On October 3, the second morning of its new term, the Supreme Court of the United States (SCOTUS) heard oral arguments in the case of Consumer Financial Protection Bureau v. Community Financial Services Association of America, Limited. This case is the latest iteration in the broadside attacks on the Bureau by an industry hoping to neuter its impact, at least during periods of Republican control of Congress.
The government is appealing the decision of the Fifth Circuit Court of Appeals that invalidated the CFPB’s Payday Lending Rule on the ground that CFPB’s funding under the 2010 Dodd-Frank Act is unconstitutional. The Fifth Circuit proceedings and background of the dispute have been discussed previously here. More recently, in May 2023, the Second Circuit held CFPB’s funding structure to be constitutional, thus creating a split among the Circuits. CFSA is a trade organization opposed to the Payday Lending Rule (which has generally not gone into widespread effect).
What does the law say?
The United States Constitution, Article I, Sec. 9, Clause 7 (the “Appropriations Clause”) states: “No money shall be drawn from the Treasury but in Consequence of Appropriations made by Law.” But the Dodd-Frank Act provides that the CFPB shall receive funds it requests directly from the Federal Reserve, up to a cap of 12% of the Federal Reserve’s operating expenses, without review by the Appropriations Committee of either chamber of Congress, although certain other mechanisms of Congressional oversight are authorized. 12 USC § 5497. And the Federal Reserve is outside the typical appropriations process, largely funding itself through user fees paid by the banks it regulates. Therein lies the conflict and the crux of this case.
What is at stake?
At argument, Justice Kavanaugh encapsulated what the case is really about. Industry counsel tried to argue that the CFPB’s funding was set by the 2010 Congress in Dodd-Frank to be “perpetually” whatever the CFPB director says that it should be, subject only to an illusory cap CFPB has yet to exceed, which impermissibly gives the Executive Branch (i.e., the CFPB Director) both the power of the sword (enforcement of law by incarceration and fines) and the power of the purse. Alexander Hamilton, among others, cautioned against an Executive unchecked by a legislative power to withdraw its funding as a slippery slope to tyranny.
But Justice Kavanaugh pushed back by positing whether it’s really perpetual. Can’t Congress, he asked, just pass a bill limiting the CFPB, curtailing either its funding or its substantive acts? Yes, CFSA’s counsel had to concede, but doing so would require a filibuster-proof and/or veto-proof majority in both houses of Congress, which “flips the baseline” because most other discretionary spending outside of financial regulatory agencies is set by regular appropriations. Justice Kavanaugh agreed it flipped the baseline, and seemed to agree that could be a cause for separation of powers concerns, but struggled with how to distinguish that concern from a broad swath of government funding that happens in a similar way.
What’s not at stake?
The Fifth Circuit did not invalidate any CFPB acts other than the Payday Lending Rule, because that was all the case presented. At oral argument, CFSA’s counsel conceded that there were a variety of mechanisms or ways in which most of the CFPB’s historic acts would or could be upheld even if SCOTUS finds a constitutional defect in the funding mechanism. The Mortgage Bankers Association and other financial industry trade groups submitted amicus briefs arguing that, however SCOTUS resolves the Constitutional funding question, it should decline to invalidate CFPB historic rules, regulations and acts, because doing so would upset settled industry expectations. No one appeared to disagree with this. But importantly, the Fifth Circuit sided with the CFPB on all statutory or administrative law challenges to the Payday Lending Rule; accordingly, if SCOTUS holds the CFPB funding structure is constitutional, the Payday Lending Rule will stand.
What stood out from the arguments?
The Court heard 90 minutes of argument, which had been scheduled to last only an hour. The justices on both sides of the 6-3 ideological divide, favoring conservatives appointed by Republican presidents, appeared to reach broad consensus on two points. First, the Appropriations Clause must put some limit on Congress’ delegation of spending discretion to the Executive Branch under general principles of the separation of powers; otherwise, Congress could just tell the President he can spend up to, say, $4 trillion on whatever he or she deems best. Second, whether the CFPB is ultimately deemed on the right or wrong side of that separation of powers line, the CFPB’s funding structure is closer to those already in existence and unchallenged—such as for the Federal Reserve, OCC, FHFA, and other financial regulators—than to a blank check to the Executive Branch. Argument was heavily focused on how much leeway Congress has under the Appropriations Clause to set in place a law that removes Congress from regularly considering an agency’s funding.
As expected, the progressive justices were more skeptical of CFSA, and the conservative justices were more skeptical of unfettered CFPB funding. Advocates arguing for CFPB and CFSA alike struggled with where to draw the line that the justices seemed to be seeking. CFSA counsel Noel Francisco had difficulty explaining how CFPB funding differs materially from funding structures for other long-unchallenged agencies like the OCC and FHFA, and ultimately had to resort to admitting that numerous agencies have at least one of the CFPB’s concerning features, just not all of them in combination. And Solicitor General Elizabeth Prelogar, arguing for CFPB, struggled with how CFPB’s funding would be distinguishable from something more akin to the $4 trillion unfettered check to the President—what limits, if any, does the Appropriations Clause even set?
At argument, the conservative justices questioned just how “unfettered” the CFPB’s funding really is. Even if the CFPB’s funding comes from a new and unprecedented structure—which Chief Justice Roberts seemed to agree it was—what exactly was the Constitutional text that would prohibit such a new device? Justice Barrett focused her skepticism there, noting in particular that the Appropriations Clause may just mean that Congress gets to designate a funding structure and does not restrict the mechanics of what Congress can write a funding bill to say. Even Justice Thomas noted that just because the funding structure is new or unique does not mean it is unconstitutional. Justice Kavanaugh, noting that SCOTUS had already held in 2019 that the CFPB director must serve at the pleasure of the President, asked if that isn’t already a sufficient check—couldn’t the Executive decide the funding should be reduced, perhaps to $0? All of this has left consumer advocates with strong expectations that the CFPB’s funding structure will survive.
Justice Gorsuch was silent but has signaled in past cases a willingness to upset the status quo. Chief Justice Roberts and Justice Kavanaugh seemed open in concept to the idea that the CFPB’s structure is new and unique, thus potentially pushing on separation of powers guardrails. That leaves a “path to five” for some restriction on the status quo via Justices Thomas and Alito, the latter of whom appeared to be the most skeptical of the government’s arguments.
To see a transcript of the oral arguments, click here.
An opinion could come in any time in 2024, but is generally not expected until early July. Please check back here for further developments on this hot topic.