I.          Introduction:

On October 3, 2023, the U.S. Supreme Court held oral argument in Community Financial Services Association of America Ltd. v. Consumer Financial Protection Bureau. This case has potentially widespread implications for the consumer finance industry, as it challenges the constitutionality of the CFPB’s funding mechanism. The Court will determine whether the Consumer Financial Protection Bureau (“CFPB”)’s funding mechanism violates the U.S. Constitution’s Appropriations Clause, and, if so, what the appropriate remedy would be. Here’s what you need to know about the case while we wait for the Supreme Court’s opinion.

What You Need to Know:

• On October 3, 2023, the U.S. Supreme Court held oral argument in Community Financial Services Association of America Ltd. v. Consumer Financial Protection Bureau, a case with potentially widespread implications for the consumer finance industry. 
• The Court will determine whether the Consumer Financial Protection Bureau (“CFPB”)’s funding mechanism violates the U.S. Constitution’s Appropriations Clause, and, if so, what the appropriate remedy would be. 

II.        How The Case Got To The Supreme Court:

A.        The District Court’s Opinion:

The Community Financial Services Association of America filed a lawsuit against the CFPB, challenging the Bureau’s payday lender rule, issued in 2017. In part, the CFSA challenged the rule based on a constitutionality challenge to the structure of the Bureau itself, arguing that the funding mechanism violates the U.S. Constitution’s appropriations clause. On August 31, 2021, Judge Lee Yeakel of the United States District Court for the Western District of Texas found that the CFPB’s funding did not violate the U.S. Constitution’s Appropriations Clause. See Community Financial Services Association Of America, Ltd. v. Consumer Financial Protection Bureau, 558 F. Supp. 3d 350, 364 (W.D. Tx. 2021). The District Court concluded: “[t]he Appropriations Clause means simply that no money can be paid out of the Treasury unless it has been appropriated by an action of Congress. Therefore, if a statute authorizes an agency to receive funds up to a certain cap, as the [Consumer Financial Protection Act] authorizes the [CFPB] to do, there is no Appropriations Clause issue.” Id. at 364.

B.        The Fifth Circuit’s Opinion:

On October 19, 2022, the Fifth Circuit Court Of Appeals reversed the District Court holding: “Wherever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it. The [CFPB]’s perpetual insulation from Congress’s appropriations power, including the express exemption from congressional review of its funding, renders the [CFPB] no longer dependent and, as a result, no longer accountable to Congress, and, ultimately, to the people. By abandoning its most complete and effectual check on the overgrown prerogatives of the other branches of the government – indeed, by enabling them in the [CFPB]’s case – Congress ran afoul of the separation of powers embodied in the Appropriations Clause.” See Community Financial Services Association Of America, Ltd. v. Consumer Financial Protection Bureau, 51 F.4th 616, 639 (5th Cir. 2022).

III.       The Parties’ Positions Before The Supreme Court:

A.        The Consumer Financial Protection Bureau’s Position:

In its Brief, the CFPB argued: “By its terms, the Appropriations Clause prohibits expenditures of public money without an appropriation made by law, but does not limit Congress’s authority to determine the specificity, duration, and source of appropriations. Here, Congress satisfied the Appropriations Clause by enacting a statute explicitly authorizing the CFPB to spend up to a specified amount of funds from a specified source for specified purposes – just as Congress has done for many other agencies.”

B.        Community Financial Services Association Of America, Ltd.’s Position:

“The CFPB’s unique funding scheme constitutes a deliberate effort to circumvent the role the Appropriations Clause assigns to the Legislative Branch in preserving the separation of powers. The 2010 Congress abdicated its fiscal power over the CFPB’s budget and abrogated the ability of its successors to wield that check against the agency’s exercise of executive power. Instead of the CFPB drawing money in consequence of appropriations made by Congress – as the Clause’s text requires – the 2010 Congress ceded to the CFPB the power to write its own appropriation each year, subject only to an illusory cap (and supplemented by a growing endowment).”

IV.       Takeaways From Oral Argument:

The Court focused their questions at oral argument on two central themes: whether there are any general limiting principles applicable to the Appropriations Clause and whether perpetual funding (versus annual funding) violates the U.S. Constitution. 

A.        Limiting Principles:

As to limiting principles, the CFPB’s position is that historically, other than the Army Appropriations Clause, there are no general limiting principles to Congressional powers under the Appropriations Clause, but Congress has historically set particular limits on certain appropriations. The fact that particular limits exist in those places, such as the Army Appropriations Clause, demonstrates that the Founders understood the difference when drafting the different clauses in the Constitution, and intended it to be that way. Thus, under the Bureau’s view, as long as Congress makes the initial determination of how much should be appropriated (in the Bureau’s case, a percentage taken from the Federal Reserve), there is no other limiting factor. 

