This article is the second in a three-part series addressing a seminal Fifth Circuit case now pending before the U.S. Supreme Court. The case, CFSA v. CFPB, is scheduled for oral argument on October 2, 2023.
In last week’s post, Myth No. 1, we explained more than a decade of history, both legislative and regulatory, displaying controversy over the constitutionality of the CFPB. As discussed last week, these legal arguments have deep implication for financial regulation and arose in vibrant debates between consumer financial and appellate law experts in trial courts, Congress, and the Supreme Court. Last week’s post discussed how the Bureau developed substantial muscle memory concerning how to operate while grappling with existential attacks, which have occurred before, and chronically after, the agency’s inception. To read more about the general details of the Fifth Circuit case, Consumer Financial Services Association of America, Ltd., et al. v. Consumer Financial Protection Bureau et al., please refer to last week’s post regarding Myth No. 1.
Myth No. 2: The case was a total blow to the CFPB’s regulatory function or enforcement capability
What is happening in district courts nationwide post-CFSA is notable. Ever since the CFSA ruling last fall, many litigants under Bureau scrutiny have used the unconstitutionality of its funding structure as a basis to argue that pending Bureau oversight functions are invalid. Some have been successful. For example:
The Bureau had promulgated a new regulation required by the Dodd-Frank Act concerning loans to minority- or women-owned businesses. In a federal court in Texas last week, the judge found it appropriate to issue a limited injunction enjoining this regulation, on the grounds that the CFPB’s unconstitutional funding mechanism (which was not disputed by the CFPB in that case) rendered the regulation invalid.
Even outside the Fifth Circuit, a federal court in New York ruled in the CFPB and the New York Attorney General’s joint lawsuit against an auto finance provider. This past Monday, the court granted the defendant’s request to stay litigation, concluding among other things that the act of waiting for the Supreme Court would not prejudice the Bureau and could clarify issues and reduce litigation cost, including discovery costs.
In both cases, the pause button on the Bureau’s regulation or enforcement action gave rise to temporary relief to the litigants, until such time as the Supreme Court decides the constitutionality of the agency’s funding mechanism. If, however, the Bureau is somehow ultimately permitted to continue its existence and work, the question remains: Has the Fifth Circuit case had any lasting impact on its enforcement or rulemaking functions?
Ironically, while concluding the Bureau was unconstitutional, the Fifth Circuit opinion contained several rulings extremely favorable to the Bureau.
On the rulemaking front, at issue was the Bureau’s 2017 payday lending rule and its “payment provisions.” The provisions limited a lender’s ability to obtain loan repayments via recurring automatic debits to a borrower’s bank account. After two consecutive failed attempts to obtain payment amounts due to insufficient funds, the rule prohibited lenders from attempting subsequent payment transfers unless such additional transfers were specifically authorized by the borrower. In 2018, the plaintiffs in CFSA v. CFPB sued, asserting (in addition to the constitutional issues) that the rule exceeded the Bureau’s statutory authority and violated the Administrative Procedures Act (APA). Multiple criticisms of the Bureau’s substantive rulemaking, which was the first of its kind for the payday lending industry, did not persuade the Fifth Circuit to rescind the rule. See summary below:
The plaintiffs asserted that the payment provisions were arbitrary and capricious because they were dependent on old data from four or five years before the rule was promulgated. The Fifth Circuit concluded that “the Bureau offered a reasoned explanation in its 2017 rulemaking record for relying on data collected from 2011-2012.” Additionally, the Fifth Circuit held that, among the factors that the Bureau had failed to consider, i.e., the greater likelihood that a defaulting borrower would enter collections sooner, such factor was not so important that the Bureau had to consider it specifically and thus, the agency rule was neither arbitrary nor capricious.
The plaintiffs had asserted that the rule arbitrarily treated prepaid cards/installment loans in the same way as check or ACH payments, because only the latter generated fees that justified the rule. The Fifth Circuit held that the Bureau’s explanations for why it did not exclude prepaid/debit or other transfer methods from the rule, i.e., that some of those methods do incur fees and it would be impracticable to comply with and enforce an exemption anyway, were sufficient to establish a “rational connection between the facts found and choice made” and, thus, the payment provisions were neither arbitrary nor capricious as applied to prepaid/debit card transfers. The Fifth Circuit upheld the payday lending rule of the Bureau as to every single issue.
