A Utah federal district court has rejected the attempt of The Center for Excellence in Higher Education (CEHE) to invalidate a civil investigative demand (CID) issued by the CFPB based on a challenge to the constitutionality of the CFPB’s funding mechanism. 

Pursuant to Dodd-Frank, the CFPB receives its funding through requests made by the CFPB Director to the Federal Reserve, subject to a cap equal to 12% of the Federal Reserve’s budget, rather than through the Congressional appropriations process.  In a May 2022 decision, en banc Fifth Circuit ruled that that the CFPB’s enforcement action against All American Check Cashing could proceed despite the unconstitutionality of the CFPB’s single-director-removable-only-for-cause-structure at the time the enforcement action was filed.  However, in a scholarly concurring opinion in which four other Fifth Circuit judges joined, Judge Edith Jones agreed with All American Check Cashing’s argument that the CFPB’s funding mechanism is unconstitutional, writing that “[t]he CFPB’s budgetary independence makes it unaccountable to Congress and the people.”  (The majority opinion did not consider the funding argument but indicated that the district court could consider other constitutional challenges on remand.)

The magistrate judge in the Utah case had issued a Report and Recommendation in which she recommended that the CFPB’s petition to enforce its CID should be granted as to certain information.  In rejecting CEHE’s constitutional challenge, the district court found that CEHE had previously raised and subsequently waived the argument before the magistrate judge.  Nevertheless, the district court discussed the merits of CEHE’s argument.

The district court stated that “after careful consideration,” it did not find the reasoning of the concurrence in All American Check Cashing to be persuasive.  While agreeing with CEHE that Seila Law did not directly address the constitutionality of the Bureau’s funding mechanism, the district court found that comments made by the U.S. Supreme Court in Seila Law “taken together…suggest that the Bureau’s funding structure does not represent an unconstitutional delegation of power from Congress to the Executive Branch.”  The district court first observed that that the Supreme Court “discussed the Bureau’s appropriations process, acknowledging that ‘[t]he director does not even depend on Congress for annual appropriations.’”  It then observed that “[t]he Court nonetheless went on to make clear that the ‘only constitutional defect we have identified in the CFPB’s structure is the Director’s insulation from removal’ and described the Bureau’s funding structure merely as an aggravator of the ‘agency’s threat to Presidential control.’”  It also observed that “[t]he Court went as far as saying the Bureau’s constitutional infirmity would ‘disappear’ if “the Director were removable at will by the President.’”

Finding that the CID was neither unreasonable nor unduly burdensome, the district court overruled CEHE’s objection to the magistrate judge’s report and recommendation and granted the CFPB’s petition to enforce the CID as to certain information.  

The constitutionality of the CFPB’s funding mechanism could soon be ruled on by a Fifth Circuit panel.  On May 9, 2022, a Fifth Circuit panel heard oral argument in Community Financial Services Association v. CFPB.  CFSA’s lawsuit challenges the payment provisions in the CFPB’s 2017 final payday/auto title/high-rate installment loan rule.  The trade groups’ primary argument on appeal continues to be that the 2017 Rule was void ab initio because the CFPA’s unconstitutional removal restriction means that the Bureau did not have the authority to promulgate the 2017 Rule.  However, the trade groups submitted the concurring opinion in All American Check Cashing as supplemental authority to the Fifth Circuit panel hearing their appeal and have argued that the panel should adopt the reasoning of the concurring opinion and invalidate the 2017 Rule.