Does the Consumer Financial Protection Bureau’s funding structure violate the Constitution’s Appropriations Clause because it draws money directly from the Federal Reserve’s proceeds, and, if so, should the Court vacate its Payday Lending Rule?
This case asks the Supreme Court to decide whether the Consumer Financial Protection Bureau’s (“CFPB”) funding structure is constitutional under the Appropriations Clause. The CFPB argues that the text of the Appropriations Clause, in conjunction with its historical and modern understandings, supports its existing funding structure. Consumer Financial Services Association of America counters that the Appropriations Clause requires Congress to make a valid appropriation, and the current funding structure does not satisfy this requirement. The outcome of this case has serious implications for the regulation of financial markets and for consumers who borrow from financial institutions.
Questions as Framed for the Court by the Parties
Whether the court of appeals erred in holding that the statute providing funding to the Consumer Financial Protection Bureau, 12 U.S.C. § 5497, violates the appropriations clause in Article I, Section 9 of the Constitution, and in vacating a regulation promulgated at a time when the Bureau was receiving such funding.
After the financial crisis of 2008, Congress enacted the Consumer Financial Protection Act which created the Consumer Financial Protection Bureau (“CFPB”). 12 U.S.C. §§ 5481–5603. The CFPB implements and enforces consumer protection laws as an independent bureau under the Federal Reserve System. Id. § 5491(a). The Act allows the Bureau to establish rules promoting a “fair, transparent, and competitive” financial market. Id. § 5511(a). Congress conferred on the CFPB the power to regulate statutes regarding financial products and services like credit cards, car payments, student loans, and mortgages by transferring this power from other agencies. Cmty. Fin. Servs. Ass’n of Am. v. Consumer Fin. Prot. Bureau at 3. Under the direction of Congress, a single Director — appointed by the President and approved by the Senate — leads the agency for a term of five years. Id.
Each year, the Director determines the Bureau’s financial needs and requests this amount of funding from the Federal Reserve. Id. at 4. Then, the Federal Reserve transfers the amount requested so long as it does not surpass 12% of its operating expenses. Id. Congress stipulated that the funds are not subject to review by the House and Senate Appropriations Committees but requires that the CFPB submit spending reports to Congress and conduct audits. Id. at 30–32.
In 2018, the CFPB finalized the Payday Lending Rule which requires lenders to assess the repayment ability of consumers before issuing loans. 12 C.F.R. § 1041.4. This rule included Payment Provisions that limit lenders’ capability to withdraw funds from consumers’ accounts after two failed tries. 12 C.F.R. § 1041.8. In April 2018, Community Financial Services Association of America, Limited (“CFSA”) et al. sued to enjoin and strike the Payday Lending Rule. Cmt. Fin. Servs. Ass’n of Am. at 2. CFSA alleged both that the rule violated the Administrative Procedure Act and also that the CFPB’s funding structure violated the Constitution’s separation of powers principles. Id.
After the suit was filed, the Bureau announced a notice and comment period regarding the Payday Lending Rule. Id. at 6. This led both parties to request a stay which the United States District Court for the Western District of Texas granted in November 2018. Id.
After the district court lifted the stay in August 2020, CFSA amended its complaint to make additional challenges to the Payment Provisions. Id. Then, the parties both filed motions for summary judgment, which the district court granted in favor of the Bureau on each of CFSA’s claims. Id. CFSA then appealed the decision to the United States Court of Appeals for the Fifth Circuit. Id.
In October 2022, the Fifth Circuit affirmed in part, reversed in part, and vacated the Payday Lending Rule’s Payment Provisions. Id. at 39. Importantly, the Fifth Circuit held that the Bureau’s funding provisions violated the Appropriations Clause. Id. The Fifth Circuit reasoned that Congress surrendered its oversight power of the CFPB, which conflicted with separation of powers principles. Id. at 30.
On November 14, 2022, the CFPB filed a petition for a writ of certiorari with two questions presented and the United States Supreme Court granted certiorari on February 27, 2023. Brief for Petitioners, Consumer Financial Protection Bureau et al. (“CFPB”) at 1.
