FYI: SCOTUS to Determine Constitutionality of CFPB Funding

The Supreme Court of the United States has agreed to consider a decision by the U.S. Court of Appeals for the Fifth Circuit that found the Consumer Financial Protection Bureau's funding structure was unconstitutional. And so, for the second time in less than four years, the CFPB's fate is set to be decided by the nation's highest court.

 

In its first appearance in 2020, the SCOTUS found the CFPB's structure of a single director who could only be removed by the president "for cause" to be unconstitutional.  The Court noted that the single-director configuration is incompatible with the structure of the Constitution, which "with the sole exception of the Presidency" avoids concentrating power in any single individual.

 

Ultimately, the Court fixed the problem by severing the "for cause" removal provision which allowed a president to easily remove the director. This allowed the bureau to continue operating.

 

THE FUNDING ISSUE

 

Unlike most other federal agencies, the CFPB does not ask Congress for funding. Instead, it obtains its funds by making a request to the Federal Reserve, and that request may not exceed 12% of the Federal Reserve's "total operating expenses."

 

The Federal Reserve itself does not obtain funding from Congress, rather its expenses are paid through assessments made on banking institutions. These "insulated funds" are not subject to Congressional approval.

However, after paying its expenses, the Federal Reserve is required to turn the rest of the "insulated funds" over to the U.S. Treasury. As the Fifth Circuit saw it, because Treasury obtains its appropriations from Congress the Federal Reserve remains "tethered" to Treasury and so it is within one degree of Congressional oversight.

 

In the case of the CFPB, because it obtains its funding from the Fed's "insulated funds" it is twice removed from Congressional oversight. The funding mechanism is intentional. It is contained in section 1017 of the Dodd-Frank Act which created the bureau in 2010, and is exactly what was explained to Congress in hearings in 2011: "Congress provided the CFPB with a source of funding outside the appropriations process . . ." To be sure, it is statutorily mandated that these funds "shall not be subject to review by" Congressional appropriations.

 

The CFPB says it is subject to oversight. Its director is required by law to submit "reports" and appear before Congress and "justify" its "budget request of the previous year." It is also subject to annual audits by the Comptroller General.

 

The Fifth Circuit sees it differently. The Constitution's Appropriations Clause grants Congress exclusive control over "the federal purse" and this control is a necessary apparatus to the checks and balances between the three branches of the federal government. The Appropriations Clause prevents "the executive [branch] . . . from unilaterally spending funds," by allowing Congress to retain control of the purse strings.

 

The CFPB, in the end, holds the strings to the purse, not Congress, and so it is constitutionally defective, according to the Fifth Circuit's opinion.

 

TWO VIEWS OF BUREAUCRACY COLLIDE

 

For more than a century, two political theories have denominated thought on the bureaucratic state.

 

One school believes that agencies that have limited Congressional oversight are antithetical to the separation of powers among the U.S. branches of government. The concern is that these agencies can make rules which in many ways usurp a power that Congress should only possess – the power to make law.

 

Most agencies, though, have some level of Congressional control because Congress must approve their funding and this oversight provides a check on agency action. Absent political accountability, this school of thought says an agency can develop what is called "bureaucratic resistance." It occurs when civil servants act outside the sphere of politics in ways that are contrary to the beliefs of elected officials.

 

Those concerned with the power of administrative agencies believe that the greater the authority given to the agency, the greater the need for political accountability. Especially when the agency routinely makes decisions that impact the lives of citizens as the CFPB will tell you it does. The Fifth Circuit decision is largely following this theory.

 

Another line of thinking is that it is necessary for bureaucratic agencies (at least some) to act without political influence. This agency type is not swayed by politics, but rather is composed of professional civil servants. Freed from political pressures, it can carry out its role within the bounds of formal and technical restraints. This is the model of the CFPB.

 

The problem for the bureau is that in its decade of existence, its public face has always been highly political, with a backseat given to technical and formal restraints.

 

For example, even before the Fifth Circuit's decision, last year Politico described recent bureau activities as a "war against industry" that "has delighted progressives and alarmed industry lobbyists who deal with the bureau, escalating partisan tensions around an already-contentious agency."

 

Last year, two Republican House members accused the CFPB director of an "unprecedented partisan power grab to take control of the Federal Deposit Insurance Corporation's agenda." At around the same time, the bureau announced it possessed "dormant" powers over "nonbanks whose activities the CFPB has reasonable cause to determine pose risks to consumers." Although these "nonbanks" may not be identified in any law that would allow the CFPB to oversee them or their product or service, the bureau said it can make such a determination that it has such power from "complaints collected by the CFPB, or on information from other sources, such as judicial opinions and administrative decisions."

 

NEXT STEPS

 

The SCOTUS will set down a briefing schedule within the next few weeks. At the earliest, argument would not be heard before this fall.

