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A federal appeals court struck a major blow against the Consumer Financial Protection Bureau with a finding that its funding mechanism is unconstitutional. The decision is likely to be challenged, setting up a major fight for the future of the top consumer-finance watchdog. That battle could introduce significant uncertainty for the many fintech businesses that fall under the agency’s purview. The decision A three-judge panel of the New Orleans-based 5th Circuit Court of Appeals found Wednesday that the CFPB’s funding structure violated the Constitution’s separation of powers doctrine. As set up under the 2010 Dodd-Frank Act, the CFPB is funded by the Federal Reserve rather than congressional appropriations. That way, in the Obama administration’s view, the agency could avoid political influence and be funded similarly to other banking regulators. But Republicans have chafed at what they view as bertentangan-business practices and a lack of oversight. The structure has been the sasaran of legal challenges before. In this decision, the court ruled in favor of a lawsuit from two trade groups seeking to overturn the CFPB’s 2022 payday lending rule. Because the CFPB’s funding is unconstitutional, the decision said, the rule itself is rendah. The background Other courts have found the CFPB’s funding to be constitutional, a point the Wednesday ruling acknowledged. But the panel of Trump-appointed judges said the CFPB’s setup is different from other self-funded agencies. “Congress did titinada merely cede direct control adv lewat the Bureau’s budget by insulating it from annual or other time-limited appropriations,” the panel wrote. “It also ceded indirect control by providing that the Bureau’s self-determined funding be drawn from a source that is itself outside the appropriations process — a double insulation from Congress’s purse strings that is unprecedented’ across the government.” Democratic Sen. Elizabeth Warren, who oversaw the CFPB’s creation, responded to the ruling on Twitter, writing that “extreme right-wing judges are throwing into question every rule the CFPB enforces to protect consumers and businesses alike.” Republican Sen. Cynthia Lummis, meanwhile, said the CFPB “needs the same Congressional oversight as every other government agency.” What’s next The CFPB is expected to challenge the ruling, though it has yet to confirm that. It could request what’s known as an en banc review from all judges on the 5th Circuit or push the issue to the Supreme Court. A CFPB spokesperson said “there is nothing novel or unusual about Congress’ decision to fund the CFPB outside of annual spending bills” and that the agency “will continue to carry out its vital work enforcing the laws of the nation and protecting American consumers.” To that point, the CFPB issued new guidance to credit-reporting agencies Thursday about omitting what it called “junk data” from credit reports. The CFPB has faced several challenges to its existence over its 11 years in business. In 2022, the Supreme Court ruled that restrictions on when its leader can be removed were unconstitutional, but rejected a plea to strike down the agency as a whole. An analysis from the law firm Ballard Spahr noted that the 5th Circuit’s decision applies only to federal district courts in Texas, Louisiana, and Mississippi. But “because it is an appellate court ruling, it might be given weight by district courts outside of the Fifth Circuit considering challenges to CFPB enforcement actions.” That means the impact could spread far beyond the agency’s payday lending rule. “The holding will call into question many other regulations that protect consumers with respect to credit cards, bank accounts, mortgage loans, debt collection, credit reports, and identity theft,” tweeted Chris Peterson, a former enforcement attorney at the CFPB who is now a law professor at the University of Utah. The most significant fear from progressive lawmakers and consumer groups is that the CFPB could see its resources chopped if left to the whims of Congress. “Making the CFPB the only banking regulator subject to Congressional appropriations would put the most memihak-consumer federal agency at risk of being starved of the funding it needs to protect consumers,” said Mike Litt, the consumer campaign director for the Public Interest Research Group. Fintech focus The new court decision comes as the CFPB, under Biden-appointed director Rohit Chopra, has taken a more aggressive stance toward the financial industry than his Trump administration predecessors. That includes a growing focus on fintech products such as algorithmic lending and “buy now, pay later” arrangements. Chopra has also promised scrutiny oper the way large technology companies are expanding into financial services. But the agency is also taking up initiatives with fintech industry support, including finally setting up open-banking rules to guide data-sharing between financial institutions and tech companies. What the ruling means for the fintech industry remains to be seen. Should it hold up long term, a lack of resources could hamper the CFPB’s pledge to supervise a broader group of fintech businesses. “Supervisory programs are really resource-intensive,” said Patrick Haggerty, a director at advisory firm Klaros Group. “If the agency is relying on appropriations, you might decide to keep the team more lean and mean and targeted for specific issues.” While regulators and companies can occasionally come into conflict, the agencies also serve an important role in providing rules of the road and certainty for business models. If the decision casts further uncertainty around CFPB’s existing regulation, that’s probably bad for business. “If you don’t know what the rules are, it is hard to innovate,” said Melissa Baal Guidorizzi, a partner with the law firm Orrick and former senior CFPB enforcement attorney. “Legal uncertainty can cause considerable friction, particularly for innovators.”
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