Cmty. Fin. Servs. Ass'n of Am., Ltd. v. Consumer Fin. Prot. Bureau

• Docket Number: 21-50826
• Decision Date: 19 October 2022
• Citation: 51 F.4th 616
• Parties: COMMUNITY FINANCIAL SERVICES ASSOCIATION OF AMERICA, LIMITED; Consumer Service Alliance of Texas, Plaintiffs—Appellants, v. CONSUMER FINANCIAL PROTECTION BUREAU; Rohit Chopra, in his official capacity as Director, Consumer Financial Protection Bureau, Defendants—Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

51 F.4th 616

COMMUNITY FINANCIAL SERVICES ASSOCIATION OF AMERICA, LIMITED; Consumer Service Alliance of Texas, Plaintiffs—Appellants,

v.CONSUMER FINANCIAL PROTECTION BUREAU; Rohit Chopra, in his official capacity as Director, Consumer Financial Protection Bureau, Defendants—Appellees.

No. 21-50826

United States Court of Appeals, Fifth Circuit.

FILED October 19, 2022

Christian George Vergonis, Hampton Hunter Bruton, I, Michael A. Carvin, Jones Day, Washington, DC, Laura Jane Durfee, Esq., Jones Day, Dallas, TX, for Plaintiffs-Appellants.

Kevin E. Friedl, Karen S. Bloom, Consumer Financial Protection Bureau, Washington, DC, for Defendants-Appellees.

Keith Jerrod Barnett, Esq., Elizabeth Penland Waldbeser, Troutman Pepper Hamilton Sanders, L.L.P., Atlanta, GA, for Amicus Curiae Third Party Payment Processors Association.

Before Willett, Engelhardt, and Wilson, Circuit Judges.

Cory T. Wilson, Circuit Judge:

"An elective despotism was not the government we fought for; but one which should not only be founded on free principles, but in which the powers of government should be so divided and balanced ..., as that no one could transcend their legal limits, without being effectually checked and restrained by the others." THE FEDERALIST NO. 48 (J. Madison) (quoting Thomas Jefferson's Notes on the State of Virginia (1781)). In particular, as George Mason put it in Philadelphia in 1787, "[t]he purse & the sword ought never to get into the same hands." 1 THE RECORDS OF THE FEDERAL CONVENTION OF 1787, at 139–40 (M. Farrand ed. 1937). These foundational precepts of the American system of government animate the Plaintiffs' claims in this action. They also compel our decision today.

Community Financial Services Association of America and Consumer Service Alliance of Texas (the "Plaintiffs") challenge the validity of the Consumer Financial Protection Bureau's 2017 Payday Lending Rule. The Plaintiffs contend that in promulgating that rule, the Bureau acted arbitrarily and capriciously and exceeded its statutory authority. They also contend that the Bureau is unconstitutionally structured, challenging the Bureau Director's insulation from removal, Congress's broad delegation of authority to the Bureau, and the Bureau's unique, double-insulated funding mechanism. The district court rejected these arguments.

We agree that, for the most part, the Plaintiffs' claims miss their mark. But one arrow has found its target: Congress's decision to abdicate its appropriations power under the Constitution, i.e., to cede its power of the purse to the Bureau, violates the Constitution's structural separation of powers. We thus reverse the judgment of the district court, render judgment in favor of the Plaintiffs, and vacate the Bureau's 2017 Payday Lending Rule.

I.

A.

In response to the 2008 financial crisis, Congress enacted the Consumer Financial Protection Act, 12 U.S.C. §§ 5481 – 5603. The Act created the Bureau as an independent regulatory agency housed within the Federal Reserve System. See id. § 5491(a). The Bureau is charged with "implement[ing]" and "enforce[ing]" consumer protection laws to "ensur[e] that all consumers have access to markets for consumer financial products and services" that "are fair, transparent, and competitive." Id. § 5511(a).

Congress transferred to the Bureau administrative and enforcement authority over 18 federal statutes which prior to the Act were overseen by seven different agencies. See id. §§ 5512(a), 5481(12), (14).

Those statutes "cover everything from credit cards and car payments to mortgages and student loans." Seila Law LLC v. CFPB , ––– U.S. ––––, 140 S. Ct. 2183, 2200, 207 L.Ed.2d 494 (2020). In addition, Congress enacted a sweeping new proscription on "any unfair, deceptive, or abusive act or practice" by certain participants in the consumer-finance industry. 12 U.S.C. § 5536(a)(1)(B). "Congress authorized the [Bureau] to implement that broad standard (and the 18 pre-existing statutes placed under the agency's purview) through binding regulations." Seila Law , 140 S. Ct. at 2193 (citing 12 U.S.C. §§ 5531(a) – (b), 5581(a)(1)(A), (b) ).

Congress placed the Bureau's leadership under a single Director to be appointed by the President with the advice and consent of the Senate. 12 U.S.C. § 5491(b)(1)–(2). The Director serves a term of five years, with the potential of a holdover period pending confirmation of a successor. Id. § 5491(c)(1)–(2). The Act originally limited the President's ability to remove the Director, id. § 5491(c)(3), but the Supreme Court invalidated that provision while this litigation was pending, see Seila Law , 140 S. Ct. at 2197.

