An appeals court decision that invalidated the Consumer Financial Protection Bureau's payday lending rule has far broader implications, potentially opening all of the agency's past rules and other actions to legal challenges, say regulatory and constitutional lawyers.
On Wednesday, a panel of three judges on the U.S. Court of Appeals for the 5th Circuit
The panel's decision is not binding, and the CFPB has roughly two weeks to seek a review of the case by the full appeals court. If that appeal is accepted, the three-judge panel's decision would be automatically vacated until the entire court hears the case, Community Financial Services Association of America v. CFPB. Alternatively, the CFPB could ask the Supreme Court for a review, lawyers said.
The ruling creates an opportunity for companies to challenge the CFPB further and attempt to unwind the bureau's 12-year history of rules and enforcement actions. A broad application of the court's theory could tie up the CFPB in litigation for years unless it prevails on appeal, some lawyers said.
"Every single CFPB rule on the books and enforcement actions could be subject to a legal challenge," said Patricia McCoy, a professor at Boston College Law School. "The only thing that has been invalidated is the payday lending rule, but the reasoning is that any activity that the CFPB does is funded by the Federal Reserve and in the future could be subject to potential challenge as unconstitutional."
Some lawyers suggested the CFPB's enforcement actions could grind to a halt as companies with cases pending before the 5th Circuit file motions claiming the bureau's actions are invalid due to its funding.
"There is going to be a slew of motions and litigation for current and past consent orders," said Joann Needleman, a member of the Clark Hill law firm. "This ruling gives no certainty to banks and financial services companies on how they move forward."
Few expect the CFPB to be completely disbanded even if the Supreme Court accepts the case on appeal. The bigger concern is whether the CFPB's past actions are valid and which authority is in a position to ratify its past rules and regulations.
"The real battle here is something has to be done by Congress," said Scott Pearson, partner and leader of consumer financial services at Manatt, Phelps & Phillips. "It's a pretty Draconian ruling. If the bureau does not have constitutional funding, then everything that flows from its activities are invalid."
One possible fix would be for Congress to modify the Dodd-Frank Act by passing legislation to subject the agency to the normal appropriations process. But few expect that to happen given the current divided Congress and the midterm elections being just two weeks away.
"It's not a great time to put forth legislation with every member of the House running for reelection," said McCoy. "It's a divided Congress with midterms that could result in a change that may not favor Democrats, making it less likely that everything the CFPB has done will be kept in place."
The ruling also could result in significant uncertainty for banks and financial services firms that rely on safe harbors to protect them from legal liability. McCoy suggested the decision threatens to paralyze mortgage lending in Louisiana, Mississippi and Texas — the three states where the 5th Circuit has jurisdiction — if lenders are sued or if there is uncertainty about whether the CFPB's existing laws apply.
Isaac Boltansky, managing director and director of policy research at BTIG, said the near-term implications of the ruling are limited. While some believe the decision will slow the CFPB down, Boltansky said he expects CFPB Director Rohit Chopra to redouble his enforcement and rulemaking efforts even as more companies seek to reverse the bureau's actions.
"We could envision companies refusing to comply with Bureau subpoenas, challenges to future larger participant rules, and a considerable amount of uncertainty regarding previously settled rules," Boltansky wrote in a research note Thursday.
Republicans have long sought to subject the CFPB to appropriations and to change its single-director structure to a commission with more oversight. Last year, the CFPB's budget of $598 million supported roughly 1,550 employees. Dodd-Frank authorized the CFPB to request funding of up to 12% of the operating expenses of the Fed. Many think the CFPB will be forced into the congressional appropriations process one way or another and that its funding will be curtailed at some point.
"Bringing the CFPB under the appropriations process would make it more accountable to the American people through their elected representatives," Rep. Patrick McHenry, R-North Carolina, said in a statement Thursday. McHenry, the top Republican on the House Financial Services Committee, said legislation sponsored by Rep. Andy Barr, R-Kentucky, should be considered to make the CFPB's funding similar to that of other federal agencies.
The CFPB challenges that view. "There is nothing novel or unusual about Congress's decision to fund the CFPB outside of annual spending bills," according to a statement issued by the bureau after the appeals court panel's ruling.
A larger question also looms as to what impact the decision might have on other government agencies including the Fed, the Federal Deposit Insurance Corp., the National Credit Union Administration and the Office of the Comptroller of the Currency.
The panel's decision differs from the constitutional challenge two years ago that was heard by the Supreme Court in Seila Law LLC v. CFPB. In that case, the
In the latest decision, the three-judge panel wrote that while the CFPB had the authority to issue its 2017 payday lending rule, the rule itself was invalid because the agency's funding from the Fed is unconstitutional. Lawyers said the funding issue is more difficult to solve largely because either Congress or the Supreme Court must ratify all of the agency's past actions, not the CFPB itself.
"There still needs to be a solution to everything that happened in the past," said Alan Kaplinsky, senior counsel at the law firm Ballard Spahr. "So there needs to be congressional ratification of everything that has already gone on and that might work as a way of saving all the regulations that have been issued."
Pearson at Manatt agreed.
"I'm sure there's chaos right now inside the CFPB and they will try to get the decision stayed while they pursue other options," he said.
Though the Supreme Court is more conservative now than it was when the Seila Law case was decided, the court typically hews to narrow rulings, Kaplinsky said. Given that Congress created the CFPB, some lawyers speculate that the current challenge could result in a similarly narrow decision with the CFPB's rules and actions remaining while its funding gets tied to appropriations.
The 5th Circuit judges frequently referred to the CFPB as "double insulated" from congressional oversight. The term is likely to show up in many legal filings calling for CFPB actions to be reversed.
The judges wrote in the 39-page decision: "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 — an abomination the Framers warned 'would destroy that division of powers on which political liberty is founded.'"
