The Consequences of the US Supreme Court’s Decision Upholding the CFPB’s Funding Structure
On May 16, 2024, the US Supreme Court upheld the constitutionality of the Consumer Financial Protection Bureau’s (“CFPB”) funding structure in a decision that will have significant ramifications on both the CFPB’s rulemaking and enforcement agenda in the near term and the future governance of the agency across administrations. In Consumer Financial Protection Bureau v. Community Financial Services Ass’n of America, Ltd (“CFSA”), the Supreme Court reversed a 2022 decision by the US Court of Appeals for the Fifth Circuit that held that the funding structure of the agency violated the Appropriations Clause of the US Constitution.1 The Supreme Court’s decision will likely spark an intensification in the CFPB’s enforcement and rulemaking activities, as evidenced by CFPB Director Rohit Chopra’s statement after the decision that the agency will now be “firing on all cylinders” and will “forge ahead with our law enforcement work.”2 Over the long-term, the decision effectively ensures the president will have enhanced authority, at the expense of Congress, over the agency’s agenda.
Below, we provide some background on the issues, summarize the Supreme Court’s decision, and discuss its consequences for entities subject to the jurisdiction of the CFPB and for the agency itself.
Background
The Supreme Court’s decision arises out of a challenge to the CFPB’s payday lending rule, which was first issued by Director Richard Cordray in 2017.3 The district court rejected the various legal challenges raised by the plaintiffs but stayed the compliance date of the rule pending the resolution of the appeal. In 2022, the Fifth Circuit rejected the plaintiffs’ challenges to the payday lending rule but instead ruled that the agency’s funding structure violated the Appropriations Clause of the Constitution.4
The Constitution provides that “[n]o money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.”5 In accordance with the Appropriations Clause, agencies are typically funded through annual appropriations by Congress. In contrast, the CFPB is funded by yearly transfers from the Board of Governors of the Federal Reserve System drawn from the Federal Reserve System’s combined earnings in an amount the CFPB director determines is reasonably necessary to operate the agency up to a maximum of 12% of the Federal Reserve System’s total operating expenses.6 By law, the House and Senate Appropriations Committees are prohibited from reviewing the funds the CFPB receives from the Federal Reserve.7 Because the Appropriations Clause grants Congress “exclusive power over the federal purse,” the Fifth Circuit found that the CFPB’s funding mechanism violated the Appropriations Clause and the separation of powers principles which underpin it.8 The court further held that the CFPB had promulgated the payday lending rule using unconstitutionally appropriated funds and therefore vacated the rule.
The CFSA Decision
In CFSA, the Supreme Court reversed the Fifth Circuit’s ruling and held in a 7-2 decision by Justice Clarence Thomas that the CFPB’s funding structure satisfies the Appropriations Clause. In so holding, the Supreme Court concluded that an identified source and purpose are all that is required for a constitutionally valid “appropriation.” The Court found that the CFPB’s funding mechanism satisfies those requirements because it identifies a specific source (the Federal Reserve) and purpose (carrying out the CFPB’s duties and responsibilities). For additional information on the Court’s decision, see our related alert.
Effects of the Supreme Court’s Decision on the CFPB’s Enforcement and Rulemaking Activities
Prior to the Supreme Court’s decision, a number of courts had stayed active litigation over several CFPB proposed rules and enforcement actions pending the outcome of the appeal on grounds, in part, that the CFPB’s funding mechanism was unconstitutional. The rules stayed include the CFPB’s final rule limiting credit card late fees for certain large issuers to $8, the CFPB’s changes to its UDAAP Exam Manual, and the CFPB’s final rule on small business lending data collection under Section 1071 of the Dodd-Frank Act.9 Like the legal challenge to the payday lending rule, the legal challenges to these rules also were based on other grounds (including violations of the Administrative Procedure Act, which are unaffected by the decision in CFSA) and not solely the unconstitutionality of the CFPB’s funding mechanism. These cases will now resume, and courts will need to consider these additional grounds as these cases move forward. Similarly, the stayed enforcement actions will begin to move forward, and pending information requests will likely require responses.
While the Supreme Court’s decision was pending, the CFPB announced a significant hiring initiative for enforcement attorneys, analysts, paralegals, e-litigation support specialists, economists, and more.10 Thus, providers of consumer financial products and services, secondary market participants, and other stakeholders should expect increased litigation, enforcement, and rulemaking activity from the CFPB throughout 2024 and beyond.11
Enhanced Presidential Control Over CFPB
The impact of CSFA on the governance of the CFPB—combined with the Supreme Court’s earlier decision challenging the structure of the CFPB in Seila Law LLC v. Consumer Financial Protection Bureau—will be greater presidential influence over the agency.
