Fifth Circuit Upholds Constitutional Challenge to CFPB's Funding Structure: Implications for Separation of Powers

Fifth Circuit Upholds Constitutional Challenge to CFPB's Funding Structure: Implications for Separation of Powers

Introduction

In the landmark case of Consumer Financial Protection Bureau (CFPB) v. All American Check Cashing, Inc., the United States Court of Appeals for the Fifth Circuit addressed significant constitutional challenges posed against the CFPB's structural framework. The plaintiffs, including the CFPB, initiated a civil enforcement action against defendants—All American Check Cashing, Mid-State Finance, and Michael E. Gray—alleging "unfair," "deceptive," and "abusive" practices under 12 U.S.C. § 5331(a). In response, the defendants contested the constitutional legitimacy of the CFPB's structure, particularly focusing on its unique funding mechanism and the removal protections of its Director, asserting violations of the Constitution's separation of powers as outlined in Article II.

Summary of the Judgment

The Fifth Circuit, upon hearing the case en banc, vacated the panel majority's decision and concurred with the dissenting opinions, emphasizing the unconstitutional nature of the CFPB's funding structure. While the Supreme Court's decision in Seila Law LLC v. CFPB (2020) had previously invalidated the CFPB Director's for-cause removal protections as a violation of separation of powers, the Fifth Circuit extended this scrutiny to the CFPB's perpetual, self-funding mechanism. The court held that the CFPB's budgetary independence, secured through a perpetual sourcing of funds outside the traditional congressional appropriations process, fundamentally undermines the constitutional division of powers between the legislative and executive branches. Consequently, the court remanded the case for dismissal of the CFPB's enforcement actions against All American, citing the CFPB's unconstitutional authority to expend funds without proper legislative oversight.

Analysis

Precedents Cited

The judgment heavily references the pivotal Seila Law LLC v. CFPB case, where the Supreme Court decisively struck down the CFPB Director’s for-cause removal protections, ruling them incompatible with the Constitution's separation of powers. This precedent set a critical framework for assessing the CFPB's structural constitutionality. Additionally, the court examines historical practices surrounding the Constitution’s Appropriations Clause, drawing parallels to ensure that the CFPB's funding mirrors established legislative oversight mechanisms.

Legal Reasoning

Central to the court's reasoning is the Constitution's Appropriations Clause, which vests the power of taxation and spending exclusively in Congress. The CFPB's perpetual funding mechanism, allowing it to requisition funds up to twelve percent of the Federal Reserve's budget without congressional approval, effectively divorces the agency from legislative oversight. This structure contravenes the historical and constitutional principle that ensures executive agencies remain accountable to the legislative branch, thereby preserving the delicate balance of power integral to preventing governmental overreach and maintaining individual liberties.

The court also meticulously analyzed the lack of historical precedent for such a funding structure, noting that no other independent agency with broad enforcement and regulatory powers operates with complete financial autonomy. This absence underscores the constitutional anomaly presented by the CFPB, reinforcing the assertion that its funding mechanism is incompatible with the established separation of powers doctrine.

Impact

This judgment has profound implications for administrative law and the structure of independent agencies. By invalidating the CFPB's funding structure, the court reinforces the necessity of legislative oversight over executive agencies' finances. This decision serves as a clarion call to Congress to reevaluate and potentially restructure the financial frameworks of other independent regulatory bodies to ensure constitutional compliance. Future cases involving agency funding and separation of powers will undoubtedly reference this decision, potentially leading to significant reforms in how federal agencies are financed and overseen.

Complex Concepts Simplified

Separation of Powers

The separation of powers is a foundational principle in the U.S. Constitution that divides government responsibilities into three branches: legislative, executive, and judicial. This division is designed to prevent any one branch from gaining excessive power, ensuring a system of checks and balances.

