We the People
Coming up with a topic for these Musings can sometimes be challenging. There’s a reason I pay homage to the Muses in my title[1]. Thinking about what is annoying or upsetting me often provides decent fodder. But, truth be told, I’m not as cranky as these Musings might suggest and I really am largely a happy person. Other times, topics strike me as completely obvious and necessary; like when CFPB missed a layup on the Juneteenth issue in 2021 or anytime someone asks me about the LO Comp Rule.
I was maybe going to talk about attorneys title letters in lieu of insurance for this edition. I mean title insurance is really important yada yada[2], but people are about as interested in that as they are about talking about reforming federal housing finance policy[3]. For those of you who tune out when I talk about legal issues[4], be glad I’m skipping the title insurance talk. No, this week the topic came easy thanks to a bombshell 5th Circuit opinion claiming the CFPB’s funding is unconstitutional.
CFPB is unconstitutionally funded
Perhaps you saw this Housing Wire headline on October 20, 2022: “Appeals court rules CFPB funding source unconstitutional”. Maybe you thought, “Eh, whatever. CFPB gets challenged all the time”. That’s true, but this decision is totally different; both in what the court found problematic for the agency and the remedy they decided was necessary. In fact, it could tip the scales in those challenges dramatically (or not). As far as I am concerned, however, metaphorically speaking, the 5th Circuit just let all the wild monkeys out of the administrative law zoo into polite society. It’s not going to be easy to round up these monkeys or contain the damage they might cause. To use less imagery, the implications stemming from this decision on the CFPB in particular and administrative law in general could be widespread, but are extremely difficult to assess and forecast.
First of all, the 5th Circuit supported the substance, process and authority of the CFPB’s payday lending rulemaking(s) themselves. So, what’s the problem?, you might ask. Well, in what some might call a Federalist Society opinion masterpiece[5](quoting heavily from the Federalist Papers themselves), the court took issue with the constitutionality of CFPB’s funding source as violating the US Constitution’s principals of separation of powers. As a result of violating “Congress’s exclusive power over the federal purse”, and despite the rule being otherwise found proper, the 5th Circuit vacated the CFPB’s rulemaking.
Double insulation
Reminiscent of the admonition of the Deep Throat source in the Watergate era book and movie All the President’s Men, the 5th Circuit decided to “follow the money”. The court emphasized that the CFPB’s funding was “double insulated” from Congressional appropriation oversight essentially because it is funded by the Federal Reserve (already an “insulated agency” due to its funding source being the Treasury) and subject to no obligations to account to Congress or the Fed for its appropriations. The court said that funding structure violates the fundamental separation of powers concepts of the Constitution and specifically the Appropriations Clause. Ok, I don’t remember the Appropriations Clause much either because it wasn’t in the Schoolhouse Rock Constitution song, but it’s there to help “secure the blessings of liberty”. The 5th Circuit’s opinion offers a thorough lesson about it.
5th Circuit also troubled by CFPB powers
In arriving at its conclusions, the court identified the CFPB’s “vast rulemaking, enforcement, and adjudicatory authority over a significant portion of the U.S. economy” (p.28 quoting from SCOTUS’s Seila Law decision). That broad authority has troubled many other courts[6]since the CFPB was formed. In dicta (not to be confused with Ditka), the 5th Circuit appeared almost as troubled by the CFPB’s overbroad powers concerns as the funding issue they ruled on. “Unlike nearly every other administrative agency, Congress placed this “staggering amalgam of legislative, judicial, and executive power in the hands of a single Director” rather than a multimember board or commission. (p.29-Quoting from concurrence of Judge Edith Jones in an earlier 5th Circuit en banc hearing in this case).[7]To be clear, however, the 5th Circuit’s decision was based on the unconstitutional funding arrangement and not based on any asserted unconstitutional grant of power[8]. The 5th Circuit also took express notice of the fact that concerns about CFPB’s ability to misuse its vast powers were not merely theoretical (citing back to the earlier Judge Jones concurrence detailing instances of the CFPB’s use of power).
Confusing remedy and implications
To me, the really confusing part of the decision is the rationale for the remedy and its mischievous implications. The 5th Circuit seemed to be trying to offer a remedy only to the plaintiffs by vacating the CFPB’s small dollar loan rule (which is in the nature of an injunction), but clearly the implications of the decision will have a much wider impact if not overturned on appeal (or perhaps a different result is reached by another Circuit). The court’s discussion about why the remedy of vacating the small dollar rule (and nothing more or less) hinged on a distinction between the CFPB’s power and funding sources that for me was dissatisfying. That is, the court said while the CFPB had the power to make this rule (and the rule was otherwise proper), that the funding of its creation was unconstitutional, so the rule must not stand.
Virtually anything the CFPB does requires funding-even the Director gets paid a salary. So, why just vacate this one rule and not everything the CFPB has ever done? There is simply no limiting principle in this decision to using the CFPB’s unconstitutional funding to challenge the CFPB. Essentially, every CFPB rule, enforcement action or other action could be challenged similarly by another plaintiff in the 5th Circuit or elsewhere. These are the monkeys I am talking about.