Generally, Congress and the president exercise joint control over most federal agencies through (i) the president’s appointment and removal authority and (ii) the congressional appropriations process and Senate confirmation of nominees, respectively. In Seila Law, the Supreme Court struck down statutory restrictions on the president’s authority to remove the director of the CFPB.12 The Court supported its decision on grounds that “[w]ithout such power, the President could not be held fully accountable for discharging his own responsibilities; the buck would stop somewhere else.”13 As a result, the CFPB director—originally removable by the president only for “inefficiency, neglect of duty, or malfeasance in office”—is now removable by the president without cause.
Congress’s “power of the purse”—the ability to direct federal spending through the Appropriations Clause—has been described as “the most important single curb in the Constitution on Presidential power.”14 The Government Accountability Office further explains: “Appropriations law is not only about ensuring that federal agencies follow a set of rules that Congress has enacted. These laws also help ensure that government carries out the will of, and remains accountable to, the American people.”15 Although Congress can always pass new legislation, practically speaking, the existence of the filibuster in the Senate (which requires 60 votes for measures to be voted on) means that the annual “must-pass” appropriations bills are the means through which Congress can actually exercise its authority over most federal agencies, including Cabinet agencies and independent agencies such as the Securities and Exchange Commission and the Commodity Futures Trading Commission.
Because the Court in CSFA upheld the CFPB’s unusual funding arrangement outside the annual appropriations process, absent a statutory change that is unlikely due to the Senate filibuster rule, Congress lacks its principal means of oversight of the agency, particularly once a director is confirmed by the Senate. However, because the Court in Seila also protected the president’s powers over the CFPB by upholding the president’s constitutional authority to remove the CFPB director at will, the Court’s decision in CSFA effectively means that the president, rather than Congress, will have the predominant role in determining the future direction of the CFPB, including, indirectly, its funding requests through the appointment and removal power. President Biden requested former CFPB Director Kathy Kraninger’s resignation on the day of his inauguration, and we expect this precedent to continue with each change in administration. As a result, the direction of the CFPB will follow the results of presidential election returns rather than congressional elections. A Democratic-controlled Congress will have less leverage to influence the agency when Republicans hold the presidency and vice versa. From this perspective, CSFA merely continues the decades-long and bipartisan trend in American government toward the greater concentration of authority in the executive branch at the expense of Congress.
1 Consumer Financial Protection Bureau v. Community Financial Services Ass’n of America, Ltd., No. 22-448 (May 16, 2024).
2 Prepared Remarks of CFPB Director Rohit Chopra Regarding the Supreme Court’s Decision in CFPB v. CFSA, https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-of-cfpb-director-rohit-chopra-regarding-the-supreme-courts-decision-in-cfpb-v-cfsa/.
4 Community Financial Services Ass’n of America, Ltd. v. Consumer Financial Protection Bureau, 51 F.4th 616 (5th Cir. 2022).
5 U.S. Const. art. I, § 9, cl. 7.
6 12 U.S.C. § 5497(a)(1). Currently, the Federal Reserve is operating at a net loss, which has raised questions about whether there are “earnings" to transfer to the CFPB and whether the recent transfers of funds to the CFPB, when the Federal Reserve was operating at a net loss, was authorized by the statute. However, this question was not put before the Court in CFSA. https://www.wsj.com/articles/the-cfpb-pyrrhic-supreme-court-victory-federal-reserve-18099f59
9 See Opinion & Order, Chamber of Commerce of the U.S. v. Consumer Financial Protection Bureau, No. 4:24-cv-213 [Dkt. No. 82] (N.D. Tex. May 10, 2024) (https://www.uschamber.com/assets/documents/District-Court-Order-Granting-PI.pdf).
10 See The CFPB’s enforcement work in 2023 and what lies ahead, Consumerfinance.gov (Jan. 29, 2024) (The CFPB’s enforcement work in 2023 and what lies ahead | Consumer Financial Protection Bureau (consumerfinance.gov).
11 For example, on May 22, 2024, the CFPB issued an interpretive rule confirming that Buy Now, Pay Later lenders are credit card providers. (https://files.consumerfinance.gov/f/documents/cfpb_bnpl-interpretive-rule_2024-05.pdf.)
12 Seila Law LLC v. Consumer Financial Protection Bureau, 591 U.S. 197 (2020).
13 Free Enterprise Fund v. Public Company Accounting Oversight Bd., 561 U.S. 477, 514 (2010).
14 GAO, Principles of Federal Appropriations Law (4th ed. 2016), vol. 1, at 1-5.
