On Wednesday, a panel of three judges from the 5th U.S. Circuit Court of Appeals ruled that the funding mechanism of the Consumer Financial Protection Bureau (CFPB) was in violation of the Constitution because its funding is funneled through the Federal Reserve instead of being appropriated directly by Congress.
The CFPB was created in 2010 by the Dodd-Frank Act and the strange funding mechanism was designed to “prevent political pressures” on the agency from swaying its behavior; however, its track record shows otherwise. Under the Biden administration the CFPB has been used as a hammer to cripple innovation and prevent fintech companies from offering new and accessible lending.
Since Biden took office the CFPB has attacked late fees charged by mainstream financial institutions, announced it would be invoking a long dormant authority to examine nonbank financial companies that represent some of the only credit available to struggling Americans who have been continuously left behind by traditional institutions, and generally exceeded its authority as granted by Congress.
The 5th Circuit’s decision is a win for consumers and taxpayers alike, and as the U.S. moves to a more technologically driven banking system it is abundantly important that we recognize the need for innovation and growth in this space and the CFPB has not lived up to its intended purpose of putting up responsible, tough, but fair guardrails. With this latest decision calling into question the structure of the CFPB hopefully the agency will take a hard look at its overall posture and shift in line with their congressional mandate.
The CFPB can and will likely appeal this decision. To appeal it they can do one of two things: the agency can request a hearing before the full Fifth Circuit panel of judges, known as an en banc review, or it can submit a request to hear the case before the Supreme Court. The Supreme Court ruled in 2020 that the agency's structure violated the Constitution's separation of powers clause because the agency is headed by a single director who could only be fired for cause rather than at will by the president. It seems the CFPB will have to think strategically about their next move.