In a landmark decision issued on May 16, the Supreme Court held that the Consumer Financial Protection Bureau’s (CFPB) funding mechanism is constitutionally sound, as it does not violate the Appropriations Clause. The decision will undoubtedly embolden an already active CFPB and put back into motion several rulemakings that were paused until the Supreme Court issued its decision. The hotly debated question over the constitutionality of the CFPB’s funding mechanism has been a source of turmoil in Congress since the bureau’s inception. The court’s decision largely puts that question to rest.

While the legality of the funding mechanism is no longer in question, Republicans are attempting to address their concerns via the CFPB Transparency and Accountability Reform Act (H.R. 2798). Members of Congress were quick to react to the decision, with House Republicans doubling down on their commitment to reign in the CFPB, while House Democrats praised the court’s ruling.

Background

As Brownstein previously outlined, the U.S. Supreme Court heard oral arguments in Consumer Financial Protection Bureau (CFPB) v. Community Financial Services Association of America (CFSA) on Oct. 3, 2023. The court reviewed the Fifth Circuit’s decision to vacate a CFPB regulation on the basis that the CFPB operates in violation of the Constitution’s Appropriations Clause given that its funding is not approved by Congress. The court also received a significant volume of briefs filed by amici curiae (friends of the court). As noted above, the Supreme Court announced its decision in Consumer Financial Protection Bureau (CFPB) v. Community Financial Services Association of America (CFSA) this week, holding that the funding mechanism for the CFPB complies with the Constitution’s Appropriations Clause. In a 7-2 vote, the justices rejected arguments that the CFPB, which receives its funding through the Federal Reserve, requires a congressional appropriation for its spending. The decision is an important win for the Biden administration and a blow for Republicans who have argued for more than a decade that the funding mechanism was not constitutional. Since the Supreme Court decision in Seila Law v. CFPB, many have argued that the CFPB has become more of a political arm of the White House since the director is removable by the president, and have pointed to a number of coordinated efforts between the independent agency and White House that target a range of industries and financial services products.

The Court’s Opinion

Writing for the majority—Justices John Roberts, Sonia Sotomayor, Elena Kagan, Brett Kavanaugh, Amy Coney Barrett and Ketanji Brown Jackson—Justice Clarence Thomas stated that:

“an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes. The statute that provides the Bureau’s funding meets these requirements.” He further concludes that the Bureau’s funding mechanism “fits comfortably with the First Congress’ appropriations practice.”

The associations challenging the CFPB made three principal arguments in their case, and the majority discredited each in the decision. Justice Kagan filed a concurring opinion joined by Justices Sotomayor, Kavanaugh and Barrett, and Justice Jackson filed an additional concurring opinion.

In their joint dissent, Justices Samuel Alito and Neil Gorsuch wrote that the decision “upholds a novel statutory scheme under which the powerful Consumer Financial Protection Bureau may bankroll its own agenda without any congressional control or oversight,” and that the bureau “enjoys a degree of financial autonomy that a Stuart king would envy.” The dissent also outlines the justices’ concerns with the insulation the CFPB’s funding mechanism provides from congressional oversight and highlights three ongoing CFPB rulemakings—on immigration status, medical debt and overdraft services—as examples of why congressional oversight is critical.

Impacted Rulemakings

As the CFPB awaited the Supreme Court’s decision, several agency priorities were stalled by other courts as a result. As examples:

• Section 1071. This rulemaking was required under the Dodd-Frank Act and would create a database on small business lending. Credit unions, banks and the Farm Credit Council have argued the CFPB has gone beyond the scope of its statutory mandate and violates the Administrative Procedures Act, and challenged the final rule in the U.S. District Court for the Southern District of Texas. The court granted a preliminary injunction enjoining the implementation and enforcement of the 1071 final rule until the Supreme Court decision. As part of this, the court stayed all compliance deadlines under the final rule. A narrower pause was also instituted by the U.S. District Court of the Eastern District of Kentucky.

Both orders were tethered to the Supreme Court’s decision, and the cases will now go forward. The financial services industry plaintiffs and the CFPB are currently in the process of cross-briefing in response to the Motion for Summary Judgment, asking the court to strike down the rule on the merits, arguing that it is arbitrary and capricious. In light of the Supreme Court decision, the court will need to take action to advise on the status of the injunction and associated compliance timeline.

Additionally, following the Supreme Court’s decision in CFPB v. CFSA, the CFPB announced extended compliance deadlines for the small business lending rule. Assuming there are no further delays caused by litigation, tier 1 institutions must comply by July 18, 2025, tier 2 institutions by Jan. 16, 2026, and Tier 3 institutions by Oct. 18, 2026.

• Credit Card Late Fees. A new final rule to cap credit card late fees at $8 was also paused pending the Supreme Court ruling. The preliminary injunction also linked the fate of the credit card late fee rule with the pending outcome of the CFPB’s funding structure constitutionality case, stating, “If the Court denies an injunction here, Plaintiffs face an enormous undertaking based upon a potentially unconstitutional rule.” It is expected that the plaintiffs in this case will also file a Motion for Summary Judgment and now debate the merits of whether the rule is arbitrary or capricious for violating the Truth in Lending Act and the CARD Act. Since the injunction was tied to the Supreme Court decision, the court will need to clarify where the injunction stands.

There are also several pending enforcement actions and CFPB litigation that were paused pending the outcome of the decision.

Congressional Reaction and Looking Ahead

In a statement released after news of the decision broke, House Financial Services Committee Chair Patrick McHenry (R-NC) said Republicans “will continue to fight to rein in the rogue CFPB.” Alternatively, Ranking Member Maxine Waters (D-CA) applauded the decision saying she is “pleased that the efforts to gut the CFPB’s funding have failed.” Congress is also actively seeking to overturn CFPB rules such as the Credit Card Late Fee rule with a Congressional Review Act challenge, with others expected later this year.

Today’s decision likely puts to rest the issue about the legality of the CFPB’s funding structure and whether it must be under the regular appropriations process. However, there are several other aspects of CFPB actions unrelated to its funding mechanism that are still under consideration in pending litigation, including arguments about violations of the rulemaking process and the Administrative Procedure Act. Those more specific arguments are not impacted by today’s ruling. As discussed, there is also a host of other legislation seeking to modify the CFPB’s structure in different ways that will likely continue to be considered. Although these measures are not expected to advance in this Congress, they could gain traction depending on the outcome of the upcoming election.

With this ruling behind it, the CFPB is also expected to issue an Request for Information on mortgage closing costs, a proposed rulemaking related to the Fair Credit Reporting Act, and final rules on overdraft fees and personal financial data rights (Section 1033), among others. A flurry of activity is expected between now and the end of the year, as the CFPB is likely to work to move through its “to-do” list before the election and any potential changes in leadership.