Second Circuit Court rules CFPB’s funding mechanism does not violate constitution

The Consumer Financial Protection Bureau’s (CFPB) funding mechanism was ruled constitutional by a three-judge panel of the U.S. Court of Appeals for the Second Circuit. The panel did not agree with the Fifth Circuit panel decision in Community Financial Services Association of America Ltd. (CFSA) v. CFPB. The U.S. Supreme Court has granted the CFPB’s petition and will review the Fifth Circuit decision in the next term.

Before the U.S. Supreme Court declared the limitation on the President’s ability to remove the CFPB Director “for cause” unconstitutional, the CFPB issued a civil investigative demand (CID) to the Law Offices of Crystal Moroney. The federal district court approved the CID against Moroney based on the CFPB’s petition.

During the Second Circuit appeal, Moroney contended that the enforcement of the CID should not take place because the CFPB Director was unconstitutionally protected from removal by the President making the CID void at its issuance.  Secondly, the CFPB’s funding structure goes against the Appropriations Clause, and thirdly, Congress broke the nondelegation principle when creating the CFPB’s funding structure.  Lastly Moroney argued that the CID is excessively burdensome.

The Second Circuit ruled that the CFPB’s funding structure was lawful because it was authorized by Congress and subject to specific rules outlined in the CFPA. This decision contradicted the Fifth Circuit’s ruling in CFSA, which argued that Congress had relinquished control over the CFPB’s budget by allowing it to receive funding from the Federal Reserve without yearly or other limited appropriations.  As a preliminary statement, the Second Circuit stated that it was unable to locate any backing in Supreme Court precedent for the conclusion reached by the Fifth Circuit.

The decision has caused a disagreement between different circuits on whether the CFPB’s funding structure is constitutional. Normally, this would be a good opportunity for the US Supreme Court to resolve the legal uncertainty. However, despite granting the CFPB’s petition for certiorari in CFSA v CFPB, the Supreme Court has decided not to hear the case this term, which was requested by the CFPB. Instead, the case will be heard next term.

Moroney has two options: either go to the Second Circuit and request a rehearing en banc, or file a certiorari petition in the Supreme Court. Since the Supreme Court has already granted CFSA’s certiorari petition, Moroney might choose to file a certiorari petition instead. If Moroney does file a certiorari petition, it is unlikely that the CFPB will oppose it, and the Supreme Court will probably grant the petition. Then, the Court would either consolidate Moroney’s case with CFSA’s case for argument or hold it pending the outcome in CFSA.

The recent ruling presents an opportunity to question the legitimacy of various regulations and enforcement actions taken using the current CFPB funding system. This applies to the Fifth Circuit and potentially other areas as well, unless the decision is challenged successfully. However, it is advised for companies and financial institutions to be careful and seek legal advice before altering their compliance programs based solely on this ruling, until its consequences are fully understood.

At Global Legal Law Firm, our lawyers are familiar with the rapidly changing nature of electronic payments processing processors, and the ever changing regulations involved, with decades of expertise in ISOs, commercial collections, credit card brands, and other forms of electronic payment processing litigation. Let us guide you through this new and volatile environment, rather than attempting to navigate it on your own.