The Consumer Financial Protection Bureau (CFPB) may have its funding system deemed “unconstitutional” in the next few months. Recent court decisions in Texas argue that the CFPB funding structure lacked constitutionally required oversight by Congress. The validity of this argument will be tested by the Supreme Court’s decision on the CFPB’s constitutionality. The hearing is scheduled to begin this fall, with expected decisions in 2024.

The Texas Bankers Association, American Bankers Association, and Rio Bank filed a complaint challenging the recent rule on Section 1071 on the grounds that because the CFPB’s funding was unconstitutional its ruling was unenforceable. The US District Court of Texas’ Southern District issued a preliminary enjoining order on the CFPB, halting implementation and enforcement of the final Section 1071 rule.

For the sake of this complaint, the actual content of Section 1071 final rule was not of significant relevance. The Texas Bankers Association complaint relied almost entirely on a previous decision made by the Fifth Circuit court in Community Financial Services Association of America v. CFPB, rather than the facts of this particular rule.

The Fifth Circuit’s decision found that the CFPB’s funding structure was unconstitutional for two reasons. Both reasons were rooted in the Appropriations Clause of the Constitution, which stipulated that “no money shall be drawn from the Treasury but in consequence of appropriations made by law.” Firstly, the fact that Congress had no direct control over the Bureau’s budget through annual or time-limited appropriations indicated an obfuscation of their constitutional duties. Secondly, Congress had no indirect control of the CFPB’s budget because the Bureau was within the Federal Reserve System, making them “uniquely unconstitutional.”

The second point is critical since many other agencies access funding through “non-appropriation” bills, including the Federal Reserve and Medicare. Because the CFPB derives its funds from the combined earnings of the Federal Reserve, based on requests from the Bureau’s director, it is not subject to any Appropriations Committee reviews. Thus, even indirect control from Congress is lacking, as recurring funds don’t derive from Congress at all but from the Federal Reserve.

The Fifth Circuit posits that the Appropriations Clause implements a duty that Congress can fail to uphold, resulting in a violation. Meaning even if Congress approved the stature that created the CFPB’s funding structure, this can still equate to a negation of their duty.

Relying on this precedent, Southern Texas’ US District Court examines the CFPB’s authority to make and enforce rules. If it finds the CFPB’s funding structure unconstitutional, then theoretically all rules made by the Bureau since its founding in 2010 could be overturned. The Texas court has issued injunctive relief for the plaintiffs and their member banks, which will halt the enforcement of Section 1071 until the Supreme Court makes a final decision. Oddly, financial institutions not members of the plaintiffs’ organization will have to continue preparing for the rule implementation, even though deeming the CFPB unconstitutional would affect all institutions, not simply the plaintiffs.

Regardless, this latest preliminary injunction helps to illustrate the primary issues with the CFPB’s funding structure. Whether the Supreme Court finds these arguments convincing remains to be seen in 2024.

Isaac Schick is a policy analyst at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.