Court to Test CFPB's Funding Mechanism

The Supreme Court will hear oral arguments on Tuesday in CFPB v. Community Financial Services Association, the case testing whether CFPB's funding mechanism violates the Appropriations Clause. Here's my preview, from the ABA Preview of United States Supreme Court Cases (with permission):

ISSUE

Does the CFPB’s funding mechanism violate the Appropriations Clause, and, if so, was the Fifth Circuit right to vacate the Payday Lending Rule?

FACTS

In 2010, in response to the 2008 economic crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among many other things, the Act created the Consumer Financial Protection Bureau (CFPB) and vested it with authority to enforce over 18 federal statutes that were previously overseen by seven different agencies. Under the Act, the CFPB is an “independent bureau” within the Federal Reserve System.

In contrast to most federal agencies, which receive direct annual appropriations from Congress, the CFPB receives its funding directly from the Federal Reserve. Each year, the CFPB asks the Federal Reserve for funding in an amount up to 12 percent of the Federal Reserve’s operating expenses. The Federal Reserve, in turn, generates its budget through the operations of the Federal Reserve Banks. The Banks “buy and sell bonds and securities, receive fees for services provided to banks, credit unions and other depository institutions, and generate interest on loans to depository institutions.”

As part of the Act, Congress specified that the funds transferred to the CFPB “shall not be subject to review by” the House and Senate Appropriations Committees. But at the same time, the CFPB director must submit regular reports to and appear before other congressional committees to “justif[y]” the CFPB’s “budget requests of the previous year.” 12 U.S.C. § 5496(c)(2). Moreover, the Comptroller General (a congressional officer) must conduct annual audits of the CFPB and submit reports to Congress.

This unique funding mechanism is designed to help ensure that the CFPB can operate independently of political influences.

In 2017, the CPFB issued a final rule entitled “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (the Payday Lending Rule). The Rule came in two parts. The first part prohibited lenders from making payday loans “without reasonably determining that consumers have the ability to repay the loans according to their terms.” 12 C.F.R. § 1041.4 (2018). (This portion of the Rule is called “the Underwriting Provision.”) The second part limited a lender’s ability to collect repayments through a borrower’s preauthorized account access. In particular, it prohibited lenders from trying to withdraw payments for loans from a borrower’s account after two consecutive withdrawal attempts failed for lack of sufficient funds. 12 C.F.R. § 1041.7. (This portion of the Rule is called “the Payment Provision.”) The CFPB later rescinded the Underwriting Provision, but ratified the Payment Provision and left it intact.

Two associations of companies regulated by the Payday Lending Rule sued the CPFB, arguing that the Payments Provision violated the Administrative Procedure Act and that it was invalid because the CFPB’s funding mechanism itself was invalid under several constitutional principles and provisions, including the Appropriations Clause. (In other words, because the CFPB was invalid, it’s Rule was invalid.) The district court ruled against the plaintiffs on all counts. The United States Court of Appeals for the Fifth Circuit reversed on the Appropriations Clause and vacated the Payday Lending Rule. (The Fifth Circuit ruled for the CFPB on the other counts.) This appeal followed.

CASE ANALYSIS

As a general matter, Congress has the power to appropriate and spend federal funds. The Appropriations Clause, in Article I, Section 9, Clause 7 of the Constitution, says, “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law . . . .” This case tests that Clause’s application to an executive agency that receives its funding from another executive agency, the Federal Reserve, which itself earns money through the operation of the Federal Reserve Banks (and not direct annual congressional appropriations).

The government argues first that the constitutional text, history, and precedent all support the CFPB’s funding mechanism. As to text, the government claims that the Appropriations Clause “does not limit Congress’s authority to determine the specificity, duration, and source of appropriations.” It contends that the Constitution’s “special restriction” on appropriations for the military—that “no Appropriation of Money” to raise and support an army “shall be for a longer Term than two Years,” Article I, Section 8, Clause 12—“confirms that the Constitution otherwise leaves it to Congress to determine the specificity, duration, and source of appropriations.” As to history, the government asserts that ever since the Founding the government has funded agencies through lump-sum appropriations and fees, assessments, investments, and similar mechanisms, particularly for financial regulatory agencies. As to precedent, the government says that “other than the Fifth Circuit below, no court has ever held that an Act of Congress violated the Appropriations Clause.”

The government argues next that the plaintiffs and the Fifth Circuit “fail[ed] to grapple with” these sources. The government contends that the plaintiffs and the Fifth Circuit rested their conclusion only on the argument that the CFPB’s funding mechanism is “unprecedented.” But the government says that this is wrong: “the CFPB’s funding mechanism accords with Congress’s longstanding practice of authorizing agencies to spend money indefinitely from sources other than annual appropriations.” Moreover, the government contends that the mechanism squares with statutes funding other financial regulators, like the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve Board.

Finally, the government argues that even if the CFPB’s funding mechanism is flawed, the Fifth Circuit erred in vacating the Payday Lending Rule. Instead of vacating, the government says that the lower court should have “excised and severed any problematic provisions” in the CFPB’s funding mechanism, and ruled only that the CFPB couldn’t use those provisions to enforce the Payday Lending Rule going forward. (Under this approach, Congress could rewrite the CFPB’s funding mechanism, and the CFPB could then enforce the Payday Lending Rule.) The government claims that this would have been consistent with historical practices when courts rule that executive branch officials spend public money in excess of a congressional appropriation. And the government says that vacatur (as the Fifth Circuit ruled) could “inflict[] significant disruptions on the Nation’s economy and the consumers, financial institutions, regulators, and others who have reasonably relief on the CFPB’s past actions.”