THE TEXT AND PURPOSE OF THE APPROPRIATIONS CLAUSE
The Consumer Financial Protection Bureau (“CFPB”) argues that the text of the Appropriations Clause permits the CFPB’s funding structure. Brief for Petitioners at 14. In support, the CFPB asserts that the Appropriations Clause, which reads “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law,” merely ensures that Congress has exclusive control over the Federal Government’s spending. Id. at 14–15. The CFPB emphasizes that the Appropriations Clause is a grant of power designed to prevent the Executive Branch from spending freely, not a restriction on how Congress can spend the Federal Government’s funds. Id. at 16. The CFPB elaborates that “appropriations,” in both historical and modern understandings of the word, broadly refers to any law that allocates funding, supporting the idea that Congress was given broad discretion to spend. Id. at 16–17. Further, the CFPB maintains that the Constitution only contains a single limitation of the appropriations power—funds for an army cannot be allocated for more than two years at a time. Id. at 17. The CFPB concludes that this sole limitation reinforces that the appropriations power is otherwise unrestricted because the Framers showed they could limit the appropriations powers when they felt it necessary. Id. at 18.
In contrast, Community Financial Services Association of America, Limited et al. (“CFSA”), argues that the CFPB’s funding structure violates the Appropriations Clause. Brief for Respondents, Community Financial Services Association of America, Limited et al. (“CFSA”) at 11. CFSA contends that the text of the Appropriations Clause requires that Congress specify the amount of money the Federal Government may spend, and, implicitly, that any law authorizing funding must respect the separation of powers. Id. at 26. While CFSA agrees with the CFPB that appropriations are exclusively a legislative power, CFSA maintains that allowing the CFPB to determine the amount of its own funding constitutes an unconstitutional delegation of this legislative power. Id. at 28–29. CFSA submits that this delegation is unconstitutional like the House of Representative’s “clearly legislative” ability to veto the Attorney General’s deportation decisions, which was ruled unconstitutional in INS v. Chadha. Id. at 29. Further, CFSA says that the CFPB’s funding structure would fail the intelligible principle standard under Mistretta v. United States because the statute’s grant to the CFPB Director to request necessary funds does not give an intelligible principle for the judiciary to determine if the Director is requesting the correct amount of funds. Id. at 29. CFSA invokes separation of powers concerns, emphasizing that the CFPB’s ability to set its own budget presents a dangerous combination of the legislative purse and the executive sword. Id. at 16.
HISTORICAL PRACTICE AND PRECEDENT
The CFPB argues that its funding structure is well represented in the Federal Government’s past practice. Brief for Petitioners at 18. Specifically, the CFPB asserts that Congress has broad authority to set the “specificity, duration, and source of appropriations.” Id. at 19. Regarding specificity, the CFPB maintains that Congress has often given the Executive Branch authority to spend up to a specified cap for general purposes, like the CFPB’s funding structure. Id. The CFPB submits that spending caps have never faced serious judicial scrutiny because they allow the Executive Branch to respond flexibly to changing situations. Id. at 19–20. Regarding duration, the CFPB contends that Congress regularly passes statutes that fund programs indefinitely and outside of the traditional yearly appropriations bill. Id. at 21. The CFPB points out that some of these programs do not even have spending caps, like Social Security payments and civil damages against the Federal Government. Id. Regarding source, the CFPB emphasizes that Congress has an extensive history of funding programs through means other than traditional appropriation bills. Id. at 22. For example, the CFPB cites the Founding-Era Post Office, which was funded by selling services, and the National Mint, funded by fees. Id. Especially relevant here, the CFPB points to the Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve Board which collect fees from entities they regulate in the amount they deem necessary to execute their missions. Id. at 23. The CFPB concludes that its funding structure is constitutional because it contains a spending cap, is for a specified duration—indefinitely, and is from an enumerated source—the Federal Reserve’s proceeds. Id. at 25–26.
Also, the CFPB asserts that its funding structure is supported by Supreme Court precedent. Id. at 24. In support, the CFPB cites Cincinnati Soap v. United States, where the Supreme Court said that the Appropriations Clause merely requires Congress to act before federal spending occurs without placing any limits on what kinds of Congressional actions are acceptable. Id.