The Director is vested with authority to "prescribe rules and issue orders and guidance, as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof." 12 U.S.C. § 5512(b)(1). This includes rules "identifying as unlawful unfair, deceptive, or abusive acts or practices" committed by certain participants in the consumer-finance industry. Id. § 5531(b).

The Bureau's funding scheme is unique across the myriad independent executive agencies across the federal government. It is not funded with periodic congressional appropriations. "Instead, the [Bureau] receives funding directly from the Federal Reserve, which is itself funded outside the appropriations process through bank assessments." Seila Law , 140 S. Ct. at 2194. Each year, the Bureau simply requests an amount "determined by the Director to be reasonably necessary to carry out the" agency's functions. Id. § 5497(a)(1). The Federal Reserve must then transfer that amount so long as it does not exceed 12% of the Federal Reserve's "total operating expenses." Id. § 5497(a)(1)–(2). For the first five years of its existence (i.e., 2010–2014), the Bureau was permitted to exceed the 12% cap by $200 million annually so long as it reported the anticipated excess to the President and congressional appropriations committees. Id. § 5497(e)(1)–(2).

B.

In 2016, Director Richard Cordray, who was appointed by President Barack Obama, proposed a rule to regulate payday, vehicle title, and certain high-cost installment loans (the "Payday Lending Rule"). After a public notice-and-comment period, Director Cordray finalized the Payday Lending Rule in November 2017, during the first year of the Trump administration. See Payday, Vehicle Title, and Certain High-Cost Installment Loans, 82 Fed. Reg. 54472 (Nov. 17, 2017). The rule became effective on January 16, 2018, and had a compliance date of August 19, 2019. Id.

The Rule had two major components, each limiting a practice the Bureau deemed "unfair" and "abusive." See id. First, the "Underwriting Provisions" prohibited lenders from making covered loans "without reasonably determining that consumers have the ability to repay the loans according to their terms." 12 C.F.R. § 1041.4 (2018) ; 82 Fed. Reg. at 54472. The Underwriting Provisions have since been repealed and are not at issue in this appeal.

See 85 Fed. Reg. 44382 (July 22, 2019).

Second, and relevant here, the "Payment Provisions" limit a lender's ability to obtain loan repayments via preauthorized account access. See 12 C.F.R. § 1041.8. The Bureau determined that absent a new and specific authorization, it is "unfair and abusive" for lenders to attempt to withdraw payments for covered loans from consumers' accounts after two consecutive withdrawal attempts have failed due to a lack of sufficient funds. Id. § 1041.7; 82 Fed. Reg. at 54472. The Payment Provisions accordingly prohibit lenders from initiating additional payment transfers from consumers' accounts after two consecutive attempts have failed for insufficient funds unless "the additional payment transfers are authorized by the consumer." 12 C.F.R. § 1041.8(b)(1), (c)(1).

The Payment Provisions cast a wide net. So long as the purpose of the attempted transfer is to collect payment due on a covered loan, the two-attempt limit applies to "any lender-initiated debt or withdrawal of funds from a consumer's account." Id. § 1041.8(a)(1). This includes checks, debit and prepaid card transfers, preauthorized electronic fund transfers, and remotely created payment orders. See id. ; 82 Fed. Reg. at 54910.

In April 2018, the Plaintiffs sued the Bureau on behalf of payday lenders and credit access businesses, seeking an "order and judgment holding unlawful, enjoining, and setting aside" the Payday Lending Rule. The Plaintiffs alleged that the rule exceeded the Bureau's statutory authority and otherwise violated the Administrative Procedure Act (APA). They further alleged that the rule was invalid because the Act's for-cause removal provision, self-funding mechanism, and delegation of rulemaking authority each violated the Constitution's separation of powers.

Around this time, the Bureau, now led by Acting Director Mick Mulvaney, announced that it intended to engage in notice-and-comment rulemaking to reconsider the Payday Lending Rule. Due to that ongoing effort, the parties filed a joint request to stay both the litigation and the rule's effective date. The district court entered a stay pending further order of the court. Cmty. Fin. Servs. Ass'n of Am., Ltd. v. CFPB , 2018 WL 6252409, at *2 (W.D. Tex. Nov. 6, 2018).

While the Bureau engaged in rulemaking, President Trump nominated and the Senate confirmed Kathleen Kraninger as Director, replacing Acting Director Mulvaney. In early 2019, the Bureau issued a proposed rule rescinding the Underwriting Provisions but leaving the Payment Provisions intact. 84 Fed. Reg. 4252. In July 2020, following the Supreme Court's decision in Seila Law , the Bureau finalized its revised rule. 85 Fed. Reg. 44382. The Bureau simultaneously issued a separate "Ratification," in which it "affirm[ed] and ratifie[d] the [P]ayment [P]rovisions of the 2017 [Payday Lending] Rule." 85 Fed. Reg. 41905-02.

In August 2020, the district court lifted...