as published in West Virginia Banker magazine, Winter 2022

In October 2022, the United States Court of Appeals for the Fifth Circuit ruled that the Consumer Financial Protection Bureau’s (CFPB) independent funding structure violates the U.S. Constitution’s Appropriations clause and the principle of separation of powers. The Dodd-Frank Act, passed in the wake of the 2008 financial crisis, provided that the CFPB would not be funded through Congressional appropriations. Instead, the CFPB receives its funding directly from the Federal Reserve, which is also funded outside the congressional appropriations process.

In Community Financial Services Association of America Ltd v. CFPB, two trade associations brought a lawsuit against the CFPB to challenge its 2017 Payday Lending Rule. Broadly speaking, the Rule governs certain personal loans with short-term or balloon payment structures. It (1) requires lenders to choose between two ability-to-repay underwriting methodologies; (2) requires lenders to report and obtain information about a consumer’s financial obligations and borrowing history from certain consumer reporting agencies; (3) limits repeated payment withdrawal attempts from a consumer’s account; and (4) requires lenders give disclosures related to those withdrawal attempts.

The trade associations asserted myriad claims against the CFPB, most of which did not persuade the court. However, a three-judge panel of the Fifth Circuit agreed with the associations on one critical argument. It held that the CFPB’s “double-insulated” funding structure violated the U.S. Constitution’s Appropriations clause and the principle of separation of powers. As a result, the court invalidated the Payday Lending Rule.

What does this mean for banks in West Virginia? Strictly speaking, the Fifth Circuit’s decision isn’t a law in West Virginia. It is a law (considered “mandatory authority”) within the Fifth Circuit, which includes only Mississippi, Louisiana, Texas, and the Canal Zone. It will remain a law unless it is reversed by the entire Fifth Circuit or the United States Supreme Court. Based on the current composition of the Fifth Circuit, some commentators have speculated that, even if the entire Fifth Circuit were to consider the issue, it is unlikely to reverse the decision. That leaves the Supreme Court as the only court that might possibly reverse the decision and essentially approve the CFPB’s funding structure. Unless and until that happens, the CFPB’s funding structure is unconstitutional, at least in the Fifth Circuit. If the CFPB doesn’t appeal to the Supreme Court, the door is opened for challenges regarding whether the CFPB’s past, ongoing and future actions are enforceable.

Even though the Fifth Circuit’s decision is not the law in West Virginia, it is considered a persuasive authority, meaning that West Virginia courts may consider it persuasive and follow its ruling if they are ruling on a lawsuit pending in West Virginia that challenges the CFPB. However, they are not required to follow the Fifth Circuit’s decision and could decide the issue in a way that conflicts with the Fifth Circuit.

From a broader standpoint, however, the Fifth Circuit’s decision may open the door in West Virginia and elsewhere for other challenges to the CFPB, the rules it has issued, and the enforcement actions it has prosecuted. Some members of Congress have been challenging the CFPB virtually since its creation. The Fifth Circuit’s decision may embolden them to renew their efforts. However, that challenge may have to wait until the next presidential administration, as it is unlikely President Biden would sign into law a bill that limits the CFPB or changes its funding structure.

For now, despite the potentially serious outcomes of the Fifth Circuit’s decision, banks should wait before changing any aspect of their compliance programs. Instead, banks should consult and work with counsel to carefully consider any potential impacts of the decision and the risks to their operations if they change their operations now. At the very least, banks should wait to see if the CFPB asks the entire Fifth Circuit or the Supreme Court to review the decision.

Another lawsuit pending in the Fifth Circuit is trying to further reign in the CFPB. In that lawsuit, the U.S. Chamber of Commerce and several industry groups are challenging a recent change to the CFPB’s Examination Manual. The Manual is a guide for the oversight of entities the CFPB regulates regarding their compliance with consumer financial protection laws. The Chamber of Commerce and industry groups challenge a change to the Manual’s provisions regarding Unfair, Deceptive, Abusive Acts or Practices (UDAAP). The CFPB has revised that section of the Manual to provide that conduct it considers unfair discrimination is now considered UDAAP and thus within the CFPB’s jurisdiction to regulate.

The Chamber of Commerce and industry groups assert three primary claims against the CFPB’s revision to the Manual:

First, they claim that the new provisions need to adequately discuss the classes of individuals that tended to be protected by its provisions, thus leaving regulated entities with unclear guidance on what actions are or are not permissible and, thus, rendering the revisions impermissibly vague.

Second, they claim that the CFPB exceeded its authority with the revisions as unfair discrimination already is policed by other agencies through other statutes that Congress authorized. They argue that the CFPB is not permitted to essentially make itself into a second Congress that assumes whatever power it wants.

Third, they claim that the CFPB failed to follow the required administrative procedures for revising the Manual.

This lawsuit is still in its beginning stages. Banks should not assume that the revisions to the Manual will be invalidated simply because this lawsuit is pending in the Fifth Circuit, the same court that ruled against the CFPB on its funding structure. While the outcome of this lawsuit is uncertain, it does highlight important aspects of the CFPB’s jurisdiction and enforcement philosophy. Banks should consider the revisions to the Manual and audit their products and services to ensure they align with the CFPB’s current posture.

At the bottom, the recent decision and lawsuit discussed above show that the scope of the CFPB’s jurisdiction may be uncertain. Banks in West Virginia should consult with counsel on the safest ways to proceed, given the current uncertainty.