Supreme Court rules CFPB funding structure is lawful

In a 7-2 decision, the Supreme Court of the United States ruled on May 16, 2024 that the current funding structure for the Consumer Financial Protection Bureau (CFPB) is constitutional. In Consumer Financial Protection Bureau et al. v. Community Financial Services Association of America, Ltd., et al., the Court held that the CFPB’s independent funding through the Federal Reserve System does not violate the Appropriations Clause of the Constitution and separation of powers principles. The Court took this case on appeal from the Fifth Circuit, which we have previously reported on, reversing the judgment and remanding for further proceedings. This decision also resolves a circuit split between the Fifth Circuit as reported above, and the Second Circuit, which we also have previously reported on, and essentially clears the way for the CFPB to pursue its expansive regulatory and enforcement agenda.

Background

The Dodd-Frank Act created the CFPB as an independent regulatory agency housed within the Federal Reserve System. The CFPB's funding scheme is unique across the independent executive agencies of the federal government in that the CFPB is not funded with periodic Congressional appropriations. Rather, the CFPB receives funding directly from the Federal Reserve System, which is itself funded outside the appropriations process. Each year, the CFPB simply requests an amount determined by the CFPB director to be "reasonably necessary to carry out" the agency's functions. The Federal Reserve must then transfer that amount so long as it does not exceed 12 percent of the Federal Reserve's "total operating expenses." At present, the CFPB’s maximum annual draw is nearly US$750 million.

The trade associations argued that this funding mechanism not only violates the Appropriations Clause because the CFPB decides for itself the amount of funding to draw from the Federal Reserve System without having to seek periodic Congressional approval, but that this scheme also offends the underlying principles of separation of powers.

Analysis

The Court found that the CFPB's funding structure was authorized by the Dodd-Frank Act, a statute passed by Congress and signed into law by the President. The Court found that the CFPB's funding structure does not violate the Appropriations Clause because Congress authorized the CFPB's funding structure in the organic statute, and bound the amount of funding with specific statutory provisions. In doing so, the Court reversed the Fifth Circuit’s decision after finding no support for the Fifth Circuit's conclusion in Supreme Court precedent, in the Constitution's text, or in the history of the Appropriations Clause.

The Court reasoned that the Congressional authorization for this particular funding system is consistent with historical examples of similar funding provisions. It also found that the system does not offend separation of powers principles because Congress authorized the disbursement of specified funds for an identified purpose, which is all that the Appropriations Clause requires in its limitation on Congress’s control of the purse.

In her concurrence, Justice Kagan writes that support for the constitutionality of the CFPB’s funding scheme is not limited to examples from the 18^th century, and adds that “[t]he way our Government has actually worked, over our entire experience, thus provides another reason to uphold Congress’s decision about how to fund the CFPB.” Justice Jackson’s concurrence finds the statute sufficient and does not raise a separation of powers issue, stating “when the Constitution’s text does not provide a limit to a coordinate branch’s power, we should not lightly assume that Article III implicitly directs the Judiciary to find one.”

Justice Alito’s dissent finds the CFPB’s funding scheme to be unconstitutional, and writes that it would allow “a law that empowers the Executive to draw as much money as it wants from any identified source for any permissible purpose until the end of time. “ Justice Alito further writes that the Court overlooks that “Appropriations” is a term of art and its definition should not be limited to its plain and ordinary meaning.

Implications

This decision resolves the circuit split between the Second and Fifth Circuits and allows the CFPB to continue operating under its current funding system. This decision was also rendered by a Court that has heard arguments regarding the CFPB before (in 2020, the Court ruled that the president could fire the CFPB director “at will,” not just for cause). The Court has one additional Republican appointee since then, and a ruling on whether the CFPB is structurally sound is different from ruling on what the agency does.

Most immediately, this decision resolves doubt concerning the legitimacy of the CFPB. As a result, to the extent that the CFPB was hesitant to pursue its regulatory and enforcement agenda due to concerns over its Constitutional legitimacy, those impediments should no longer be an issue. The CFPB will be able to continue to operate normally under its current funding structure on a business-as-usual basis, meaning that Director Rohit Chopra is now further incentivized to continue his robust regulatory, enforcement and supervision policies. We will likely see forward motion on CFPB objectives that have been in somewhat of a holding pattern. More than a dozen CFPB enforcement cases and investigative efforts have been stayed pending the case resolution. We have already seen the CFPB announce two enforcement actions in the few days since the Supreme Court issued its opinion, including the first new contested enforcement action since January. Several recently issued rules, including the small business lending rule and the credit card late fee rule, will likely no longer be stayed and the remaining pieces of the CFPB’s payday lending rule, which was partly revoked in 2020, will finally take effect, although we expect parties to now seek to apply other grounds for stays. The CFPB will also move forward with expanding how it examines financial institutions for discriminatory practices. Additionally, the CFPB likely will feel more confident that its more recent regulatory initiatives—regarding open banking, overdraft fees and non-sufficient funds (NSF) fees, credit card penalty fees, and oversight of digital wallet and payment apps—are now more insulated from potent Constitutional challenges.

An opinion that the CFPB’s funding was unconstitutional could have rendered all of the CFPB’s past actions invalid, which could have thrown key industry practices into turmoil. In addition, a decision against the CFPB in this case could have potentially been used to support challenges to other agency funding structures, including potentially the Federal Reserve, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC). 

We note that this decision does not mean the end of other challenges to the CFPB’s rulemakings, enforcement actions, and other activities on other bases in the future (and many such challenges to specific CFPB actions are pending today), but it does mean that such challenges will not be able to make the additional argument that the agency is operating with an unconstitutional structure. As a result, we should expect to see future challenges to agency action rooted in the so-called major questions doctrine and nondelegation doctrine, especially in the context of challenging actions predicated on the CFPB's broad authority to prohibit unfair, deceptive, and abusive acts or practices. In addition, challenges will have to be conducted through the traditional means—courts, Congress, and the ballot box. Republicans in Congress are not likely to give up on their efforts to bring the CFPB funding on budget and can be expected to continue to promote legislative initiatives in that direction. Ultimately, however, the success of Republican campaigns against the authority of the CFPB will depend on whether they can hold the House of Representatives, retake the Senate, and win the White House in the upcoming November elections. The CFPB is also beginning to close in on its funding cap, which begs the question of whether the CFPB will at some point need to turn to Congress for additional resources.

Finally, we note that this decision is just one of several impactful administrative law decisions the Court is slated to issue this term. The Court is set to make a landmark decision before the end of this term to either retain, reject, or restrict the judicial doctrine known as Chevron deference in two cases. This doctrine, created in the 1980s by the Supreme Court in a case titled Chevron v. NRDC, provides that courts must defer to an administrative agency’s reasonable interpretation of an ambiguous statute, and this legal precedent has formed the basis for numerous federal regulations. The Court will also decide on the legality of in-house tribunals at the US Securities and Exchange Commission.