A federal appeals court ruled on Wednesday that the Consumer Financial Protection Bureau, a leading financial regulator, has been unconstitutionally funded since its creation more than a decade ago, a decision that vacated a bureau rule on payday lending and cast doubt over a vast swath of its regulations.
The consumer bureau is funded directly by the Federal Reserve, a structure that Congress created through the 2010 Dodd-Frank law to shield the independent agency from political whims. It has been a frequent target of ire from Republican lawmakers.
A three-judge panel of the New Orleans-based Fifth Circuit Court of Appeals said that the funding method improperly ceded too much authority to the bureau and insulated it from being accountable to Congress and the American people.
“Wherever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it,” Judge Cory Wilson wrote in the ruling. All three judges on the panel were appointed by former President Donald J. Trump.
The case could post the most significant legal challenge to the bureau’s authority since 2020, when the Supreme Court, in a 5-to-4 ruling, gave the president the power to fire the bureau’s director.
The ruling, if it stands, could upend every regulation and enforcement action undertaken by the bureau since its creation in 2011. The decision is widely expected to be stayed pending appeal. The consumer bureau can ask the full Fifth Circuit to reconsider the case, or it could appeal directly to the Supreme Court.
Sam Gilford, a spokesman for the consumer bureau, said there is “nothing novel or unusual” about the agency’s funding mechanism, citing programs like Medicare and Social Security that are funded outside of the annual appropriations process. The Federal Reserve itself is also independently funded, mainly through the interest it earns on government bonds.
Mr. Gilford said the bureau “will continue to carry out its vital work enforcing the laws of the nation and protecting American consumers.”
The case before the Fifth Circuit was brought by two trade groups representing payday lenders, which challenged a rule limiting the number of times lenders can attempt to withdraw funds from borrowers’ bank accounts. The core of the bureau’s payday lending rule — which would have placed much stricter limits on the number of loans lenders can make — was gutted in 2019 by Kathleen Kraninger, a Trump appointee who at the time was the bureau’s director.
The court’s ruling in favor of the trade associations would eliminate the remainder of the rule. But it would also broadly threaten other bureau actions, including its extensive regulation of the mortgage market.
Senator Elizabeth Warren, the Massachusetts Democrat who championed the bureau’s creation, called the Fifth Circuit ruling “a lawless and reckless decision.” She wrote on Twitter that “extreme right-wing judges are throwing into question every rule the CFPB enforces to protect consumers and businesses alike.”
