High Court Review of CFPB’s Funding Structure Could Invalidate “Payday Lending Rule”

This coming term, the Supreme Court of the United States will hear arguments over the validity of a federal regulation that has stymied payment processors in recent years.

In 2017, the Consumer Financial Protection Bureau (“CFPB”) promulgated its “Payday Lending Rule,” which prohibits a covered lender — and, by extension, its payment processor — from continuing to make preauthorized attempts to withdraw loan repayments from a consumer’s bank account after two consecutive attempts are denied for insufficient funds unless the consumer gives new and specific authorization to make further withdrawals. 82 Fed. Reg. 54,472, 54,877-79 (Nov. 17, 2017). The CFPB has the authority to conduct investigations, issue subpoenas and civil investigative demands, initiate administrative adjudications, and prosecute civil actions in federal court. Over the years, it has initiated a number of enforcement investigations into alleged violations of the Payday Lending Rule.

From a payments perspective, the Payday Lending Rule conflicts with the implementing regulation of the Electronic Fund Transfer Act, called Regulation E, which allows lenders to process pre-authorized electronic fund transfers from consumers’ accounts as recurring payments, and puts the onus on consumers to revoke such authorizations by notifying their financial institutions. 12 C.F.R. §§ 1005.2(k), 1005.2(m), and 1005.10(c)(1). Significantly, Regulation E does not limit the number of electronic payment withdrawals that can be made after a consumer has signed up to make recurring payments to a lender.

This conflict prompted Community Financial Services Association of America and Consumer Service Alliance of Texas to file suit in 2018 and dispute the validity of the Payday Lending Rule. Among other things, the plaintiffs argued that the CFPB “is unconstitutionally structured” because of its “unique, double-insulated funding mechanism” whereby it bypasses the normal Congressional appropriations process and receives funding directly from the Federal Reserve, which itself is funded outside the appropriations process. Functionally, this allows the CFPB to choose its own amount of annual funding (as long as it does not exceed 12% of the Fed’s total expenses), which the plaintiffs argued contravenes the restraint on Executive Branch spending enshrined in the Appropriations Clause of the Constitution.

The United States Court of Appeals for the Fifth Circuit ultimately agreed, holding that the Payday Lending Rule is invalid because Congress’s decision to abdicate its appropriations power to the CFPB violated the Constitution and deprived the agency of lawfully funded means to promulgate the rule.

The CFPB petitioned for a writ of certiorari to review the decision, which the Supreme Court granted on February 27, 2023. Then, on March 23, 2023, the United States Court of Appeals for the Second Circuit created a split of authority in CFPB v. Law Offices of Crystal Moroney, where it addressed the same constitutional question presented in the Fifth Circuit but sided instead with the CFPB. With briefing currently underway in the Supreme Court, the parties will have an opportunity to argue the case in the upcoming October 2023 term. In the meantime, the CFPB’s authority to enforce the Payday Lending Rule — and, for that matter, any of the consumer protection laws it was designed to enforce — will hang in the balance.