On October 19, 2022, the Fifth Circuit Court of Appeals gave his opinion in American Community Financial Services Association, et al. vs. CFPB (CFSA v. CFPB) invalidating the CFPB rule on payday, vehicle title and certain high-cost installment loans (Little dollar rule). The decision of the three-member panel calls into question the future viability of the CFPB by declaring the regulator’s funding mechanism unconstitutional.

In 2017, the CFSA and the Consumer Service Alliance of Texas sued the CFPB to challenge the agency’s small dollars rule. In particular, the plaintiffs argued that in enacting the rule, the Bureau acted arbitrarily and capriciously and exceeded its statutory authority. Additionally, the plaintiffs alleged that the CFPB was unconstitutionally structured because the CFPB Director’s protection from impeachment and the CFPB’s independent funding mechanism violated the principles of separation of powers.

Although the panel concluded that “for the most part, Plaintiff’s claims miss their mark. . . an arrow. . . found its target: Congress’s decision to abdicate its appropriation power under the Constitution, that is, to cede its purse power to the Board, violates the Constitution’s structural separation of powers. Accordingly, the court reversed the decision of a district court render an interim judgment in favor of the CFPBand overturned the small dollar rule.

What happens afterwards? The CFPB has the option of either requesting a bench a rehearing in the full Fifth Circuit Court of Appeals or the filing of a petition for certiorari in the United States Supreme Court. Of course, the immediate effect is that the small dollar rule will continue to be suspended for the foreseeable future. Additionally, the decision itself only binds the federal Fifth Circuit courts and does not immediately affect the Bureau’s broader operations. As such, we can expect that the CFPB can continue to operate normally, despite the injection of uncertainty as to the validity of any future actions it might take.

Nonetheless, the substance of the panel’s decision calls into question all of the CFPB’s regulatory, supervisory and enforcement activities. Indeed, the panel states that “[b]Since the funding employed by the Bureau to enact the payday loan rule was drawn entirely from the agency’s unconstitutional funding scheme, there is a linear connection between the crippled provision (the Bureau’s funding mechanism) and the challenged action (promulgation of the rule). In other words, without its unconstitutional funding, the Bureau had no other means of enacting the rule. This reasoning is arguably applicable to all CFPB activities and could pose a significant challenge to the future viability of the CFPB in the absence of Congressional action. We will continue to monitor this litigation closely.