In contrast, CFSA counters that the CFPB’s funding structure is unprecedented, and that all the CFPB’s cited precedents are distinguishable. Brief for Respondents at 24. Regarding amount, CFSA argues that the CFPB’s examples of spending caps are disanalogous to the CFPB’s funding structure because those earlier examples were appropriated annually and closely tracked by Congress, which required detailed cost estimates from the Treasury. Id. at 30–31. The CFPB’s funding structure, CFSA contends, gives the CFPB too much discretion in drawing money from the Federal Reserve. Id. at 33. Regarding duration, CFSA maintains that Congress has never granted indefinite funding to an entity while allowing that entity to determine its own budgetary needs or evade Congressional oversight. Id. CFSA reexamines the CFPB’s example of funding Social Security benefits, concluding that, while the grant was indefinite, Congress specified the amount of spending the Social Security Administration could give to beneficiaries. Id. Regarding source, CFSA submits that the CFPB’s funding structure is unprecedented because it is not reliant on funding from the public or the entities it regulates. Id. at 34. CFSA posits that fee-funded entities like the Post Office were directly accountable to the public who could always refuse to engage with them. Id. at 36. CFSA maintains that similar concerns keep checks on organizations like the OCC and Federal Reserve, since the entities that they regulate could always withdraw from the industry if they disagree with their regulator’s actions. Id. at 36–37. In contrast, CFSA says, the CFPB is sheltered from public or political accountability because the Federal Reserve’s funds are not impacted by the CFPB’s decisions. Id. at 39–40.
Also, CFSA contends that Supreme Court precedent does not support the CFPB’s funding structure. Id. at 41. CFSA says that the CFPB relies on dicta from Cincinnati Soap, which is distinguishable from the present case because Cincinnati Soap involved dispersing funds to a territorial government and did not place the amount of funding dispersed into question. Id. at 41–42.
The CFPB argues that if the Supreme Court finds its funding structure unconstitutional, the Court should not vacate the Payday Lending Rule because the CFPB had statutory authority to enact the rule. Brief for Petitioners at 38. Instead, the CFPB submits that the Court should sever the funding structure provision and merely prevent the CFPB from spending funds to enforce future actions. Id. at 38–39. The CFPB asserts that vacating the Payday Lending Rule goes against public policy and equity concerns because all the CFPB’s rulings and actions over the past twelve years would be put in question. Id. at 46–47. The CFPB concludes that the uncertainty and confusion generated by vacating the Payday Lending Rule presents a strong reason to limit CFSA’s remedy to nonenforcement. Id. at 47–48.
In contrast, CFSA argues that the Supreme Court should vacate the Payday Lending Rule because it was issued using illegally sourced funds and was never in effect. Brief for Respondents at 46. CFSA submits that the CFPB’s suggested remedy would incentivize the Executive Branch to illegally enact rules in the first place. Id. at 49. CFSA says that the CFPB’s public policy concerns are overblown as there would be no effect from vacating the currently stayed Payday Lending Rule. Id. at 49–50. Further, CFSA adds that many of the CFPB’s other rules would stay in effect, as Congress could ratify them if it chooses to refund the CFPB, and many of the CFPB’s older rulings have seen their statute of limitations run. Id. at 50–51.
IMPACT ON ENFORCEMENT EFFORTS IN FINANCIAL MARKETS
The National Treasury Employees Union, in support of the CFPB, contends that if the Fifth Circuit’s ruling is affirmed, the CFPB will cease cooperating with states to protect consumer rights. Brief of Amicus Curiae National Treasury Employees Union, in support of Petitioners at 10–11. To this point, New York et al. (“New York”) elaborates that the CFPB complements existing consumer protection efforts by creating uniform standards that states can expand on. Brief of Amici Curiae New York et al., in support of Petitioners at 14–15. New York asserts that the CFPB ensures financial market integrity by regulating sectors that states previously failed to oversee and protect. Id. at 12. Further, New York claims that the states also rely on the CFPB as an enforcement partner. Id. at 14–18. In the wake of the Fifth Circuit’s ruling, courts have begun to halt enforcement actions between states and the CFPB. Id. at 22. Ultimately, New York argues that if the cooperation between states and the CFPB is curtailed, enforcement actions will suffer. Id.
