Appeals Court Kills the Payday Lending Rule—and Perhaps Other Consumer Protection Actions

A federal appeals court ruled that the CFPB has been unconstitutionally funded since it was created. And, in the process, the court vacated the Payday Lending Rule.

By , Attorney

On October 19, 2022, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit decided the case of Community Financial Services of America v. Consumer Financial Protection Bureau. In this decision, the court ruled that the funding structure of the Consumer Financial Protection Bureau (CFPB) is unconstitutional. And for this reason, the Payday Lending Rule the CFPB previously issued is invalid.

This decision could potentially overturn every regulation and enforcement action the CFPB has ever issued.

History of the CFPB Payday Lending Rule

In 2017, the CFPB issued a new rule called the "Payday Lending Rule" concerning payday loans. The rule had two major parts: an underwriting part and a part concerning payments.

The Underwriting Provisions of the Payday Lending Rule

The underwriting provisions of the Payday Lending Rule prohibited lenders from making covered payday loans without conducting a "full-payment test" or "ability-to-pay test."

The test's purpose was to determine upfront whether a borrower has sufficient resources to repay a loan without rolling it over. Certain types of less-risky loans, like those offered by community banks and credit unions, and those that offer the option to repay the debt more gradually, were granted an exemption from the rule.

But the CFPB eventually eliminated the requirement that lenders confirm borrowers could afford their payday loans from the rule.

Payment Provisions of the Payday Lending Rule

The payment provisions of the Payday Lending Rule limited a lender's ability to obtain loan repayments through preauthorized account access. The rule included a "debit attempt cutoff" for certain payday loans.

Under the rule, after two unsuccessful attempts to debit the borrower's account, the lender couldn't debit the account again unless the borrower provided a new authorization. The lender would also have to give consumers written notice before attempting to debit an account at an irregular interval or amount.

The CFPB kept these restrictions, which prohibited payday lenders from repeatedly trying to withdraw payments from borrowers' bank accounts. But the provisions never went into effect. (They went on hold because of a court order.)

Community Financial Services of America v. Consumer Financial Protection Bureau

In the case of Community Financial Services of America v. Consumer Financial Protection Bureau, the court noted that the CFPB gets its funding directly from the Federal Reserve rather than from the usual congressional appropriations process.

The court then ruled that this funding mechanism is unconstitutional because it violates the Appropriations Clause and the Constitution's structural separation of powers. With this ruling, what was left of the Payday Lending Rule was invalidated, basically as a byproduct of the CFPB's unconstitutional funding scheme.

Implications of This Decision

Not only does this ruling leave consumers vulnerable to expensive overdraft fees triggered by predatory payday loan lenders, but it could also potentially nullify other CFPB protections.

In fact, this decision potentially calls into question every single rule that the CFPB has issued, such as mortgage servicing rules that protect borrowers in the foreclosure process, ability-to-repay and qualified mortgage rules, and rules for debt collection notices, because they all go back to the CFPB's unconstitutional funding structure.

The CFPB will probably appeal this decision, and this case will likely go to the U.S. Supreme Court. Keep in mind that, currently, this decision doesn't bind courts in other circuits. Various other courts have held the CFPB's funding mechanism is constitutional.

Effective Date: October 19, 2022