2nd Circuit Upholds CFPB’s Funding Structure

On March 23, 2023, a three-judge panel for the Second Circuit upheld the constitutionality of the Consumer Financial Protection Bureau’s funding structure. The unanimous decision creates a circuit split with the Fifth Circuit, which recently struck down the CFPB’s funding structure as an unconstitutional violation of the Appropriations Clause.

In Consumer Financial Protection Bureau v. Law Offices of Crystal Moroney, P.C., the respondent-appellant, a law firm that provides legal advice and services to clients seeking to collect debt, argued that a civil investigative demand (CID) from the CFPB was unenforceable on numerous grounds, including that the CFPB’s funding structure was unconstitutional. The Second Circuit ruled that the CFPB’s funding structure is proper under the Appropriations Clause because it was authorized by a Congressional statute. According to the Second Circuit, the Appropriations Clause “means simply that no money can be paid out of the Treasury unless it has been appropriated by an act of Congress…In other words, the payment of money from the Treasury must be authorized by a statute.” The CFPB’s funding structure was authorized by the Consumer Financial Protection Act and, therefore, does not violate the Appropriations Clause.  The Second Circuit expressly declined to follow the Fifth Circuit’s recent opinion in Community Financial Services Association of America, Ltd. v. CFPB, which found the CFPB’s funding structure to be unconstitutional, stating that the Court could not find “any support for the Fifth Circuit’s conclusion in Supreme Court precedent … in the Constitution’s text … [or] in the history of the Appropriations Clause.”

The Second Circuit also ruled that the CFPB’s funding structure is proper under the nondelegation doctrine. The nondelegation doctrine requires Congress to articulate an “intelligible principle” to which an agency must conform. The Second Circuit found that in the CFPA, Congress articulated five “objectives” and six “primary functions” for the CFPB. These serve as an intelligible principle to “guide the CFPB in setting and spending its budget.”

Finally, the Second Circuit ruled that the CID issued by the CFPB to the law firm was enforceable. The law firm argued that the CID was unduly burdensome, impermissibly sought information that implicated the practice of law, and sought documents protected by the attorney-client privilege. Although the CFPA specifically prohibits the CFPB from exercising enforcement authority over the practice of law, the Second Circuit found that the CFPB’s CID only sought information related to the law firm’s debt-collection practices, and was thus issued pursuant to a legitimate statutory purpose. The Second Circuit also rejected the law firm’s attorney-client privilege claims, noting that it was the law firm’s burden to show that specific documents were privileged, but that the law firm did not submit a privilege log or otherwise meet its burden to show that the CID was unreasonable.

As previously reported, the Supreme Court has already granted the CFPB’s certiorari petition to review the Fifth Circuit’s decision in Community Financial Services Association of America, Ltd. v. CFPB, and will decide the constitutionality of the CFPB’s funding mechanism next term.