On May 16, 2024, the United States Supreme Court issued its long-awaited opinion in Consumer Financial Protection Bureau v. Community Financial Services Association of America, Ltd., holding that the CFPB’s unique funding mechanism does not violate the Appropriations Clause of the Constitution. The 7-2 opinion resolves an important constitutional question and, for the moment, is a green light for the CFPB’s enforcement and regulatory activities. However, there remain opportunities to challenge widespread over-reach by the agency.
CFPB v. CFSA Decision
The Appropriations Clause states that “[n]o money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” In most cases, federal agencies’ operating funds are supplied by annual appropriations from Congress. The CFPB’s funding structure departs from this norm. By statute, the CFPB may draw funds from the Federal Reserve System in an amount that the CFPB Director deems “reasonably necessary to carry out” the CFPB’s duties but which cannot exceed 12 percent of the Federal Reserve’s total operating expenses for 2009, as adjusted for inflation. (In fiscal year 2022, that cap was approximately $734 million).
Two financial services trade associations raised the CFPB’s funding mechanism as a constitutional challenge to its 2017 Payday Lending Rule in federal court, arguing that the funding mechanism violated the Appropriations Clause. This argument gained huge traction when the Fifth Circuit reversed a summary judgment in the district court, reasoning that the Constitution’s text and history required Congress to do more than merely pass a statute that authorized the CFPB’s funding mechanism. According to the Fifth Circuit, the Appropriations Clause actually required Congress to appropriate sums to the CFPB. Therefore, the CFPB’s funding mechanism violated both the “Appropriations Clause and the Constitution’s underlying structural separation of powers.”
However, the Supreme Court rejected the Fifth Circuit’s reasoning, finding that “an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes.” Because the CFPB’s statutory funding mechanism meets these requirements, the Court concluded that it did not violate the Appropriations Clause. Only two Justices dissented, arguing that the CFPB’s funding mechanism violates the Separation of Powers by making the CFPB largely unaccountable to Congress.
The Immediate Aftermath of the Decision
The Supreme Court’s decision has great importance for the CFPB and the financial services industry. Most immediately, the decision will result in the lifting of stays of numerous high profile CFPB enforcement actions and also greenlight rulemaking activities such as the CFPB’s small business lending rule. The CFPB will also be emboldened to pursue aggressive enforcement and other actions that may have been tempered by the Fifth Circuit’s Sword of Damocles decision, as reflected by the Director’s rather inflammatory comments on the ruling.
What Comes Next?
Although the decision undoubtedly will result in an acceleration of CFPB aggression, there remain numerous avenues for pushing back against the agency.
First, although the Supreme Court rejected the narrow Appropriations Clause argument before it, there are other fertile grounds for challenging the funding of the Bureau. For example, the percentage of operating expenses of the Federal Reserve set forth in Dodd-Frank is not the only statutory cap on CFPB funding. Section 1017(a)(1) of the Dodd-Frank Act provides that the funds requested by the Director are to be transferred to the Bureau “from the combined earnings of the Federal Reserve System.” As discussed recently by Alex J. Pollock, the Fed’s September 14, 2023 H.4.1 Release reflects that the Federal Reserve System has not had any recent earnings from which funds could be transferred to the CFPB. Rather, there have been massive losses that are likely to approximate $117 billion for calendar year 2023. Thus, the Federal Reserve Board may be acting unlawfully in continuing to fund the CFPB. Other problems with CFPB funding recently were highlighted before Congress by former CFPB Deputy Director Brian Johnson.
Second, individual actions by the CFPB remain subject to challenge as outside its statutory and Constitutional authority. In addition to the familiar principle that agency action is limited by its statutory authority, Bureau efforts to police any conduct it does not like are limited by the major questions doctrine recently discussed by the Supreme Court in its 2022 West Virginia v. EPA decision. That doctrine teaches that Separation of Powers principles limit agency authority to undertake certain actions without “clear congressional authorization.”
We have no doubt that these theories and others will be employed by industry to challenge CFPB over‑reach in the coming months.
