Payday Lending Rule
Community Financial Services Association v. Consumer Financial Protection Bureau
Date: July 3, 2024
Issue: Whether the Fifth Circuit’s inquiry for separation of powers violations and its use of agency convenience to uphold the Payday Lending Rule warrants en banc review.
Case Summary: The Community Financial Services Association (CFSA) filed a petition for rehearing en banc in its lawsuit challenging the Consumer Financial Protection Bureau’s (CFPB) Payday Lending Rule.
The Payday Lending Rule requires lenders to evaluate whether borrowers can repay loans. In its lawsuit, CFSA argued that CFPB overstepped constitutional grounds, the rule was fundamentally flawed, and that it derived from unconstitutionally concentrated power within CFPB. A federal court denied CFSA’s motion for summary judgment, ruling CFPB’s ability to fund itself outside the regular congressional budget did not infringe on the power given to Congress by the Constitution’s Appropriation Clause.
On appeal, a Fifth Circuit panel affirmed, concluding CFPB did not exceed its authority under the Dodd-Frank Act or Administrative Procedure Act (APA) in promulgating its Payday Lending Rule. However, the panel vacated the rule because CFPB’s funding structure was unconstitutional. The panel opined Congress’s decision to abdicate its appropriations power under the Constitution by ceding its power of the purse to CFPB violates the Constitution’s structural separation of powers. In addition, the Fifth Circuit concluded there was no way to fix CFPB’s unconstitutional funding. The panel relied on Collins v. Yellen (2021), where the Supreme Court clarified the proper remedy when an agency’s actions are tainted by an unconstitutional structure. The panel ruled that to obtain vacatur of the agency action, a party must show that a provision of the agency’s enacting statute is unconstitutional; and the unconstitutional provision inflicted harm.
On June 19, 2024, the U.S. Supreme Court reversed the Fifth Circuit’s decision, ruling CFPB’s funding structure under Section 1017 of the Dodd-Frank Act is constitutional. The Court explained an appropriation is a law authorizing expenditures from a specified source of public money for designated purposes. The Court concluded Section 1017 meets these requirements because the CFPB draws money from the combined earnings of the Federal Reserve to carry out its duties. The Court remanded the lawsuit for further proceedings consistent with its opinion. On remand, the Fifth Circuit panel reinstated the remainder of its opinion, affirmed the grant of summary judgment to the CFPB, and allowed CFSA 14 days to file its rehearing petition.
First, CFSA argued the panel’s remedial inquiry for separation-of-powers violations warrants en banc review. While the panel recognized that the Payday Rule was “promulgated by a director who was unconstitutionally shielded from removal,” it declined to vacate the rule. Relying on Collins, CFSA argued it was entitled to vacatur because then-CFPB Director Richard Cordray issued the Payday Rule while unconstitutionally insulated from removal by President Trump.
Second, CFSA argued the panel’s use of agency convenience to uphold an overbroad rule warrants en banc review. CFSA claimed the panel “ratcheted down” the government’s burden to defend against APA challenges on the merits. Applying the Payday Lending Rule’s payment provisions to debit and pre-paid card payments and separate installments of multipayment installment loans, according to CFSA, do not serve those provisions’ supposed purpose. CFSA explained that unsuccessful withdrawal attempts against debit and prepaid cards ordinarily do not trigger the consumer fees the rule supposedly targets. In addition, multiple payment attempts for separate installments of a loan, spaced two weeks or a month apart, do not produce the asserted harm of multiple attempts to collect payment on the same day or within a short period. In effect, CFSA claimed the Payday Lending Rule was arbitrary and capricious.
Third, CFSA argued the panel improperly deferred to CFPB’s assertion that including carveouts for these transactions would be impractical and complex. CFSA stressed that “efficiency is no substitute for reasoned decision-making.” CFSA also claimed an irrationally overbroad regulation cannot be justified by efficiency. In CFSA’s view, “now that the Supreme Court has upheld the Bureau’s funding scheme, it is more important than ever that the CFPB be held to the basic demands of reasoned decision-making.”
Bottom Line: CFPB’s response to CFSA’s petition is due Aug. 5, 2024.
Documents: Order
