Second Circuit Holds CFPB's Funding Structure Is Constitutional

• Published date: 10 April 2023
• Subject Matter: Finance and Banking, Consumer Protection, Financial Services, Dodd-Frank, Consumer Protection Act
• Law Firm: Blank Rome LLP
• Author: Ms Diana Eng, Louise Bowes and Jonathan K. Moore

Entities regulated by the Consumer Financial Protection Bureau ("CFPB"), including banks, credit unions, payday lenders, mortgage servicers, debt collectors, and other financial services providers, should take note that the Second Circuit has held that the CFPB's funding structure does not violate the Appropriations Clause of the Constitution. Further, CFPB-regulated entities should pay close attention to the Supreme Court of the United States' forthcoming decision on the constitutionality of the CFPB's funding structure. If the CFPB's funding structure is held to be unconstitutional, the bureau's future operations will be in jeopardy without action from Congress.

In Consumer Financial Protection Bureau v. Law Offices of Crystal ^Moroney, P.C., No. 20-3471 (2d Cir. March 23, 2023), the United States Court of Appeals for the Second Circuit ("Second Circuit") held that the Consumer Financial Protection Bureau's ("CFPB") funding structure is constitutional. In doing so, the Second Circuit affirmed the decision of the United States District Court for the Southern District of New York ("District Court") upholding the enforceability of an investigative demand served by the CFPB on a debt collection law firm.

Background

In June 2017, the CFPB issued a civil investigative demand ("CID") to the Law Offices of Crystal Moroney, P.C. ("Moroney"), in response to which Moroney produced thousands of pages of documents and other information. However, Moroney withheld a subset of documents, claiming the production of such documents would violate ethical obligations to her clients. In November 2019, the CFPB sought to enforce the CID in District Court. However, shortly before the scheduled hearing, it withdrew the CID and the Court denied the petition to enforce the CID as moot.

The CFPB subsequently issued a second CID, which demanded similar documents to the 2017 CID, and again moved to enforce the same in the District Court. While the petition was pending, the Supreme Court of the United States ("SCOTUS") issued its decision in Seila Law LLC v. Consumer Financial Protection Bureau, 140 S. Ct. 2183 (2020). In Seila Law, the Court held that the CFPB's structure involving a single Director who could only be removed "for cause" violated the separation of powers, recognizing that the President may generally remove officers at will.

The decision in Seila Law prompted the CFPB to file a Notification of Ratification purporting to ratify its second CID. In August 2020, the...