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Following an appeals court funding decision, the CFPB is under "existential threat"

The Dodd-Frank Act included protections for the Consumer Financial Protection Bureau (CFPB) to protect its director and funding source from political pressure, but the CFPB has found that these safeguards are ineffective when facing unfriendly judges.

The CFPB was set up under Dodd-Frank to receive funding from the Federal Reserve, not Congress. Because they were selected to five-year terms, agency executive directors were shielded from potential sacking when the presidency changed.

The Supreme Court found that the CFPB's single-director structure is unconstitutional in 2020, violating the separation of powers between the executive and legislative branches. According to the judgment, a president may fire a CFPB director "at will" without giving a cause. With that choice, the agency maintained all of its regulatory jurisdiction.

The effects of a new ruling can be more significant. The CFPB's financing system was determined to be unconstitutional on October 19 by a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit in New Orleans. Although the ruling benefitted a payday lender, legal experts warned that it may have implications for all Fifth Circuit lawsuits brought against the CFPB. In light of the ruling, parties that have sued the CFPB—including a recent complaint filed by the U.S. Chamber of Commerce and others alleging the agency is acting outside of its statutory authority—now have solid grounds for winning their claims.

More generally, the decision may have a significant impact on the CFPB.

"An agency cannot act without funding. You have a U.S. court of appeals saying their funding is unconstitutional. From a practical standpoint, it strikes at the heart of the agency’s ability to function ," according to Rachel Rodman, a partner at the law firm Cadwalader and a former enforcement lawyer for the CFPB's Division of Supervision. "It also calls into question anything it has ever done—all of it is subject to challenge."

Allen Denson, a partner at the legal firm Stroock & Stroock & Lavan, stated that the decision "affects the CFPB’s ability to do its job. The bureau faces an uphill battle right now. It’s an existential threat."

The CFPB now has two  options: submit a petition with the Supreme Court, or appeal to the Fifth Circuit court for a ruling by all the circuit's appeals judges. The bureau will carry on with its duties in the meantime, a spokesman said.

According to the spokesperson, "There is nothing novel or unusual about Congress’s decision to fund the CFPB outside of annual spending bills. Other federal financial regulators and the entire Federal Reserve System are funded that way, and programs such as Medicare and Social Security are funded outside of the annual appropriations process. The CFPB will continue to carry out its vital work enforcing the laws of the nation and protecting American consumers."

The agency declined to answer any further questions.

Especially if they take control of the House of Representatives in next month's midterm elections, Republicans who have long criticized the Consumer Financial Protection Bureau as being unaccountable would undoubtedly enjoy taking the agency to task in congressional hearings.

Sen. Pat Toomey (R-Penn.), ranking member of the Senate Banking Committee, declared in a statement on October 19 that "The CFPB has been an unconstitutional and unaccountable agency since its inception. I’ve long argued that the CFPB should be subject to Congressional appropriations. As the Constitution requires, the people’s representatives shall determine how their tax dollars are spent. I’m glad to see the court agrees."

According to Denson, businesses have two alternatives for reacting to the decision on CFPB rule compliance. The first is to make minor adjustments while maintaining the firm's compliance procedures.

He claimed, "he way they were with the stroke of a pen."

However, suppose your company is engaged in legal proceedings with the CFPB, attempting to reach a settlement, or is facing potential enforcement action. Then it’s a different calculation, he explained.

He questioned, "What is the incentive to accept a settlement from them right now?" Companies may wish to at the very least postpone settlement negotiations while the Fifth Circuit's decision is likely to be appealed by the CFPB.

According to Rodman, the majority of businesses will continue to abide by the agency's rules since business as usual will continue at the bureau. Additionally, there is usefulness in the CFPB's laws, especially in the mortgage business, despite accusations from other sectors that the agency has overstepped its limits in some instances.

"Industry doesn’t want the uncertainty of the CFPB becoming a phantom federal agency," according to Rodman. "There are a lot of benefits to industry from the structure that the CFPB provides."



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