The plaintiffs counter that the CFPB’s funding mechanism violates the Appropriations Clause, because Congress ceded away its power of the purse to the CFPB. “The CFPB’s funding . . . is not ‘drawn . . . in Consequence of Appropriations made by Law’ . . . but rather taken based on the agency’s say-so.” The plaintiffs contend that this is especially problematic, because it is hard-wired into federal law, and because this unique funding mechanism gives the CFPB both appropriations power and executive power—“combining the purse with the sword in the most dangerous manner.” The plaintiffs claim that the government offers no limit “that would prevent Congress from writing the President a blank check,” and that there there is no precedent in our history for such an agency. “Whether one looks back in time or down the slippery slope, the threat to separated powers and individual liberty is obvious.”

The plaintiffs argue next that the CFPB is wrong to say that text, history, and precedent support its funding mechanism. They claim that the CFPB’s funding mechanism isn’t a valid exercise of congressional authority; instead, “it is a void delegation of exclusive legislative power” to the executive branch. Moreover, the plaintiffs say, contrary to the CFPB’s examples, there is no precedent for “permanently eliminating all fiscal oversight from both the People’s Representatives and the People themselves.” The plaintiffs contend that the CFPB can only support its funding mechanism based on “out-of-context dicta” from the Court’s cases and deference to the political process. But as to deference, the plaintiffs assert that the CFPB’s structure itself has warped the political process.

Finally, the plaintiffs argue that the government is wrong to say that the Fifth Circuit shouldn’t have vacated the Payday Lending Rule. The plaintiffs claim that the government ignores the fact “that critical defects” in the CFPB’s funding mechanism “can be cured only through legislative revision.” Moreover, they say that the APA requires courts to “set aside” invalid rules. And they claim that the government is wrong to worry about any economic impacts of vacating the Payday Lending Rule, because the plaintiffs challenged the Rule before it went into effect.

 

SIGNIFICANCE

Given the CFPB’s broad jurisdiction over consumer financial protection laws, and given the sweeping nature of the Fifth Circuit’s ruling, this case could have enormous consequences. Just since the Fifth Circuit vacated the Payday Lending Rule, defendants in several other CFPB enforcement cases have moved to dismiss based on that decision. If the Court affirms the Fifth Circuit’s ruling, we can expect all defendants in CFPB enforcement actions to move to dismiss. Such a ruling could effectively decimate the CFPB, unless Congress creates a new funding mechanism, and quickly. (To state the obvious: this seems unlikely in the current political climate.)

Such a result would sharply curtail federal consumer financial protection. It could also shock or destabilize the entire financial industry. That’s because regulated corporations adjusted their activities based on CFPB regulations. If those regulations go away, regulated corporations will re-adjust, affecting consumers and the financial markets as a whole. The government provided this example in its petition for certiorari: “If . . . regulations [making adjustments and exceptions to certain mortgage-related disclosure requirements] were vacated, mortgage lenders would have to immediately modify the disclosures they give millions of consumers each year, and borrowers could seek to rescind certain mortgage transactions that had relied on regulatory disclosure exceptions.” Moreover, because the Fifth Circuit vacated a past agency action, a ruling upholding it could threaten other past actions by the CFPB, as well.

Outside the CFPB, a ruling for the plaintiffs could threaten the funding mechanisms for certain other federal agencies that regulate financial markets, even the Federal Reserve. While funding mechanisms for other agencies are not before the Court—and while the plaintiffs do not appear to challenge them in this case—a Court ruling that strikes the CFPB funding mechanism could reach downstream to other federal agencies in future cases.

This is not the first time that the CFPB’s structure has come before the Court. Just three years ago, the Court ruled that the Bureau’s structure—in particular, its single director, who could be fired by the President only for cause—impermissibly interfered with the president’s power as chief executive. Seila Law LLC v. Consumer Financial Protection Bureau, 140 S. Ct. 2183 (2020). (The CFPB director’s “for cause” protection was another way that Congress sought to insulate the CFPB from political influences.) Moreover, this case and Seila Law are part of a larger trend by litigants and the Court to restrict the power of federal administrative agencies. (Indeed, there’s another important case on the Court’s docket this Term, Loper Bright Enterprises v. Raimondo, not yet set for argument, which could limit agencies’ discretion to interpret and apply federal law.)

That said, this move—vacating a CFPB regulation based on the Bureau’s funding mechanism—may be a bridge too far for this Court. In addition to the reasons described above, I’ll add this: The Fifth Circuit’s ruling is, in fact, an extreme outlier for both its reasoning and its result. The D.C. Circuit and at least six district courts—every other court that considered the issue—ruled the other way.

Still, we’ve seen the Roberts Court in a variety of cases move aggressively to alter existing law; to effect significant political, social, economic, and environmental change; and to upset settled expectations in politics, the markets, and society. A ruling for the plaintiffs—based on a full-throated endorsement of the Fifth Circuit’s ruling, or based on some other more modest approach—shouldn’t be a surprise.