Fifth Circuit Finds CFPB Funding Unconstitutional — Now What?

5 minute read | October.20.2022

The Fifth Circuit ruled last night in CFSA v. CFPB that the Consumer Financial Protection Bureau’s funding structure is unconstitutional, triggering a potential wave of implications discussed below.

The holdings

A panel of three Fifth Circuit judges unanimously held that the CFPB funding structure created by Congress violated the Appropriations Clause of the Constitution, which provides that “no money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” It ruled that, although the CFPB spends money pursuant to a validly enacted statute, the structure violates the Appropriations Clause because the CFPB obtains its funds from the Federal Reserve (not the Treasury), the CFPB maintains funds in a separate account, the Appropriations Committees do not have authority to review the agency’s expenditures, and the bureau exercises broad authority over the economy. The court rejected the bureau’s arguments that the funding structure was necessarily constitutional because it was created by and subject to Congress, and distinguished other agencies that are funded outside of the annual appropriations process.

The case involves a challenge to the bureau’s 2017 payday rule, which prohibits lenders from attempting to withdraw payments for covered loans from consumers’ accounts after two consecutive withdrawal attempts have failed due to insufficient funds. The court rejected other challenges to the rule, including arguments that Congress violated the non-delegation doctrine by authorizing the bureau to promulgate rules prohibiting unfair practices, that this particular rule exceeded that statutory authority, and that the rule was otherwise arbitrary or capricious. But the court reasoned that the bureau could not have promulgated the payday rule without the unconstitutional funding, and, therefore, vacated it. As a result, lenders’ obligation to comply with the rule (originally set for Aug. 19, 2019, but repeatedly delayed) will be further delayed (if compliance is ever required) while the constitutional issue winds its way through the courts.


If upheld, the Fifth Circuit’s view regarding the constitutionality of the bureau’s funding, combined with its remedy, pose an existential threat to the agency. Under the court’s logic, the CFPB cannot act consistent with the Constitution, because its actions all depend on the expenditure of funds.

For example, bureau examinations and investigations, like bureau rulemakings, depend on the expenditure of funds. The receipt and processing of complaints requires the expenditure of funds. Indeed, the work of every bureau official or employee relies on a funding mechanism that the court has found unconstitutional. Simply put, without funding, the agency cannot act.

But the immediate implications are less dramatic. Challenges to the bureau’s funding structure have been pending for many years, and while it is likely that the panel’s decision will encourage more challenges, particularly in the Fifth Circuit, the existential threat depends on whether the panel’s decision remains the law. The bureau is likely to seek further review, either in the Supreme Court or before the full Fifth Circuit, and either court could reverse the panel’s decision. Indeed, other courts, including the D.C. Circuit, have reached the opposite conclusion after considering the relevant constitutional text and precedent. And, assuming it decides the question, the Supreme Court may be reluctant to adopt an interpretation of the Appropriations Clause that limits Congress’s authority to fund agencies or government programs outside of the annual appropriations process, especially given the many important agencies and programs that are currently funded outside that process.

If the Supreme Court ultimately upholds the bureau’s funding structure, the agency will have weathered its second significant constitutional challenge in its short history and eliminated another structural ground for challenging its actions.

However, the consequences for the agency should the Supreme Court agree with the panel’s decision are more complex. For example, it may not have the option of simply severing the unconstitutional provisions. In Seila Law, it was relatively straightforward for the court to sever the removal provision and simply fall back on the default presumption that the director of the CFPB is removable by the president at will. Here, there is no other funding mechanism to fall back on and the Supreme Court cannot create one, as that would likely present its own problems under the Appropriations Clause.

Instead, the Court might stay its mandate to give Congress an opportunity to pass legislation to “cure” the constitutional issue. There is some precedent for this. When the Supreme Court declared the Federal Election Commission unconstitutional in 1976 in Buckley v. Valeo, it afforded “de facto” validity to past agency actions, and stayed its mandate to allow Congress to repromulgate the statute in a manner that complied with the court’s holding. Of course, Congress would not be limited to simply “fixing” any constitutional defect, but would have plenary authority to revisit the agency’s structure, authorities, and very existence. Depending on the composition of the political branches, the CFPB that emerged from this process may be significantly different than the agency that exists now.

While this drama plays out, companies would be well served to not relax their focus on the day-to-day task of compliance. The litigation over the removal provision did not, ultimately, provide shelter to any company sued by the bureau. In addition, the state AGs, the Federal Trade Commission, and other relevant regulators will continue to partner with the CFPB and independently enforce the laws against entities subject to their authority. For the time being, companies also likely should presume the validity of other rules promulgated by the bureau, including various safe harbors contained in those rules, for compliance purposes. As noted, the Fifth Circuit’s decision will almost certainly be subject to further review, no existing regulation has yet been challenged on this ground, and courts are unlikely to penalize companies that have relied in good faith on a bureau rule, even if it is later struck down. See, e.g., 15 U.S.C. 1640(f), 1692k(e).

In short, we do not expect yesterday’s decision to affect the CFPB’s policy direction, and we anticipate that the bureau will continue to advance its rulemaking agenda and its supervision and enforcement priorities. While yesterday’s decision may result in some delays, it is not yet certain what other impact it will have.