The CFPB has filed its brief with the U.S. Supreme Court seeking reversal of the Fifth Circuit panel decision in Community Financial Services Association of America Ltd. v. CFPB.  In that decision, the panel held the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution and, as a remedy for the constitutional violation, vacated the CFPB’s payday lending rule (Payday Rule).

In its brief, the CFPB makes the following principal arguments:

• The Appropriations Clause states that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.”  The Founders included the Clause to confirm that federal officials could not spend public funds unless and until Congress enacted a statute authorizing such spending.  The historical and modern meaning of a congressional “appropriation” is “simply a law making a particular source of funding available for particular uses.”  The provision in the Constitution preceding the Appropriations Clause that expressly limits the duration of army appropriations to two years demonstrates that the Founders knew how to limit Congress’s appropriations authority when they wished to do so and confirms that the Constitution otherwise leaves it to Congress to determine the specificity, duration, and source of appropriations that it makes by law.

• The natural reading of the Constitution’s text is reinforced by longstanding practice.  Since the Founding, appropriations statutes have often given the Executive Branch broad discretion to spend funds up to a specified amount  (i.e. “lump-sum appropriations” or appropriations “in gross”); provided federal entities and activities with standing appropriations (i.e. spending that does not require annual appropriations) that remain in place unless and until Congress repeals them; and funded agencies through fees, assessments, investments, and other similar sources.  Congress has frequently used such funding mechanisms for financial regulatory agencies, including the OCC, FDIC, and Federal Reserve Board.

• The Supreme Court has decided only one case involving a claim that a statute violated the Appropriations Clause.  In the 1937 case, the plaintiffs challenged a law that imposed a tax on the processing of coconut oil and provided that the tax proceeds should be held as a separate fund and paid to the Treasury of the Philippines.  The court deemed the plaintiffs’ challenge premature because none of the funds had been transferred to the Philippines but the Court concluded that the plaintiffs’ Appropriation’s Clause challenge was “without merit” because the Clause “means simply that no money can be paid out of the Treasury unless it has been appropriated by an act of Congress.”  Except for the Fifth Circuit, no court has ever held that an Act of Congress violated the Appropriations Clause.  (The CFPB did not note that because the Court deemed the plaintiffs’ Appropriations Clause challenge premature, its statement regarding the Clause’s meaning is dicta.)

• The CFPB’s “standing, capped, lump-sum appropriation” is consistent with the constitutional text, history, and precedent.  12 U.S.C. Section 5497 provides for the CFPB to receive a capped amount of funding each year from the Federal Reserve System’s earnings, specifies that the funds shall be “immediately available,” “remain available until expended,” and be used to pay the CFPB’s expenses “in carrying out its duties and responsibilities.”  By prescribing the amount, duration, source, and purpose of the CFPB’s funding, Section 5497 satisfies the classic elements of an appropriation.  It also falls comfortably within Congress’s historical practice because (1) the CFPB’s discretion to spend its capped funding is not different from the discretion Congress has long given agencies through routine lump-sum appropriations, and (2) the duration and source of the CFPB’s funding is consistent with the standing authority that Congress has often given agencies since the Founding to spend funds derived from sources such as fees, assessments, and investments (and the CFPB’s funding source, the combined earnings of the Federal Reserve System, is the same as the Federal Reserve Board’s funding source.)

• Although the Fifth Circuit labeled the CFPB’s funding mechanism “unprecedented,” it is consistent with Congress’s longstanding practice of authorizing agencies to spend money indefinitely from sources other than annual appropriations statutes.  Respondents have offered no evidence that the Founders intended the Appropriations Clause to limit Congress’s power to pass laws that provide funding to agencies and the standing, capped appropriation mechanism designated by Congress to fund the CFPB does not threaten “the separation of purse and sword” (assuming the Founders used the word “sword” as a metaphor for the Executive Branch.)

• Section 5497 is not materially different from the statutes that provide funding to other financial regulators (whose constitutionality respondents appear to concede) for the following reasons:
  • Congress did not give the CFPB “nearly unfettered discretion over its funding” as asserted by respondents.  It imposed an annual cap of $597.6 million adjusted for inflation, and the only discretion the CFPB has is to request less than the capped amount.  In contrast, Congress has not imposed a dollar cap on the OCC or Federal Reserve Board which can determine the amount of assessments they collect.
  • The capped amount is not “illusory” or “astronomical” as asserted by respondents. In fiscal year 2022, the CFPB’s funding cap was approximately $734 million and the CFPB requested and received $641.5 million.  The OCC’s, FDIC’s, and Federal Reserve Board’s operating expenses significantly exceed the CFPB’s cap and the CFPB’s cap is well below the budgets of various other agencies that receive funding in part through the collection of fees.
  • The feature of the CFPB’s funding that allows it to “remain available until expended” is commonplace.  For example, the OCC is allowed to keep its unspent funds for investment and use in the OCC’s ongoing activities.

