The decision follows a legal challenge asserting that the CFPB’s funding structure violates the U.S. Constitution’s separation of powers, an issue now awaiting resolution by the Supreme Court.
09/20/2023 1:30 P.M.
2.5 minute read
In a significant legal development, a U.S. district judge serving in the Eastern District of Kentucky granted a plaintiff’s motion for a preliminary injunction (PDF), effectively putting a halt on the enforcement of the Consumer Financial Protection Bureau’s Small Business Lending Rule.
This ruling comes in response to a lawsuit filed by The Monticello Banking Company and several other banking entities (plaintiffs), asserting the unconstitutionality of the CFPB’s funding structure. A Texas federal court injunction was also issued in April 2023 challenging the bureau’s constitutionally, ACA International previously reported.
The core argument presented by the plaintiffs centers on the U.S. Constitution’s separation of powers, specifically focusing on the Appropriations Clause. The plaintiffs contend that the CFPB’s funding structure, which allows it to draw funds directly from the Federal Reserve, bypassing the traditional congressional appropriations process, violates the fundamental principles of the U.S. Constitution.
The case dives into the Appropriations Clause, which dictates that no funds shall be drawn from the U.S. Treasury without explicit appropriations made by law. The CFPB’s unique funding model, where it directly accesses funds from the Federal Reserve, insulates it from Congress’s appropriations power.
While the CFPB had slated the Small Business Lending Rule to be effective starting Aug. 29, 2023, compliance by financial institutions was not mandated until later dates depending on their recent small business lending activity. However, with this injunction in place, the enforcement of the rule remains on hold until the Supreme Court issues its verdict on the funding structure’s constitutionality.
One of the primary reasons for granting the preliminary injunction was the potential irreparable harm to the plaintiffs. The compliance costs associated with preparing for the rule’s implementation were deemed unrecoverable, making them irreparable in nature. The expenses already incurred by the plaintiffs for compliance preparations include training programs, seminar fees, staff time, and new software, according to the order.
ACA’s Take
As the legal saga continues, all eyes are on the Supreme Court, for its ruling on the constitutionality of the CFPB’s funding structure and if Congress should act on it. The outcome of this case will undoubtedly have far-reaching implications, not only for the CFPB and the accounts receivable management industry but also for the broader understanding of the constitutional balance of power within the U.S. government.
ACA filed an amicus brief (PDF) in the case arguing that the Supreme Court should affirm the 5th Circuit’s decision on the CFPB’s funding structure but delay its judgment for six months to allow Congress time to consider options to reconstitute the bureau while minimizing disruptions for consumers and regulated entities, ACA previously reported.
The Supreme Court will hear six cases between Oct. 2 and Oct. 11. A decision in the CFPB case is expected to be issued between December 2023 and the end of June 2024.
Read the injunction order here (PDF).
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