A federal appeals court just ruled that the funding scheme for a powerful financial services watchdog group is unconstitutional, dealing the agency a massive blow. In addition, the agency’s 2017 banking regulations on lenders offering small-dollar loans (i.e. payday loans) are out. 

Supporters of the watchdog group will spin this decision as an open door for lenders to prey upon consumers. We don’t buy it. As with other major issues, Congress is too willing to cede its authority to unelected and unaccountable bureaucrats. Turning a blind eye as agencies execute damaging regulations do consumers no good at all.

What happened

Imagine that Congress created a federal agency granted with immense power to wield against Americans, but constrained by little oversight or accountability.

The Consumer Financial Protection Bureau (CFPB) is the embodiment of such an agency. Designed by Democratic Senator Elizabeth Warren to be a highly independent financial services watchdog, the CFPB was established during the Obama era as part of Dodd-Frank. Democrats severed the CFPB’s funding from the congressional appropriations process by giving the purse strings to the Federal Reserve. 

The left may have thought this was a smart way to funnel unlimited funds to this agency for it to go after the lending industry without Congress meddling too much. But that is exactly what a federal appellate court found violates Congress’ own constitutional responsibilities.

A three-member 5th U.S. Circuit Court of Appeals in New Orleans ruled that the CFPB’s independent funding scheme violated the separation of powers principles in the U.S. Constitution. 

In its opinion, the Court explained that the CFPB differs from a “great majority” of executive agencies in how it is funded. Firstly, the Federal Reserve writes the CFPB a check for whatever the agency’s director asks for. Secondly, the Federal Reserve’s funding source is outside of the appropriations process.

So Congress did not merely cede direct control over the Bureau’s budget by insulating it from annual or other time limited appropriations. It also ceded indirect control by providing that the Bureau’s self-determined funding be drawn from a source that is itself outside the appropriations process—a double insulation from Congress’s purse strings that is “unprecedented” across the government.

Furthermore, this agency has sweeping powers that make the lack of congressional oversight of its funding all the more striking: 

It acts as a mini legislature, prosecutor, and court, responsible for creating substantive rules for a wide swath of industries, prosecuting violations, and levying knee-buckling penalties against private citizens.” … An expansive executive agency insulated (no, double-insulated) from Congress’s purse strings, expressly exempt from budgetary review, and headed by a single Director removable at the President’s pleasure is the epitome of the unification of the purse and the sword in the executive—an abomination the Framers warned “would destroy that division of powers on which political liberty is founded.

As such as the court found the CFPB to be “an innovation with no foothold in history or tradition.”

In addition, the court invalidated the CFPB’s payday lending rule by finding that the agency effectively had no legal means to enforce it without using unconstitutional funding. 

What this means

The invalidation of the payday lending rule is a good outcome. As we’ve written, the CFPB has tried to crack down on the lending industry by implementing this rule which would strip women, un/under-banked, and low-income Americans of access to credit when they need it.

The big picture is that the CFPB has been kneecapped. This decision will likely be appealed to the Supreme Court. However, this ruling cuts deeply into the agency’s power. 

No wonder Senator Warren threw a tantrum. She blasted this decision, trafficked in fear-mongering about the consequences of this decision, and then smeared the court as a bunch of “right-wing” extremists.  

The Editorial Board of the Wall Street Journal explained the implications of this decision:

The CFPB ruling continues the trend of originalist judges attempting to restore the proper understanding of the Constitution’s separation of powers. This means reining in the administrative state and requiring Congress to reassert its powers in writing laws with specificity and funding the government.

In creating the CFPB, Congress abdicated its duty and created an agency that has too much unaccountable power. The Fifth Circuit has done its duty to call out the CFPB as Congress’s illegitimate child.

We couldn’t agree more.