Supreme Court Hears Oral Argument on the Constitutionality of the Funding of the CFPB

The Supreme Court heard oral arguments on October 3, 2023 in Consumer Financial Protection Bureau v. Community Financial Services Association of America, Ltd.  The issue before  the Court is whether the CFPB’s funding mechanism violaties the U.S. Constitution’s Appropriations Clause (U.S. Const. art. I, § 9, cl. 7).  Solicitor General, Elizabeth Prelogar argued on behalf of the CFPB and Noel Francisco (a former Solicitor General) argued for the Community Financial Services Association of America, Ltd. (CFSA).

The CFPB’s distinct funding mechanism is promulgated in the Dodd-Frank Act of 2010. Unlike other federal agencies, the CFPB’s funding is drawn directly from the Federal Reserve System.   The CFPB  requests funding on an annual basis, according to what the CFPB’s director finds “reasonably necessary to carry out” the authorities of the  CFPB under Federal consumer financial law.  12 U.S.C. 5497(a)(1).   The CFPB is subject to a cap of 12% of the Federal Reserve System’s total operating expenses.

In 2017, the CFPB promulgated a rule (Rule) regulating “payday” loans, which are typically short-term, high interest loans, as well as other short-term loans, including  certain vehicle title and high-cost installment loans.  12 C.F.R. 1041.

The following year, the CFSA and the Consumer Service Alliance of Texas (CSA) filed a lawsuit challenging the Rule, alleging that the CFPB’s funding mechanism violations the U.S. Constitution because the Appropriations Clause requires that any money paid out of the Treasury must be “appropriated by an act of Congress.”  Therefore, CFSA and CSA argued, the Rule should be vacated because it was promulgated at the time the CFPB was receiving  funding in violation of the Appropriations Clause.

In 2021, the District Court of Western Texas held that the bureau’s self-funding mechanism was constitutional, finding that the Dodd-Frank Act of 2010, passed by Congress properly authorized the CFPB to receive funds up to a certain cap and was not a violation of the Appropriations Clause.  Cmty. Fin. Servs. Ass’n of Am., Ltd. v. Consumer Fin. Prot. Bureau, 558 F. Supp. 3d 350, 367 (W.D. Tex. 2021).  On appeal, the Fifth Circuit reversed, holding that it was not enough that Congress created the CFPB’s funding scheme, because the “appropriation” was too far divorced from Congressional oversight.  51 F.4th at 640.  In reaching its conclusion, the Court of Appeals considered the CFPB’s “insulation from congressional budgetary review,” its single director power structure, and the “vast rulemaking, enforcement, and adjudicatory authority” the agency holds. Id. at 638, 641–42.

The CFPB’s position is that its funding mechanism is constitutionally sound, as the Appropriations Clause requires an appropriation by Congress, which is what Congress precisely did by prescribing the amount, duration, source and purpose of the CFPB’s funding.  The CFPB also argues that the Appropriations Clause does not require the appropriation to take any particular form, like a numerical amount, taken from the general treasury.  Further, the CFPB  argued that historical practice supports their interpretation as Congress has funded agencies through a variety of different mechanisms.

The CFSA’s position is that the 2010 Congress abdicated the power of the purse by giving the CFPB the ability to determine its own funding level, akin to a blank check.  The CFSA also argues that the CFPB’s funding stream is improperly perpetual since Congress is not required to approve funding each year.  Lastly, the CFSA argued that the CFPB, as an enforcement agency, should not have the power to determine its own appropriations, insulating it from accountability to the public.

During the argument, the Court had nearly double the amount of questions for the CFSA than the CFPB, asking the CFPB 38 questions compared to 61 for CFSA.  Justices Thomas, Gorsuch and Alito questioned the CFPB’s expansive view of the Appropriations Clause and whether there was an adequate separation of powers between Congress and the Executive Branch.  Chief Justice Roberts questioned the CFPB’s “very aggressive view” of Congress’ authority under the Appropriations Clause and noted that he “didn’t see any compelling historical analogues” to the CFPB’s funding mechanism, as the CFPB extensively argued in their brief.  Justice Alito questioned the CFPB on the language contained in the Dodd-Frank Act of 2010 that indicated that the CFPB fund “shall not be construed to be government funds or appropriated monies.”   In response, the CFPB stated that that particular language was merely Congress’ way of trying to control the interaction between the appropriations process and the funding of the CFPB.   The questions posed by Justice Kagan, Sotomayor and Jackson appeared to suggest that they did not believe the CFPB’s funding mechanism was unconstitutional.  Justice Kavanaugh questioned the CFSA’s argument that the funding to the CFPB was perpetual, noting that there was “always an additional check by a future Congress if it decides it wants to alter the work of a prior Congress.”  Justice Barrett also questioned whether the CFSA had met its burden to “show that Congress can’t set up the Agency this way” because the language of the Appropriations Clause “seems to give the legislature the prerogative of the purse” and “we have a statute in which the legislature exercised that.”   The CFSA received multiple questions on the substance of their arguments, including why the durational limits of the CFPB’s funding were problematic, with Justice Sotomayor noting, “I’m sorry.  I’m trying to understand your argument, and I’m at a total loss.”

Even after oral argument, it is difficult to predict how the Court will rule.  A decision is expected in June 2024.

The transcript of oral argument can be found here.  The opening briefing filed by CFPB can be found here and the reply brief filed by the CFPB can be found here. The brief in opposition filed by the CFSA can be found here.