• The fact that agencies such as the Federal Reserve Board, OCC and FDIC are funded through fees and assessments while the CFPB is funded through transfers from the Federal Reserve Board is a distinction with no constitutional relevance.  (The Fifth Circuit described this arrangement as “a double insulation from Congress’s purse strings.”)  This is because:
  • The Federal Reserve Board receives its funding from the combined earnings of the Federal Reserve System and respondents do not dispute that Congress satisfied the Appropriations Clause when it authorized the Board to spend a portion of the System’s earnings on the Board’s operations.  It follows that Congress also made a valid appropriation when it authorized the CFPB—an independent bureau established in the Federal Reserve System—to spend a portion of the same earnings on its operations.
  • The double-insulation theory is incorrect because the Federal Reserve Board exercises no power over how much money the CFPB receives but simply transfers the amount requested by the CFPB up to the statutory cap.  The Board’s ministerial role does not insulate the CFPB from congressional control and Congress can modify the CFPB’s funding at any time by statute.
  • The argument made by respondents is wrong that agencies that rely on their own fees and assessments are constrained because they must consider the risk of losing funding if regulated entities “exit their regulatory sphere.”  The argument is based on the incorrect premise that the Federal Reserve Board is funded by assessments on private parties when, in fact, the Board is funded by assessments on Federal Reserve Banks.  The Federal Reserve Banks are statutorily mandated components of the Federal Reserve System that cannot “exit the regulatory sphere” if they thought the assessments were too high.  As a practical matter, the financial institutions insured by the FDIC also could not exit unless they were willing to forgo FDIC deposit insurance.  Even if private parties could “exit the regulatory sphere” because of dissatisfaction with agency assessments, the resulting “accountability” has no relevance under the Appropriations Clause which is concerned with preserving Congress’s control over spending and not with agencies’ accountability to private parties.  There is nothing in the  Clause’s text or history to suggest that the constitutionality of an agency’s funding mechanism turns on whether it is sufficiently constrained by market forces.
  • There is no basis in the Appropriations Clause for respondents’ attempt to distinguish the CFPB from other agencies funded outside of annual spending bills based on the scope of the CFPB’s authority.  The Founders made the same appropriations principles applicable to all government entities and nothing in the constitution’s text or history supports distinctions based on the size or nature of an agency’s portfolio.   Also, respondents’ assertion is wrong that the authority of other agencies with similar funding mechanisms is not comparable to the CFPB’s authority.  The Federal Reserve exercises authority that has global consequence and the Federal Reserve Board, OCC, and FDIC exercise “significant policymaking and enforcement authority over key segments of the financial industry.”  (The CFPB notes that pursuant to Dodd-Frank, it inherited most of its authorities from agencies with similar funding mechanisms.)

• Even if the CFPB’s funding mechanism is constitutionally flawed, pursuant to Dodd-Frank’s severability clause, the Fifth Circuit should have conducted a severability analysis of Section 5497 to determine which of its provisions causes the constitutional violation.  The Fifth Circuit focused on the fact that the CFPB’s funding “remain[s] available until expended.”  It also emphasized that Section 5497 provides for the CFPB’s funds to be held in an account controlled by the CFPB rather than in a Treasury account and does not allow the CFPB’s funding to be reviewed by the House or Senate Appropriations Committees.  A decision that declared some or all of these provisions unconstitutional while finding that the remainder of Section 5497 complies with the Appropriations Clause would not provide a basis for vacating the Rule because respondents have not suggested that the CFPB’s rulemaking costs during the years in question exceeded the funding available to the CFPB such that the CFPB would have been unable to complete the rulemaking unless it had been able to use unexpended funds from prior years.  They also have not offered a reason to believe the CFPB’s rulemaking would have proceeded differently if the CFPB’s funds were held in Treasury accounts or if it were subject to Appropriation Committees’ oversight rather than the oversight of other congressional committees.
• Even if the entire funding mechanism in Section 5497 is unconstitutional, the Fifth Circuit’s conclusion that agency action carried out using funds that were not validly appropriated conflicts with traditional remedial principles.  Unlike a constitutional defect in the substantive statute authorizing agency action, an unconstitutional funding provision does not mean the agency action itself is invalid.  The Fifth Circuit recognized that Congress authorized the CFPB to issue a payday lending rule and that the Payday Rule it issued complied with the statutory standards.  Also, unlike the invalidation of a substantively unauthorized agency action, retrospective invalidation would not cure the relevant constitutional violation-i.e. it would not undo the CFPB’s rulemaking expenditures or “restore any funds to the federal fisc.”  Applying the traditional remedial principle that requires courts to fashion remedies that do not unnecessarily infringe on competing interests and take account of the public interest and the balance of equities, the CFPB, at most, should be prevented from enforcing the Payday Rule against respondents or their members until Congress changes the CFPB’s funding.  In addition, vacating the CFPB’s past actions would inflict significant disruption on the Nation’s economy and consumers, financial institutions, and others who have reasonably relied on the CFPB’s past actions.  As an example, if the CFPB’s mortgage regulations were vacated, mortgage lenders would have to immediately modify their disclosures and borrowers could seek to rescind certain mortgage transactions that had relied on disclosure exceptions in the regulations.

Amicus briefs in support of the CFPB must be filed by May 15,  2023.  CFSA must file its reply brief by July 3, 2023.

Our Consumer Finance Podcast has already devoted two episodes to this case.  In January 2023, we released a two-part episode, “How the U.S. Supreme Court will decide the threat to the CFPB’s funding and structure,” in which our special guest was Adam J. White, a renowned expert on separation of powers and the Appropriations Clause.  To listen to the episode, click here for Part I and click here for Part II.  Earlier this month, we released a second episode, “CFSA v. CFPB moves to U.S. Supreme Court: a closer look at the constitutional challenge to the Consumer Financial Protection Bureau’s funding,” in which our special guest was GianCarlo Canaparo, Senior Legal Fellow in the Heritage Foundation’s Edwin Meese III Center for Legal and Judicial Studies.  To listen to the second episode, click here.

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