Decision Alert: Supreme Court Upholds Constitutionality of CFPB’s Funding Structure

In Consumer Fin. Protection Bureau v. Cmty. Fin. Services Assn. of Am., the Court held that the funding mechanism for the Consumer Financial Protection Bureau (CFPB) in 12 U.S.C. § 5497 satisfies the Constitution’s Appropriations Clause.

As previously summarized in Dykema’s November 2023 edition of Last Month at the Supreme Court, Congress created the CFPB as an independent agency within the Federal Reserve in 2010. The CFPB is not funded by Congress through the annual appropriations process, but it receives a percentage of the Federal Reserve’s revenues to pay for its expenses. Two associations representing companies regulated by the CFPB challenged a proposed Payday Lending Rule by arguing (among other things) that this funding mechanism ran afoul of the Appropriations Clause. The District Court rejected that argument, but the Fifth Circuit held that funding structure violated the Appropriations Clause, reasoning that an appropriation must authorize spending and that merely providing an agency with a funding source and spending authority does not suffice.

In an opinion by Justice Thomas and joined by six other Justices, the Court reversed. The Court started by defining “appropriation” based on the text of the Constitution and historical practices. According to the Constitution’s text and the ordinary usage of the word “appropriation,” an appropriation requires “the expenditure of particular funds for specified ends.” Historical examples from England and the United States, the Court concluded, support this definition. Although Parliament, Colonial governments, early state legislatures, and Congress funded most items through annual grants, that was far from the only method. Legislative bodies also made “open-ended discretionary” or “sums not exceeding” appropriations which afforded discretion about how to spend funds for a particular purpose up to a specified limit. Congress gave even more flexibility to the Customs Service and Post Office which were funded “indefinitely,” based on fees they collected in rendering their service instead of through annual appropriations. Applying this standard, the Court concluded the CFPB’s funding mechanism is a valid appropriation. The CFPB is funded by a specified source (earnings from the Federal Reserve System) with a specified purpose (paying for the CFPB’s expenses in carrying out its duties and responsibilities). This approach, the Court concluded, satisfies the Appropriations Clause and comports with historical practice.

Justice Alito, joined by Justice Gorsuch, dissented. According to Justice Alito, “appropriation” is a term of art that should be interpreted according to “legal tradition” and “centuries of practice,” not “ordinary usage.” They also disagreed with the Court’s historical analysis. Congress’s historical practice was to make annual appropriations (even though the Constitution did not explicitly so require). Funding schemes for the Customs Service and Post Office are not instructive because the CFPB has “[b]road and vast” powers to craft rules and regulations. The handful of examples cited by the majority were not sufficient, in their view, to justify the CFPB’s unique funding scheme. They warned that the CFPB’s funding structure poses real-world risks by insulating the CFPB from meaningful congressional oversight.

Takeaways

• The Court’s ruling, though a victory for the CFPB, does not necessarily mean the proposed Payday Lending Rule will go into effect. The Court’s rejection of the constitutional challenge to the CFPB’s funding structure clears the way for the district court to resolve the challengers’ other arguments against the Rule, including what the district court called “compelling” statutory arguments. Thus, alternative grounds may delay the Rule’s implementation.
• Several CFPB enforcement actions that were stayed pending a decision in this case will now resume.

For more information, please contact Chantel Febus, James Azadian, Cory Webster, Christopher Sakauye, Monika Harris, Puja Valera, or A. Joseph Duffy, IV.