5th Circuit: CFPB Enforcement Can Proceed Despite Unconstitutional Structure

The U.S. Court of Appeals for the Fifth Circuit recently remanded and vacated a lower court’s order that denied a payday lender’s motion for a judgement on a CFPB enforcement action.  The case originated in the U.S. District Court for the Southern District of Mississippi where the CFPB alleged that a payday lender engaged in unfair, deceptive, or abusive acts in violation of the Consumer Financial Protection Act.  The payday lender argued in District Court that the CFPB’s structure is unconstitutional because it violates the President’s removal power.  The District Court denied the motion and the payday lender appealed to the Fifth Circuit, where the Fifth Circuit affirmed the District Court’s ruling. 

However, after the Fifth Circuit ruled against the payday lender, the U.S. Supreme Court heard a similar case (Seila Law LLC v. CFPB, 140 S. Ct. 2183 (2020) and found the CFPB’s structure unconstitutional.  In Seila Law, the Supreme Court severed the CFPB’s unconstitutional structure from the CFPB’s enforcement powers, allowing the agency to go forward with its enforcement actions.  The Fifth Circuit voted sua sponte to rehear the payday lender’s case en banc.  The majority ruled that the District Court erred because it declined to find the CFPB’s structure unconstitutional.  But the majority did not issue a judgement in favor of the payday lender because the majority did not believe that the record called for a judgement on the pleadings.  Additionally, the majority allowed the payday lender to bring subsequent constitutional challenges on remand.  Accordingly, the CFPB can go forward with its enforcement action and the payday lender can bring additional challenges to the CFPB’s structure.

The dissent acknowledged the Supreme Court’s holding in Seila Law and argued that not only does the CFPB’s structure violate the constitution, but that the CFPB’s funding mechanism also violates the constitution.  In Seila Law, the Supreme Court ruled that the CFPB’s director enjoyed too many removal protections, which violated the constitution because it shieled the Director from any executive oversight by the President.  The dissent argued that the CFPB’s funding mechanism shields the CFPB from Congressional oversight, which violates the constitution.  Unlike other federal agencies, the CFPB receives its funding directly from the Federal Reserve instead of through Congressional appropriations.  The dissent stated that the lack of Congressional oversight in the CFPB’s funding process allows the agency to “assume a level of fiscal independence that shields it from any effective public accountability,” making the CFPB unconstitutional.  The dissent believed that the court should have dismissed CFPB’s action because of the CFPB’s unconstitutional structure and funding mechanism.