The plaintiffs argued that the payment provisions’ extension of the 2-attempt limit across all scheduled payments on the same loan was lacking in “reasoned analysis or record evidence.” The Fifth Circuit disagreed, as the Bureau’s “rulemaking record prove[d] otherwise.” The Fifth Circuit concluded that the Bureau’s study showed that a third withdrawal attempt, even if applied to a different scheduled payment, would still likely fail after weeks or a month passed; the effort to tailor individual requirements for each possible discrete payment practice would add too much complexity to the regulation; and ACH transactions data historically supported the Bureau’s determination that a distinction (between re-presentment of the same payment vs. a new presentment for new installments) would invite lender evasion. Thus, the Fifth Circuit concluded that the payment provisions were neither arbitrary nor capricious.
In some respects, the payment provisions hinged upon stale information or incendiary assumptions regarding the industry, and yet the Fifth Circuit’s outcome, deferential to the Bureau’s findings, concluded that no actionable flaws under the APA existed in the Bureau’s promulgated rulemaking.
On the enforcement front, the Fifth Circuit’s decision had groundbreaking implications for the Bureau’s power to enforce the ban on Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) in the Dodd-Frank Act. Although the court’s conclusions arose out of agency rulemaking rather than enforcement, the way the court justified the rule directly rests on interpretations that are favorable to the Bureau’s enforcement program, with respect to one of the most challenging aspects of UDAAP, the “unfairness” test. Under the Dodd-Frank Act, a practice is “unfair” if:
The act or practice causes or is likely to cause substantial injury to consumers
It is not reasonably avoidable by consumers
Any substantial injury is not outweighed by the countervailing benefits to consumers or to competition
The plaintiffs challenged the Bureau’s determination in the 2017 rulemaking that the lender practices necessitating the payment provisions were unfair. As to Prong 1 above, the plaintiffs asserted that the consumers’ banks, not the payday lenders, caused insufficient funds fees or bank-account closures. The Fifth Circuit was not convinced. It held that the “[t]hough not the ‘most proximate cause,’ a lender’s repeated initiation of unsuccessful payment transfers is both a but-for and a proximate cause of any resulting fees or closures.”
As to Prong 2 above, the plaintiffs challenged the Bureau’s findings that the injuries in question were not reasonably avoidable by consumers. What is groundbreaking about the Fifth Circuit case is that it went someplace few courts have. Since the Bureau’s inception, we have all been hard-pressed to find federal court decisions that have meaningfully fleshed out Prong 2 of an unfairness claim under the Dodd-Frank Act. Here, the plaintiffs argued that under Dodd-Frank, consumers could in fact avoid injury associated with successive funds withdrawal attempts by (a) not authorizing automatic withdrawals, (b) ensuring their accounts are sufficiently funded, (c) negotiating revised payment options, (d) issue stop-payment orders or rescind account access, or (e) not applying for the loan in the first place and pursuing alternative sources of consumer credit instead.
Remarkably, the Fifth Circuit rejected each of (a) through (e) and concluded that the Bureau had a “reasonable basis to conclude” that the harms associated with three or more unsuccessful withdrawal attempts are “not reasonably avoidable by consumers,” satisfying Prong 2 of an “unfair” act under Dodd-Frank. In future Bureau matters on lending products or short-term credit solutions, while a 519-page record may not be readily available (as it was in the payday loan rulemaking), the principles that the Fifth Circuit used on unfairness will still be illustrative if not binding. The ramifications of the Fifth Circuit’s rulings on UDAAP are far-reaching, as now there is clearcut federal appellate court precedent for what constitutes “reasonably avoidable” harm for an “unfair” act when it comes to automatic withdrawals or preauthorized electronic funds transfers for loan repayment. The other implications? The Bureau can now use this case in future enforcement litigation as a basis to assist the Bureau in crafting novel UDAAP claims for similar acts and practices.
Granted, while it remains to be seen how the Supreme Court will rule on the Bureau’s constitutionality, if the agency continues to operate, it’s extremely ironic that the Fifth Circuit’s other holdings, reached in CFSA v. CFPB, established precedents that inure to the benefit of the Bureau. The unfairness analysis is a major contribution to the Bureau’s UDAAP program and findings that the Bureau was neither arbitrary nor capricious offer the Bureau a blueprint for how to successfully defend an APA attack on future rulemaking. In that regard, if the constitutionality problem is resolved in a way that permits the Bureau to continue its work under the enabling statute, the Fifth Circuit decision will have effectively strengthened, not weakened, the Bureau’s regulatory and enforcement functions. I admit that’s certainly a big “if.” This leads me to my next section, below.
Next week’s article regarding Myth No. 3 will address whether the funding structure issue is a zero-sum game for the CFPB and its opponents.
 Most of the precedents arose under an analogous provision found in Section 5 of the FTC Act.