The future of a powerful financial watchdog agency has been upended by a federal court, with both its funding and its independence now in danger.
A panel of the 5th Circuit Court of Appeals ruled last week that the Consumer Financial Protection Bureau’s (CFPB) unique power to fund its own operations is unconstitutional.
“For the time being, the decision raises more questions than it answers,” wrote Ian Katz, director at research consultancy Capital Alpha Partners, in an analysis.
“It will likely be appealed to the full Fifth Circuit Court of Appeals and could eventually end up before the Supreme Court,” Katz added.
If the conservative-majority justices sustain the ruling, the CFPB may be unable to enforce financial rules or crack down on fraud without Congress stepping in to fund it. But that would also give Republican lawmakers, who’ve long griped about the agency, a chance to undermine it for good.
“As Republicans have said all along, the CFPB’s ‘double-insulated,’ independent funding mechanism is unconstitutional and makes it wholly unaccountable,” Rep. Patrick McHenry (N.C.), the top Republican on the House Financial Services Committee, said in a statement responding to the ruling.
McHenry would lead efforts to revamp the CFPB if the GOP takes control of the House in the upcoming midterm elections.
“Bringing the CFPB under the appropriations process would make it more accountable to the American people through their elected representatives,” he added.
The CFPB has been a partisan flashpoint since it was created in 2011 by the Dodd-Frank Wall Street reform law as part of the response to the Great Recession.
The brainchild of Sen. Elizabeth Warren (D-Mass.), the CFPB was granted unprecedented power and independence to enforce laws meant to protect Americans from fraud and abuse from the financial sector. Over its 11 years in operation, the CFPB has issued sweeping new rules and reeled in more than $10 billion in fines paid by firms that allegedly abused, deceived or discriminated against customers.
Republicans have taken several steps to tame the CFPB from within since its creation.
Former President Trump overrode the agency’s line of succession in 2017 by appointing then-White House budget director Mick Mulvaney to serve as its acting chief.
After a federal court deemed Mulvaney the rightful acting head of the CFPB amid a power struggle with a Democratic holdover deputy director, Trump’s pick curtailed several agency rules and reined in its efforts to enforce lending discrimination laws.
“Congress deliberately ensured the independent funding of the CFPB, so that the consumer watchdog could protect consumers and help create an economy that centers working families,” Sen. Sherrod Brown (D-Ohio), chairman of the Senate Banking Committee, said in a statement in the wake of the 5th Circuit ruling.
“It is not a coincidence that, while other financial regulators …. all have independent funding structures, Wall Street chose to attack the one financial regulator charged with protecting consumers.”
The CFPB is led by a single director — appointed by the president and confirmed by the Senate — who has total authority over the agency’s ability to write new financial rules and punish financial firms that break them.
The CFPB was also able to forge its own path without congressional interference thanks to its unique source of funding.
Most federal agencies are funded through the congressional appropriations process, where lawmakers can allocate money to the executive branch for specific purposes and with strings attached.
Other agencies, such as the Federal Reserve System and Office of the Comptroller of the Currency, are independently funded through fees paid by financial firms. That gives those agencies the ability to set their own agendas without approval from Congress.
But the CFPB has a unique layer of protection: It secures its funding through a simple budget request from the director to the Federal Reserve System, which is obligated to fulfill it up to an exceedingly high threshold.
“Even among self-funded agencies, the Bureau is unique. The Bureau’s perpetual self-directed, double-insulated funding structure goes a significant step further than that enjoyed by the other agencies on offer,” wrote 5th Circuit Court of Appeals Judge Cory Wilson, a Trump appointee, writing on behalf of a unanimous panel of two other judges nominated by the previous president.
The ruling leaves several questions about the future of the CFPB open, likely until the Supreme Court settles the matter.
The court last year already ruled one aspect of the CFPB’s structure unconstitutional, stripping the director’s protection from being fired by the president, and seems poised to curb it again.
Another ruling against the agency could affect the legality of the dozens of regulations it has issued over its decade-plus of existence and may leave other laws the agency is charged with enforcing up for grabs.
Even so, the chaos the uncertainty could cause for the financial sector may force Democrats and Republicans to find a bipartisan solution that could pass through a divided Congress.
Democrats have historically resisted attempts to change the structure of the CFPB from a directorate to a five-person commission and place the agency under congressional appropriations. But they may be left with no other choice if a GOP-controlled House is responsible for rebooting the agency after a major court ruling.
“The CFPB’s funding setup has been opposed by Republicans since the bureau was born a dozen years ago. Congress deliberately provided the CFPB a separate funding mechanism so that it wouldn’t be at the mercy of politics,” Katz wrote.
“Conservative judges may make that untenable.”