Appropriations Clause

Found in Article I, Section 9, Clause 7 of the Constitution, the Appropriations Clause grants Congress the exclusive authority to levy taxes and authorize government spending. This clause serves as a critical check on the executive branch, ensuring that no money is spent from the Treasury without legislative approval.

For-Cause Removal Protections

For-cause removal protections limit the President's ability to dismiss certain officials without just cause. In the context of the CFPB, the Director could only be removed for inefficiency, neglect of duty, or malfeasance, which the courts have now deemed unconstitutional as it infringes upon the executive branch's authority.

Conclusion

The Fifth Circuit's decision in CFPB v. All American Check Cashing, Inc. represents a significant reinforcement of the Constitution's separation of powers. By deeming the CFPB's perpetual, self-funded structure unconstitutional, the court underscores the imperative of maintaining legislative oversight over executive agencies. This ruling not only impacts the CFPB but sets a precedent that may necessitate the reevaluation of funding mechanisms across various independent agencies. The decision acts as a safeguard against the potential accumulation of unchecked power within the executive branch, thereby preserving the constitutional balance essential for the protection of individual liberties and the prevention of governmental tyranny.

Moving forward, Congress will need to address these constitutional concerns to ensure that agencies like the CFPB operate within the boundaries established by the Constitution. This may involve restructuring the funding mechanisms to align with the Appropriations Clause, thereby restoring the necessary accountability and oversight that such powerful agencies require.

Case Details

Year: 2022
Court: United States Court of Appeals, Fifth Circuit.

Judge(s)

PER CURIAM.

Attorney(S)

Christopher J. Deal, Consumer Financial Protection Bureau, Washington, DC, for Plaintiff - Appellee. Theodore Olson, Jeremy Max Christiansen, Joshua Seth Lipshutz, Esq., Lochlan Francis Shelfer, Helgard Clarice Walker, Esq., Gibson Dunn & Crutcher, L.L.P., Washington, DC, Bentley Edd Conner, Canton, MS, Michael Verdier Cory, Jr., Danks, Miller & Cory, Jackson, MS, for Defendants - Appellants. Judd Edward Stone, II, Office of the Attorney General, Office of the Solicitor General, Austin, TX, for Amici Curiae State of Texas, State of Arkansas, State of Georgia, State of Indiana, State of Kansas, State of Louisiana, State of Nebraska, State of Oklahoma, State of South Carolina, State of Tennessee, State of Utah, State of West Virginia. Ilan Wurman, Arizona State University, Sandra Day O'Connor College of Law, Phoenix, AZ, for Amicus Curiae Separation of Powers Scholars. Oliver J. Dunford, Pacific Legal Foundation, Palm Beach Gardens, FL, for Amicus Curiae Chamber of Commerce of the United States of America. Marc Gottridge, Herbert Smith Freehills, L.L.P., New York, NY, Ilya Shapiro, Esq., Cato Institute, Washington, DC, Allison Michele Wuertz, Esq., Hogan Lovells US, L.L.P., New York, NY, for Amicus Curiae Cato Institute. Elizabeth Wydra, Chief Counsel, Constitutional Accountability Center, Washington, DC, for Amicus Curiae Current and Former Members of Congress. Katharine M. Mapes, Jeffrey Michael Bayne, Esq., Spiegel & McDiarmid, L.L.P., Washington, DC, for Amici Curiae Harold H. Bruff, Gillian E. Metzger, Peter Shane, Peter L. Strauss, Paul R. Verkuil. Scott Lawrence Nelson, Allison M. Zieve, Public Citizen Litigation Group, Washington, DC, for Amici Curiae Public Citizen, Incorporated, Americans for Financial Reform Education Fund, Center for Responsible Lending, Consumer Federation of America, Consumers Union, National Association of Consumer Advocates, National Consumer Law Center, Tzedek DC, United States Public Interest Research Group Education Fund. Colin Michael Watterson, Susman Godfrey, L.L.P., Houston, TX, for Amicus Curiae Appleseed Foundation, Incorporated.

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