Court rules CFPB’s funding structure is unconstitutional, potentially stripping it of its authority

Article by Jenna McNamee | Oct 24, 2022

The news: New Orleans-based 5th U.S. Circuit Court of Appeals ruled the Consumer Financial Protection Bureau’s (CFPB) funding structure unconstitutional, per Banking Dive.

A divided response: In most cases, federal agencies are funded by annual appropriations from Congress. This ruling hinges on the CFPB receiving its funding from the Federal Reserve, which isn’t funded via appropriation. The court’s verdict has essentially stripped the CFPB of its enforcement authority.

In response to the ruling, a CFPB spokesperson pointed out that most financial agencies are financed outside of annual appropriations, such as the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), and thus the CFPB’s financing structure is not out of the ordinary.
Democratic lawmakers say the ruling is reckless and puts American consumers at major risk because the ruling may prevent the CFPB from effectively enforcing.
Republican senators welcomed the ruling, as they believe the CFPB has been enacting radical regulations across the financial sector, hurting consumers and stifling competition.

The CFPB hasn’t said whether it will appeal the ruling.

How’d we get here? The CFPB has aggressively attempted to rein in the financial sector this year, tackling a full gamut of financial topics.

Overdraft fees have been a major focus of the bureau, with CFPB Director Rohit Chopra saying banks with a higher share of frequent overdrafters or greater average fee burdens for overdrafts will be closely monitored.
The CFPB has also buckled down on credit card companies and their data sharing practices, as well as nonbank and rent-a-bank lending.
It’s also extended its reach to fintech firms by planning to bring regulatory parity to banks and fintechs.

But the mounting crackdowns have been wearing banks down, and last month a group of industry trade groups united to sue the CFPB for overextending its reach. In that lawsuit, the trade groups questioned the agency’s funding structure.

What’s next? The unconstitutional funding ruling could have broad implications, as it lets banks and other financial institutions push back on the regulatory agency.

Without the CFPB’s enforcement authority, consumers might feel that their protections are threatened and that they’ll fall victim to predatory behaviors, like unreasonable overdraft fees.
But banks can’t afford to lose customer loyalty. The race to attract and maintain customers is tight, brand differentiation is difficult within the sector, and with the economy worsening, customers will seek out financial institutions that they feel have their best interests in mind.