 

If the Court does find the funding scheme unconstitutional, it could result in several rules, like Regulation F for debt collection, being deemed invalid. Other CFPB rulemaking activities cover nearly all other aspects of consumer finance, from mortgage lending to credit reporting and all would have occurred during the period of unconstitutional funding. Enforcement and supervision activities would have a similar fate. The Court might try to sever the funding scheme, if it can find a path to do so, simply to avoid these outcomes.

 

For the CFPB's part, it has not put a pause on any of its activities. But with the Court agreeing to take up the case, it is likely that anyone litigating with the bureau will seek a stay pending the Court's decision.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 8th Cir Vacates FDCPA Class Action Post-Trial Judgment for Lack of Article III Standing

The U.S. Court of Appeals for the Eighth Circuit recently vacated a trial court's judgment entered after trial in favor of the named plaintiff and a class of consumers for alleged violations of the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 ("FDCPA"), and the Nebraska Consumer Practices Act, Neb. Rev. Stat. § 59- 1601 ("NCPA"), due to lack of Article III standing.

 

In so ruling, the Eighth Circuit held that, because the named plaintiff never actually paid any part of the interest or principal sought in the collection letters at issue, she did not suffer a concrete injury as required for Article III standing.

 

A copy of the opinion is available at:  Link to Opinion

 

Two debt collectors sent the named plaintiff (and her deceased husband) a letter demanding payment for medical bills. The letter listed amounts owed without distinguishing interest from principal. The letter stated "interest and other charges may accrue daily."

 

The named plaintiff brought a putative class action lawsuit against the collectors for alleged FDCPA and NCPA violations. After a trial, the trial court granted judgment as a matter of law in favor of the named plaintiff and the plaintiff class.

 

The collectors appealed, alleging among various issues, (i) the named plaintiff did not have Article III standing, (ii) the trial court erred in allowing her to introduce an issue at trial without notice, (iii) the trial court erred in determining that the NCPA requires a judgment before collecting prejudgment interest, (iv) the trial court abused its discretion in finding that the named plaintiff was an adequate class representative, and (v) the trial court abused its discretion in certifying the FDCPA class.

 

As you may recall, standing under Article III consists of three elements: the plaintiff must have "(1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision." Spokeo, Inc. v. Robins, 578 U.S. 330, 338 (2016), citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992).

 

"To establish injury in fact, a plaintiff must show that he or she suffered 'an invasion of a legally protected interest' that is 'concrete and particularized' and 'actual or imminent, not conjectural or hypothetical.'" Id. at 339, quoting Lujan, 504 U.S. at 560 (1992). "Central to assessing concreteness is whether the asserted harm has a 'close relationship' to a harm traditionally recognized as providing a basis for a lawsuit in American courts—such as physical harm, monetary harm, or various intangible harms." TransUnion LLC v. Ramirez, 141 S. Ct. 2190, 2200 (2021), citing Spokeo, 578 U.S. at 340-41.

 

The Eighth Circuit noted that the Supreme Court of the United States "has rejected the proposition that 'a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right." TransUnion LLC v. Ramirez, 141 S. Ct. 2190, 2205 (2021), citing Spokeo, 578 U.S. at 341.

 

The named plaintiff contended that she suffered an injury in fact when the collectors sent a letter demanding interest on her debts without a judgment - despite the fact that the named plaintiff never actually paid any part of the interest or principal. The named plaintiff analogized her alleged injury to the type of harms recognized in common-law fraudulent misrepresentation and conversion. Fraudulent misrepresentation recognizes harm flowing from plaintiffs' reasonable reliance on a misrepresentation. See Flamme v. Wolf Ins. Agency, 476 N.W.2d 802, 809 (Neb. 1991). Conversion recognizes harm resulting from a wrongful deprivation of or interference with plaintiffs' property. See Zimmerman v. FirsTier Bank, 585 N.W.2d 445, 451 (Neb. 1998).

 

The Eighth Circuit concluded that the named plaintiff did not show any harm that bears a "close relationship" to the type of injury that results from reliance on a misrepresentation or wrongful interference with property rights. Spokeo, 578 U.S. at 341; cf. TransUnion, 141 S. Ct. at 2209. Although "Spokeo does not require an exact duplicate in American history and tradition," TransUnion, 141 S. Ct. at 2204, the Court reasoned that the absence of any injury resembling these harms meant that the borrower did not suffer a concrete injury in fact. See Trichell v. Midland Credit Mgmt., 964 F.3d 990, 998 (11th Cir. 2020).

 

Accordingly, the Eighth Circuit held that, because the named plaintiff did not suffer a concrete injury in fact as a result of the alleged statutory violations, she lacked Article III standing. Thus, the Court vacated the trial court's judgment and remanded the case for further proceedings consistent with its opinion.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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and

 

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