not directly from taxpayer dollars, so this isn’t quite the blank check it may seem–but still this funding mechanism was radically different than the old “Congress passes a law to fund governmental operations” approach that exists in most scenarios.

And the Court in CFSAA simply was not going to have it. Allowing the CFPB to fund itself, into perpetuity, would merge the power of the “purse” with the power of the “sword” and that would run afoul of the separation of powers doctrine and threaten our entire way of life. Which, is actually true enough (even if the CFPB’s perpetual funding scheme feels like small stakes compared to the constant abuses to the separation of powers doctrines on proud display all around us.)

Upon determining that the CFPB was unconstitutionally funded, that just left one question–what to do about it?

The Court had already determined that the CFPB’s payday lending rule was otherwise just fine. It wasn’t arbitrary or capricious. It was passed according to appropriate procedures. It was based on a robust factual record and the decisions reflected were within the realm of reason. And the fact that the CFPB’s director was illegally shielded from removal at the time it was passed really didn’t matter–there was no nexus between that illegal shield and the rule itself.

So, as the CFSAA panel frames it–the CFPB had the power to pass the payday lending ruling. It simply did not have the money needed to do so. And since the CFPB did not draw breath except via the illegal appropriation scheme Congress unconstitutionally created–nothing the CFPB has done to date (including but certainly not limited to the Pay Day lending rules) is binding.

Here is the most important line in the entire 35 page ruling:

In other words, without its unconstitutional funding, the Bureau lacked any other means to promulgate the rule.

Bing bing bing bing.

The light switch has been turned off. No juice means no rulings, or anything else. I.e. there is no CFPB (again, in the Fifth Circuit.)

So… now what?

Well there will be an appeal to the entire Fifth Circuit en banc. Likely an appeal to the Supreme Court. But I’ve got to tell you–and you know I am ALWAYS right when I make predictions–I think CFSAA is correctly decided and further appeals will be unsuccessful. The funding mechanism here DOES violate the Appropriations Clause of the Constitution (“No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.”) No case law to date supports the perpetual-funding machine the CFPB was handed.

So the CFPB is, in effect, unplugged at the moment.

But it is still there. And CFSAA actually confirms the CFPB is tremendously powerful (again every aspect of the pay day lending rule, itself, was upheld and the whole “illegal director” thing was cast aside like so many table scraps). It just doesn’t have the ability to do anything just yet.

Its like that time Superman died. I mean, you know he wasn’t going to stay dead. But for a little while, there it was, a Funeral for a Friend comic with all the little DC heroes morning him.

That’s precisely where we are right now. We are witnesses the insincere “death” of a super powerful being that will “be right back.”

But when?

In theory Congress would act quickly to pass a bill to give the CFPB life (easy fix) but since all the little congress people are off trying to convince you to vote for them–or more correctly, vote for their party since the individuals running are just puppets that do the bidding of their party and not you–that is unlikely to happen. So this lifeless husk of the CFPB will remain until December, and perhaps longer.

Then again, the political situation might result in the CFPB having no power for months, or even years. Just depends if one party or the other thinks they can get some political gain or leverage in holding back funding. Truthfully though, I don’t think the lights will be out on the CFPB for very long. So stay tuned.

For now, however, the Fifth Circuit has spoken–and I believe correctly–that the CFPB lacks the power to do anything. Other circuits will eventually agree but, by then, Congress will have fixed the problem and we will have all moved on with our lives.

© 2023 Troutman FirmNational Law Review, Volume XII, Number 293
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About this Author

Eric Troutman TCPA Lawyer Troutman Law Firm Orange County, CA
Founder

Eric J Troutman is known as one of the country’s prominent class action defense lawyers and is nationally recognized in Telephone Consumer Protection Act (TCPA) litigation and compliance. He has served as lead defense counsel in more than 70 national TCPA class actions and has litigated nearly a thousand individual TCPA cases in his role as national strategic litigation counsel for major banks and finance companies. Eric also helps industry participants build TCPA-compliant processes, policies, and systems.

Eric's perspective allows him to...

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