At the outset of the argument, Justice Thomas asked Solicitor General Elizabeth Prelogar: “other than passing an appropriations law, are there any limits on what Congress can do?” Ms. Prelogar responded: “And then I think the question becomes, are there other limits out there on how Congress can structure funding for a particular type of activities or government functions? We know, obviously, from the Army Appropriations Clause that the answer is yes. With respect to that particular government function, there’s a durational limit, and it’s based on the nature of the activity because the Framers were specifically concerned about having a standing Army. But I think the Army Appropriations Clause itself demonstrates that there are not otherwise constraints in the Appropriations Clause that would limit Congress in how it decides to structure the funding.”

The Community Financial Services Association Of America, Ltd.’s position is that the limiting principle is one of separation of powers: Congress needs to determine the amount that a particular agency can spend and how that agency is to spend its money, and must do so regularly in order to exercise its control over the budget of the executive branch. CFSA argues that the appropriations clause plays a fundamental role in the separation of powers, creating a check and balance on the executive so that no money may be spent by the executive unless Congress explicitly authorizes it. Otherwise, as it argues is the case with the CFPB’s funding, the executive branch is exercising powers that are properly the realm of Congress, in violation of the separation of powers clause. In response to Justice Barrett’s questions surrounding the limitations of the Appropriations Clause, former Solicitor General Noel J. Francisco, on behalf of the CFSA, argued: “What I’m saying is that the word ‘appropriation’ is—you can interpret it in different ways. At its core, what the Appropriation Clause does, Congress has to make an appropriation. It’s got to determine what the government should be spending. It’s got to determine the amount of that it should be spending. And it’s got a non-delegation component baked into it because you cannot simply transfer that core legislative function to the executive branch.”

B.        Perpetual vs. Annual Funding:

The Court also focused on the impact of Congress’ ability to change the funding scheme in the future. Justice Kavanaugh asked Ms. Prelogar: “My understanding, but I want to make sure you agree, is that Congress could not entrench a funding scheme, in other words, Congress could not pass a law that says this is the funding scheme and no future Congress may alter this for 10 years or a hundred years. That would be constitutionally problematic, is my understanding, and I want to make sure you agree with that.” To which Ms. Prelogar responded: “Yes, I absolutely share that understanding, Justice Kavanaugh. And I think what it shows is that it’s incorrect to characterize standing appropriations as lasting forever. In fact, we’ve pointed to a number of examples where Congress has acted to change the standing appropriations, and the Customs Service is a great example on this one too.”

Justice Kavanaugh had more pointed questions for the CFSA surrounding the CFSA’s theme of perpetual funding: “Sorry. What -- what do you -- the word ‘perpetual’ I’m having trouble with because it implies that it’s entrenched and that a future Congress couldn’t change it. But Congress could change it tomorrow and there’s nothing perpetual or permanent or -- about this.” To which, Mr. Francisco responded: “So I -- I think it’s entrenched, Your Honor, in the sense that I think maybe the Chief Justice was referring to. One Congress gives it over to the executive and expands executive power, you’ve now given, you know, a coequal branch of government a large amount of your power and you need to claw it back. You can’t claw it back through an ordinary law. You can only claw it back through either convincing the President himself to give up presidential power, something you’ve given to him, which is tough to do, or you’ve got to override a presidential veto.” 

C.        No Questions on Remedial Measures:

Perhaps the most interesting development of the argument was that none of the justices delved into the potential remedies for a violation of the Appropriations Clause. Large portions of the briefing, including many of the Amicus Briefs filed by third parties, addressed the potential remedies. While the question of the proper remedy for a constitutional defect in the structure of the CFPB or similar federal agency has been raised in previous challenges, the justices failure to ask any substantive questions on remedies suggests we will not receive an answer here.

V.        Conclusion:

Ultimately, the question before the Court is: what does it mean to appropriate funds? The CFPB’s position is that the Appropriations Clause only requires Congress to make an appropriation of funds, which does not need to be specific or time constrained, and Congress has done so here. The CFSA’s position is that any appropriation must be specific and cannot be perpetual because that means Congress is not otherwise exercising its power of the purse. The Court’s focus on the outer limits of the CFPB’s position, pointed questions related to the CFSA’s theme of “perpetual funding,” and lack of focus on remedial measures, may suggest that the Court has concerns with the implications of each legal position. We expect a final decision from the Supreme Court by June 2024.

This is the second in a series of articles on the Supreme Court’s review of the CFPB’s funding mechanism. Part 1 can be found here.