West Virginia and 26 Other States (“West Virginia”), in support of CFSA, refute the importance of the CFPB cooperating with the states to enforce consumer protections. Brief of Amici Curiae State West Virginia and 26 Other States, in support of Respondents at 32–33. According to West Virginia, the state Attorneys General have traditionally been financial regulators and can increase their enforcement duties if the CFPB goes unfunded. Id. at 33. Further, West Virginia argues that states are closer to financial abuses than the CFPB and are more adept at handling them quickly. Id. Also in opposition, The Foundation for Government Accountability asserts that other agencies with proper constitutional funding will take over key functions that were performed by the CFPB. Brief of Amicus Curiae The Foundation for Government Accountability, in support of Respondents at 13.
IMPACT ON CONSUMERS THAT BORROW FROM FINANCIAL INSTITUTIONS
In support of the CFPB, Financial Regulation Scholars (“The Scholars”) argue that defunding the CFPB will decrease the total amount of money lent and increase loan interest rates, hurting consumers. Brief of Amicus Curiae Financial Regulation Scholars, in support of Petitioners at 4. The Scholars assert that, because no other agency is authorized to replace the CFBP’s federal oversight, the national financial market will become deregulated and likely cause an economic recession. Id. Specifically, New York contends that defunding the CFPB will eliminate protections for consumers with mortgages, student loans, and automobile loans. Brief of New York at 12–13. For support, New York cites the $16 billion in previously recovered funds by the CFPB and the handling of over three million consumer complaints. Id. at 18.
Military and Veterans Organizations (“The Veterans”), in support of the CFPB, asserts that the CFPB protects distinct classes of consumers. Brief of Amicus Curiae Military and Veterans Organizations, in support of Petitioners at 6. The Veterans maintains that through the CFPB’s Office of Service Member Affairs, the CFPB defends service members’ financial assets and their families’ financial security before deployment. Id. at 6. Similarly, Lawyers’ Committee for Civil Rights Under Law (“The Civil Rights Lawyers”) contends that the CFPB is crucial for protecting minority consumers, regulating what The Civil Rights Lawyers calls a racial justice imperative. Brief of Lawyers’ Committee for Civil Rights Under Law, in support of Petitioners at 13. The Civil Rights Lawyers argues that an alternative credit market exists that peddles inferior financial products to Black and Latino consumers which the CFPB seeks to correct. Id. at 13.
America’s Future et al., in support of CFSA, responds that the CFPB’s partisanship has distracted the agency’s priorities and resulted in ineffective consumer protection. Brief of Amicus Curiae America’s Future et al., in support of Respondents at 20–23. America’s Future cites the Wells Fargo data breach in 2016 as one of CFPB’s failures to protect consumers. Id. During this breach, Wells Fargo incentivized employees to create unauthorized accounts with customer’s data, and America’s Future claims that the CFPB failed to take timely action. Id. at 23–24.
In support of CFSA, Credit Union National Association et al. (“CUNA”) recognizes that a significant disruption in the market will occur if the CFPB’s spending clause is severed but argues that convenience and disruption are not enough to save an unconstitutional law. Brief of Amicus Curiae Credit Union National Association et al., in support of Respondents at 22. Even though consumers have relied on the CFPB for so long, CUNA contends that the CFPB’s unconstitutional funding structure must be remedied even if the results are messy. Id. at 22–24. Lastly, CUNA asserts that Americans are harmed by the funding structure itself because CFPB is unconstitutionally insulated from congressional accountability. Id. at 7. According to CUNA, this insulation from oversight results in excess spending and over-regulation. Id.
The authors would like to thank Professor Jed Stiglitz for his guidance and insights into this case.
- Tom Laser & Francis X. Riley, III, CFSA v. CFPB Certiorari Arguments, JDSupra (February 15, 2023).
- Adam Liptak, Supreme Court to Take Up Case on Fate of Consumer Watchdog, New York Times (February 27, 2023).
- Eamonn Moran, Thomas J. Delaney & Stephen Aschettino, US Supreme Court Agrees to Hear Challenge to CFPB’s Funding Structure, Norton Rose Fulbright (February 2023).
- Rachel Rodman, Keith Gerver & Kathleen Comerford, CFPB Enforcement Lags in Federal Court Due to Supreme Court Case, Bloomberg Law (July 20, 2023).