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Appeals court says financial watchdog agency CFPB's structure is unconstitutional

A seal at the Consumer Financial Protection Bureau (CFPB) headquarters in Washington, D.C., on April 16.
Samuel Corum
Bloomberg via Getty Images
A seal at the Consumer Financial Protection Bureau (CFPB) headquarters in Washington, D.C., on April 16.

A federal appeals court has ruled that the funding structure of the nation's most powerful financial watchdog agency, the Consumer Financial Protection Bureau, is unconstitutional.

In a case brought by a payday lending group, a three-judge panel of the 5th U.S. Circuit Court of Appeals threw out a CFPB regulation governing those high-interest-rate lenders and ruled that the way the bureau is funded, "violates the Constitution's structural separation of powers."

"Three judges, all appointed by President Trump, have decided to take away the funding for that agency that Congress itself had voted for," says Chris Peterson, a law professor at the University of Utah and former enforcement attorney at the CFPB.

The bureau was created by the Obama administration and Congress in the wake of the financial crisis and Great Recession to better protect everyday Americans from getting cheated by banks, student loan and credit card companies and other financial firms. It has returned billions of dollars to consumers who it deemed have been treated unfairly.

To protect it from political influence though, the bureau receives its funding from the Federal Reserve, not Congress. It was that part of its structure that the court said violates the Constitution.

"While the great majority of executive agencies rely on annual appropriations for funding, the Bureau does not," the judges wrote. "Wherever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it."

Peterson says the CFPB is not unique as an agency that does not receive its annual funding determined by Congress — the Federal Reserve and the Federal Deposit Insurance Corporation both are funded in other ways.

"The CFPB is likely to ask for a stay while it seeks an appeal to the entire 5th Circuit... and then likely the United States Supreme Court after that," says Peterson.

In the meantime, he says it raises doubt about all sorts of other rules that the bureau has in place, because at least in the region of the 5th circuit - Texas, Louisiana, and Mississippi - other CFPB rules could be challenged with similar lawsuits.

"There's going to be a lot of confusion about whether or not rules associated with mortgage loans, debt collection, credit cards, are still even viable rules anymore down in the Fifth Circuit."

If the ruling ultimately stands it could mean the bureau would need to get an annual budget approved by Congress, which Peterson says would make it vulnerable to, "banks, payday lenders, and debt collection agencies who are incredibly effective at lobbying Congress to weaken consumer protections."

In a statement, the CFPB said "there is nothing novel or unusual about Congress's decision to fund the CFPB outside of annual spending bills." A bureau spokesperson said Medicare and Social Security are funded outside of the annual appropriations process. The agency says it will, "continue to carry out its vital work enforcing the laws of the nation and protecting American consumers."

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NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.