Supreme Court Grapples With The Constitutionality Of The CFPB’s Funding By The Federal Reserve

In Consumer Fin. Protection Bureau v. Community Fin. Services Assn. of Am., the question before the Court is whether the court of appeals erred in holding that the statute providing funding to the Consumer Financial Protection Bureau (CFPB), 12 U.S.C. § 5497, violates the Appropriations Clause, U.S. Const. Art. I, § 9, Cl. 7, and in vacating a regulation promulgated at a time when the CFPB was receiving such funding.

After the 2008 financial crisis, Congress created the CFPB as an independent agency within the Federal Reserve, as part of the Dodd-Frank Act of 2010. The Bureau oversees and promulgates rules for banks, credit unions, mortgage servicing companies, and payday lenders, among other financial entities. Unlike other agencies established by Congress, the CFPB is funded by the Federal Reserve and is not subject to Congress’s annual appropriations process.

Two associations representing companies regulated by the CFPB’s Payday Lending Rule filed a lawsuit challenging the rule on multiple statutory and constitutional grounds. During their lawsuit, the CFPB engaged in rulemaking to reconsider the Payday Lending Rule. The district court stayed proceedings given that rulemaking.

In June 2020, following the Court’s decision in Seila Law LLC v. CFPB, the CFPB issued a new Payday Lending Rule. The revised rule rescinded the original rule’s underwriting provisions but retained its payment provisions.

The associations filed an amended complaint challenging the new rule on various grounds, including that the CFPB's funding mechanism violates the Appropriations Clause and the separation of powers because it improperly insulates the CFPB from congressional oversight.

The district court granted summary judgment to the CFPB, explaining that the Appropriations Clause dictates that money may be disbursed only from the Treasury if it has been appropriated by an act of Congress. Additionally, according to the district court, when a statute authorizes an agency to receive funds up to a specific cap, there is no Appropriations Clause issue.

The Fifth Circuit affirmed in part and reversed in part. It held that the Payday Lending Rule’s payment provisions fall within the CFPB’s statutory authority to deem certain practices unfair and that these provisions were not arbitrary or capricious. But that court held that the Bureau's funding structure violates the Appropriations Clause and separation of powers because an appropriation is required to authorize spending; merely providing an agency with a funding source and spending authority does not suffice.

The Court’s decision could have wide-reaching implications. In addition to potentially affecting many consumer protection laws, this case is one of several on the Court’s docket this term examining the authority, if not the validity, of administrative agencies. It, therefore, presents the Court with an opportunity to recalibrate the balance of power among the branches of government and the expansive powers conferred on many administrative agencies under doctrines developed in recent decades, and the perceived lack of appropriate accountability for their policy choices.

At oral argument, nearly all of the Justices were concerned about the upper limits of the Appropriations Clause, and what principles should guide their decisions in determining Congress’s limits in enacting an appropriations statute for it to be constitutional. Justice Thomas and Chief Justice Roberts, in particular, focused on the idea that, beyond passing an appropriations law, Congress may have little to no limits on what it can do, which in turn gives away more power to the Executive Branch. Justice Gorsuch focused on whether Section 5497’s constitutionality hinged on imposing upper or lower limits to the amount appropriated, to which CFPB responded that the amount must be “reasonably necessary” under the statute. Justice Alito centered on the phrase in the Dodd-Frank Act stating that funds “shall not be construed to be government funds or appropriated monies,” and asked whether CFPB’s budget is considered appropriated money.  The CFPB’s argument was that the Act wasn’t taking a stance on whether these funds are considered appropriated for constitutional purposes, and that phrase is simply meant to ensure Congress’s control.

This case was argued on October 3, 2023. A decision is expected later in the term. Stay tuned for Dykema’s client alert discussing the Court’s opinion.

For more information about this alert, please contact the authors of this alert, Chantel Febus, James Azadian, David Schenck, Christopher Sakauye, McKenna Crisp, Monika Harris, and Puja Valera.