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The conservative legal movement’s strategy to kneecap the administrative state continued its march yesterday, with a ruling that calls into question the operation of the Consumer Financial Protection Bureau (CFPB). While bad enough on its own terms, if ultimately successful, this ruling would lead to significant collateral damage that the gleeful destroyers of consumer protection haven’t thought through.
The case, where the Fifth Circuit Court of Appeals found the funding mechanism for the CFPB unconstitutional, could throw nearly all consumer financial markets into upheaval. Separately, it could potentially toss aside every agency and federal program that is not funded through discretionary congressional appropriations—threatening senior health care, retirement security, food and drug safety, and all kinds of other actions. The unintended consequences of the ruling would drive the U.S. government into near-total paralysis.
The theory of originalism justifying the conservative legal argument, which supposedly looks to the specific meaning of a document written when medical treatment often consisted of alcohol and opium to govern the modern polity, is underequipped to handle these implications, says law professor Christopher L. Peterson of the University of Utah, a former CFPB official. “I want to shake up the system myself,” Peterson said, “but you need to do it some tactical and strategic ways, instead of through a charge of tri-corner cap musketeers.”
THE FIFTH CIRCUIT RULING was made by three Trump-appointed judges. The case, brought by the payday lending lobby (the Community Financial Services Association of America) and a Texas short-term lending trade group, challenges the CFPB’s 2017 issuance of a payday lending rule on several grounds. The Fifth Circuit threw out all of those arguments but one: that the CFPB’s funding structure is an unconstitutional violation of the separation of powers.
In the Dodd-Frank Act that created the CFPB, lawmakers intentionally placed the bureau inside the Federal Reserve System, so it could receive funding from the Fed, rather than through congressional appropriations. As many have noted, a number of bank regulators are funded outside of appropriations through industry assessments, like the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, and the Federal Reserve itself, to name a few. Even agencies unrelated to banking like the Food and Drug Administration are funded on industry assessments.
The goal with the CFPB was explicit: to avoid the appropriations process that would lead bank-friendly Republicans who don’t like consumer protection to defund the agency, as they have done to other bank regulators that rely on appropriations.
Despite these multiple precedents, the judges maintained that Congress has “exclusive power over the federal purse,” and that the CFPB’s funding from the Federal Reserve, which gets its funding from bank assessments, is “double insulated” from congressional appropriations, since it gets money outside the process from an agency that gets money outside the process. “Wherever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it,” the ruling states.
This makes all the funds that the CFPB uses unconstitutional, according to the ruling. The citations for this come mostly from law review articles and a concurring opinion in a case where the CFPB’s funding structure was not found invalid. There is no current mechanism to fund the CFPB any other way; you could sever the funding mechanism from the law establishing the agency, but it would be impoverished until new legislation is passed to fund it.
Essentially every consumer financial regulation that was transferred to the CFPB, even if they were originally instituted by other agencies, would be illegal now.
In a statement, a CFPB spokesperson told the Prospect: “There is nothing novel or unusual about Congress’s decision to fund the CFPB outside of annual spending bills. Other federal financial regulators and the entire Federal Reserve System are funded that way, and programs such as Medicare and Social Security are funded outside of the annual appropriations process. The CFPB will continue to carry out its vital work enforcing the laws of the nation and protecting American consumers.”
The implications of the ruling are vast, though not explicitly envisioned by the Fifth Circuit judges, who only applied it to the payday lending rule to throw it out. But everything the CFPB has done since its inception would be put into question by the logic of this ruling.
That includes a lot of rules that banks would not want to see eliminated, as Professor Peterson explained. For example, the amendments to Regulation F, which governs the debt collection agency, included several safe harbors that adapt the rules for debt collectors to modern technology. If the Fifth Circuit holding that this and other rules were implemented with unconstitutional funds holds, those safe harbors would no longer exist, and virtually all debt collectors would be in violation of the Fair Debt Collection Practices Act, and would be open to consumer lawsuits.
In Dodd-Frank, Congress required that lenders subscribe to an “ability to repay” standard for mortgages. In rulemaking, the CFPB allowed “qualified mortgages” with certain characteristics to be exempt from that standard. That would go away too, and all mortgage borrowers could challenge their qualified mortgages and seek restitution. In other words, financial institutions would see themselves put at risk by the CFPB being ruled unconstitutional.
Georgetown professor Adam Levitin named a host of other rules that would be struck down under the Fifth Circuit logic. Essentially every consumer financial regulation that was transferred to the CFPB, even if they were originally instituted by other agencies, would be illegal now because the bureau reissued them. And all of the CFPB’s enforcement actions, including subpoenas to businesses, as well as the consumer complaint database it maintains (and which businesses use to try to correct errors), would also be undermined. So both consumers and the entities they purchase from would be significantly harmed.
“No court said any other regulation would be struck down, but [the Fifth Circuit] did strike down the payday lending rule, and it’s not clear to me what’s the difference,” said Peterson. “All of the regulations that organize daily financial transactions for 300 million people were just called into question. It’s going to be a mess.”
There’s also the point that the CFPB spokesperson made in its statement: Medicare, Social Security, and a host of other programs are funded outside of the appropriations process. The plain logic of the Fifth Circuit is that only Congress can authorize appropriations directly from general fund revenues. Any other system of funding agencies or programs is questionable. So say goodbye to the FDIC, the FDA, and the Fed on the agency side, and all mandatory programs like Social Security on the spending side.
The ruling tried to carve out Social Security and other mandatory spending by saying that the Social Security Administration, at least, depends on annual appropriations (as do other agencies that direct mandatory spending), and Congress directs the payment levels for beneficiaries. But Congress clearly directed the Fed to fund the CFPB and set limits on how much it could fund (no more than 12 percent of the Fed’s total operating expenses). And both mandatory spending like Social Security and the CFPB have “perpetual funding features” that the Fifth Circuit claims violate the Constitution’s requirement for congressional appropriations.
The bottom line is that a creative and determined conservative judge could easily state that the plain language of the Constitution rejects all mandatory spending, making Social Security, Medicare, food stamps, welfare benefits, and more illegal.
ORIGINALISM HAS NOT REALLY ANTICIPATED the implications of its doctrines. Conservatives are all too happy to end consumer protection as we know it and leave millions to the vicissitudes of the free market, but they might not be ready for banks and financial firms to be angry over being newly exposed to consumer lawsuits.
We’ve seen these unintended consequences in a host of incidents since the Dobbs ruling, where women’s lives have been threatened because doctors fear prosecution for performing lifesaving abortions. If hard-line conservatives have their way, this extreme disruption is coming to other walks of life.
“[Conservatives] have this antique vision of the administrative state that does not have elegant theories or tools to unravel the chaos that can ensue when a century of work to build up the way that businesses and consumers and taxpayers organize their lives gets destroyed,” said Peterson.
In short, Americans depend on the administrative state. Tearing great holes in it would create tremendous disruption and uncertainty—the very argument that businesses make all the time in decrying new regulations or tax policies—as part of a deranged anti-government crusade. But if there’s anything that can be said about Republicans with any certainty, it’s that disastrous consequences won’t stop them.
