The latest threat to the CFPB could reverberate big time

UNITED STATES – MARCH 29: The Consumer Financial Protection Bureau building in Washington on Monday, March 29, 2021. (Photo By Bill Clark/CQ-Roll Call, Inc via Getty Images)

Three Trump-appointed judges in Texas declared the Consumer Financial Protection Bureau's funding structure unconstitutional on Wednesday in a decision with the potential to reverberate throughout the financial industry.

Why it matters: The reasoning behind the ruling, if upheld, could potentially invalidate all the rules enacted by the CFPB over its 11-year existence — including regulations underpinning the U.S. mortgage system.

Details: On its face, the case seems insignificant — the judges on the Fifth Circuit overturned a regulation governing payday lenders that was never in effect.

  • But the decision's reasoning essentially says that because the agency's funding structure is unconstitutional, none of its rules are valid. And that throws new uncertainty into the system.
  • The implication is anyone could theoretically use that argument to challenge the agency's regulations — including some, like the standards around mortgage lending, that have become systemically important.
  • If upheld, the CFPB would need to get its funding approved by Congress annually. That would also imperil the agency's resources to pursue bad actors and enforce regulations.

Background: Like other financial regulators, the CFPB does not rely on Congressional appropriations. Instead, it's directly funded by the Federal Reserve.

  • “There is nothing novel or unusual about Congress’s decision to fund the CFPB outside of annual spending bills," the agency said in a statement, adding that Medicare and Social Security are also funded outside Congress's appropriations process.

The implications: A weaker CFPB would be undeniably positive for certain financial services firms like payday lenders, Isaac Boltansky, director of policy research at BTIG, wrote in a note.

  • "But some more established corners of the financial services industry could look at the resulting uncertainty with grave concern," he said, noting the bureau writes the rules for mortgage originations and money transmission.
  • "[That] makes the prospect of throwing out the settled rule book less than appealing for some market participants."

Zoom out: The Fifth Circuit, which covers Louisiana, Mississippi and Texas, is considered the most conservative appeals court in the country — more than a third of its judges were appointed by former President Trump.

What they're saying: Consumer advocates issued a flurry of statements on Thursday decrying the ruling.

  • "This case was wrongly decided and it should be reversed on appeal," said Rachel Gittleman, of the Consumer Federation of America, in a statement, arguing the decision threatens the agency's enforcement capabilities.

The other side: Payday lenders, who won this case, the Chamber of Commerce, which makes a similar argument in another suit, and Republican lawmakers, who've long opposed the agency, applauded the ruling.

  • “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 … I’m glad to see the court agrees," Senator Pat Toomey (R-Pa.), said in a statement.
  • “The Chamber has long believed, and warned Democrats and Republicans, that the CFPB’s structure is unconstitutional," said Bill Hulse, a vice president, at the Chamber, in a statement.

What's next: The CFPB will likely appeal, seeking either a hearing before the entire Fifth Circuit, or at the Supreme Court, which has in the past sided against the agency.

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