CFPB says, “Nothing to see here“
Remarkably, as noted below, CFPB seems to be totally nonplussed by the decision; essentially saying it’s business as usual. At this time, it’s unclear if they are going to appeal or perhaps simply ignore the court’s ruling[9]and see what happens next[10]. As reported in that Housing Wire article, “a CFPB spokesperson told Politico that the ongoing work of the agency will remain unaffected for the foreseeable future.”
“[T]here is nothing novel or unusual about Congress’s decision to fund the CFPB outside of annual spending bills,” said CFPB spokesperson Sam Gilford. “Other federal financial regulators and the entire Federal Reserve System are funded that way, and programs such as Medicare and Social Security are funded outside of the annual appropriations process. The CFPB will continue to carry out its vital work enforcing the laws of the nation and protecting American consumers.”
Implications
So where does this leave us? Congress could fix this by amending the CFPB’s funding sources and ratifying all of its prior regulatory actions, but Congress is another zoo that has wild animals escaping. I don’t expect any clarity coming from that body, especially with an imminent election that will open more cages.[11]
Ultimately, short of a successful appeal by CFPB to SCOTUS, it seems highly likely that other CFPB regulations and enforcement actions will be challenged on a similar basis in and perhaps out of court. For example, I don’t know what the result might be if CFPB tells a company to “Jump!” and the response is “You don’t have the funding to make me”. Can an unconstitutionally funded agency call on a federal police force like the FBI to enforce their subpoenas, especially in the 5th Circuit? This raises all kinds of kooky constitutional and administrative law issues that I am sure some litigators will have some fun with (if they are not working pro-bono).
Not “open season”
All that said, a word of caution to anyone who thinks this means it time to celebrate the demise of the CFPB and the administrative state. Not even close. The other laws that CFPB has issued, interpreted and enforces (including all mortgage related laws and regulations) are still in effect. Moreover, this ruling has no impact whatsoever on state law or enforcement and its application outside of the 5th Circuit is unclear. Whatever happens on appeal may dramatically change the landscape and could put all the monkeys back in their cages quickly. So, while anyone already tangling with the CFPB is likely to add this to their defense arsenal, if you are not already in their crosshairs, I would not change any compliant behaviors as a result of this decision. You can keep this defense in your back pocket in case CFPB comes at you, but be prepared to spend a lot of money on lawyers to make it stick.
Hard times
I received a lot of email “bounces” from my last Musings blast and, unfortunately, I expect more this time as well. Clearly, we are experiencing tough times in the mortgage industry right now and my heart goes out to those who are seeking new positions and also to those who have to make the hard decisions. I am hoping to hear about better prospects at this week’s MBA Annual Conference in Nashville and look forward to catching up with many colleagues.
Meanwhile, despite what appeared to be some unnecessarily personal and acrimonious back and forth, I was heartened to hear in Rob Chrisman’s October 22, 2022 Saturday Daily that UWM’s Mat Ishbia claims[12]UWM is “actually still hiring and has never done a layoff in history.” Given the industry’s current economic challenges, I hope UWM’s efforts to be the top lender proves to be a sustainable business model.
[1]Not these Disney Muses from the animated Hercules movie, who are quite good in their own right.
[2] Is title insurance really like an extended warranty business that needs to go? Cars have gotten much better at being reliable. So has title recordkeeping. Still, attorneys make mistakes too and don’t have nearly as good financial resources as title insurance companies, so I’m not ready to trust my title rights to that program just yet.
[3] Federal housing finance policy is perhaps the most important thing this industry actually could have a discussion about, but a dozen years after Dodd Frank, Washington DC still has no interest in changing the status quo.
[4] If this is you, you can stop reading after I talk about monkeys.
[5] No one at the CFPB likely would call it a masterpiece, but they might agree about the Federalist Society part.
[6] As well as a certain Mortgage Musings author. See e.g., this 2016 article from Mortgage Banker Magazine.
[7] CFPB v. All American Check Cashing, Inc., 2022 WL 1302488 (5th Cir., May 2, 2022) at *2 (Jones, J., concurring) (Jones concurrence begins on page 5).
[8]That issue was not before the 5th Circuit. In other words, the 5thCircuit didn’t rule CFPB has unconstitutional powers, but just noted that in “dicta”. Perhaps that’s a claim some released monkeys might bring.
[9] In or outside the 5th Circuit.
[10] Ignoring the ruling would be like CFPB putting out monkey food.
[11]Although a lame duck session might be an interesting place to try.
[12]Ishbia likened himself to being the Nick Saban of mortgage executives. Clearly, he believes himself and his company are the top dogs in the mortgage industry. Still, it’s important to choose your metaphors wisely; that week Alabama lost to Tennessee for the first time in 15 years. You’d think a Michigan State booster like Ishbia might have gone with a Magic Johnson sports analogy instead.