CFPB asks appeals court to reject payday efforts to keep litigating

Bloomberg News

The Consumer Financial Protection Bureau has asked the U.S. Court of Appeals for the 5th Circuit to reject a request by payday lenders to reopen an appeal to the agency's small-dollar rule aimed at keeping the rule from going into effect next year. 

On Friday, the CFPB sent a letter to the 5th Circuit asking the court to reject payday lenders' efforts to reopen a forthcoming appeal that is expected to be based on a novel legal theory that the CFPB's funding from the Federal Reserve System is only valid when the Fed turns a profit. 

The deadline for payday lenders to petition for a rehearing expired on Dec. 5, the CFPB said. But the effort has gained new impetus with the payday lending industry trying to keep the payday lending rule from going into effect on March 30, 2025.   

"The Court should reject Plaintiffs' request that it depart from its standard procedures when this case returns from the Supreme Court so that Plaintiffs can take the extraordinary step of trying to reopen this now-resolved appeal," wrote Kevin E. Friedl, senior counsel at the CFPB.

In its 7-2 decision by Justice Clarence Thomas, the high court reversed a 5th Circuit court decision from 2022 and upheld the constitutionality of the CFPB's funding through the Federal Reserve System. Still, some legal experts think that the 5th Circuit could agree to a rehearing given its hostility to government agencies in general and the CFPB in particular. 

"I can absolutely see the 5th Circuit entertaining a funding challenge part two," said Allen Denson, a partner at the law firm Morgan Lewis. "The CFPB is saying there's no need for a rehearing but I think it's more likely that the 5th Circuit is going to allow additional challenges."

Since the Supreme Court upheld the CFPB's funding last month, the CFPB's detractors have created a new line of attack. The theory is that the CFPB cannot draw funding from the Federal Reserve System if the Fed doesn't turn a profit, which it hasn't since 2022. The idea was first laid out in an opinion piece in The Wall Street Journal by Hal Scott, a professor emeritus at Harvard Law School, just four days after the Supreme Court upheld the CFPB's funding. A few Republican lawmakers raised the same claim in hearings last week. 

Community Financial Services Association of America, the payday lending trade group that sued the CFPB in 2018, is expected to ask for a rehearing by claiming that the CFPB's funding in the past two years has not been executed properly and that the agency should not have received any money from the Federal Reserve System because it has no earnings. A lawyer for CFSA did not respond to a request for comment. 

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"The industry is now arguing that under Dodd-Frank, the CFPB has to get its annual budget from the Fed's earnings — but if the Fed has no earnings, then the CFPB could not be funded," Denson said.

The Fed posted a record operating loss of $114.3 billion last year, up from a loss of $58.8 billion in 2022. The Fed has long claimed that negative net income does not impact its ability to operate, and further argues that its own funding is independent from Congress, enabling it to run up as many paper losses as it wants. The Fed ran a surplus for many years with excess returns handed back to the Treasury Department. Experts attribute the Fed's losses to its aggressive support of the economy during the pandemic, combined with jacking up interest rates to combat high inflation.

But Friedl, the CFPB's senior counsel, said in his letter to the appeals court that the payday industry's claims have already been rejected.

"It is unclear that a new judgment is needed where Plaintiffs' non-funding claims were already resolved by this court's 2022 judgment and mandate and their funding claim by the Supreme Court's decision and forthcoming judgment," he wrote. "But even if a new judgment were appropriate, that new  judgment would be limited to the funding claim on which the Supreme Court  granted certiorari — not Plaintiffs' other claims, which were settled by the Court's 2022 judgment and mandate and which should no longer be open to relitigation."

The Supreme Court found that the CFPB's funding satisfies two requirements: that it have a specific source of funding and a purpose. The 5th Circuit's three-judge panel that found the CFPB to be unconstitutional were all appointed by former President Donald Trump.