The US Supreme Court ruled on May 16, 2024 that the funding structure of the Consumer Financial Protection Bureau (CFPB)—which is funded with money from the Federal Reserve rather than the US Congress—does not run afoul of the Appropriations Clause of the US Constitution. The Court’s decision reversed the Fifth Circuit’s ruling that the CFPB’s funding structure was unconstitutional and put a definitive end to the last pending wholesale challenge to the CFPB’s constitutionality.

In the few days since the decision, the ruling has already emboldened the agency to move forward even more aggressively with its regulatory, enforcement, and supervision agenda.

Background

The Dodd-Frank Act of 2010, which created the CFPB, also created a unique funding structure for the agency. As a means to preserve the agency’s independence, the CFPB funding mechanism operates independently from the annual congressional appropriations process and instead permits the CFPB’s director to draw funds “reasonably necessary to carry out the Bureau’s duties” from the Federal Reserve’s operating expenses, up to a statutory limit. CFPB v. Community Financial Services Ass’n of America, Ltd. (Op.).

Several trade associations, representing payday lenders, brought this suit, challenging the CFPB’s “Payday Lending Rule” on the grounds that the CFPB’s funding mechanism violated the Appropriations Clause. The Fifth Circuit sided with the plaintiff lenders, concluding that the CFPB’s funding structure risked executive overreach due to inadequate congressional oversight.

Writing for a 7-2 majority, Justice Clarence Thomas reversed the Fifth Circuit’s decision. Justice Thomas wrote that, “[u]nder the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes.” Op. at 5. The Court’s majority held that the CFPB’s funding mechanism met that requirement. Id. at 15.  

According to Justice Elena Kagan, who wrote a concurring opinion joined by three of the seven majority justices, “the CFPB’s funding scheme, if transplanted back to the late-18th century, would have fit right in” under the original meaning of the Appropriations Clause as well as “at any other time in our Nation’s history.” Concurring Op. at 1.

Impact

The Supreme Court’s ruling affirms the CFPB’s operational independence and reinforces the basic legality of its funding structure. Importantly, the ruling will allow the CFPB to continue operating without the need for annual funding approval from Congress. Further, the ruling ensures that judicial and administrative orders, as well as regulations, resulting from the Bureau’s prior activities—which were in jeopardy if the CFPB’s funding structure were deemed unconstitutional—remain intact. 

The director of the CFPB immediately released a statement accusing “lawbreaking companies and Wall Street lobbyists” of “scheming to defund essential consumer protection enforcement” and emphasizing that the agency would continue to pursue its mission. The agency’s regulatory and enforcement efforts had recently been met with motions to stay pending the outcome of this case. This decision will remove those roadblocks and uncertainty and move those matters toward resolution on their merits.

With respect to the underlying litigation itself, the ruling clears the way for the CFPB to begin enforcement of the Payday Lending Rule that it promulgated in 2017. That rule, in its current form, restricts lenders’ ability to obtain loan payments through preauthorized account access after two unsuccessful withdrawal attempts. While many lenders have already adopted mechanisms to comply with the rule, the Bureau now has yet another tool in its arsenal when it examines or investigates the payday industry.

The ruling has also spurred immediate efforts by the CFPB to ramp up its enforcement capabilities. The day after the opinion was issued, the CFPB’s director announced plans to hire additional investigators and pursue additional enforcement measures related to pawn shops, medical billing, credit reporting, and financial data.