Appeals court rules CFPB funding mechanism is unconstitutional

A federal appeals court on Wednesday dropped a bombshell on the financial services industry, ruling that the CFPB’s funding structure is unconstitutional and, as a result, the agency’s payday loan rule was voided.

The Fifth Circuit Court of Appeals ruled that Congress “abdicated” its responsibility to subject the agency to the annual appropriations process, saying that Dodd-Frank, which created the bureau, gave the agency “an off-books charge card.”

In voiding the payday rule because of agency funding, the court throws into question all past actions taken by the bureau.

Background on the Case

The ruling came in a challenge to the payday lending rule filed by the Community Financial Services Association, the trade group representing payday lenders. The rule itself, first issued by then-Director Richard Cordray, stated that lenders had to verify that a borrower had an ability to repay the loan before the transaction was made. It further stated that it was unfair and abusive for lenders to withdraw loan payments from a borrower’s account after two successive attempts to withdraw funds failed due to insufficient funds.

 

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