Supreme Court Upholds CFPB Funding Structure

Welcome to another podcast of Clearly Conspicuous. As we’ve noted in previous sessions, our goal in these podcasts is to make you succeed in this current regulatory environment, make you aware of what’s going on with the federal and state consumer protection agencies and give you practical tips for success. It’s a privilege to be with you today.

Supreme Court Upholds CFPB Funding Structure

Today we discuss the Supreme Court’s upholding of the CFPB funding in a 7-2 decision. Specifically, the Supreme Court rejected a challenge to the constitutionality of the structure used to fund the Consumer Financial Protection Bureau by a vote of 7-2. The court reversed a decision by a federal appeals court, which had ruled that the agency’s funding violates the Constitution because it comes from the Federal Reserve rather than through the congressional appropriations process. Justice Thomas wrote for the majority in a decision that relied heavily on both the text of the Constitution and early English and U.S. history. Justice Alito dissented in an opinion joined by Justice Gorsuch. He offered a dueling interpretation of history that he suggested leads to the conclusion that the CFPB’s funding scheme “blatantly attempts to circumvent the Constitution.” The case was one of several on the court’s docket this term involving the division of authority between the three branches of government, as well as the power of administrative agencies.

Case Background

It began as a challenge by two industry groups to a payday lending rule that the agency issued in 2017. A three-judge panel of the U.S. Court of Appeals for the Fifth Circuit rejected their argument that the rule violated the federal laws governing administrative agencies, but the Court of Appeals agreed with the groups that the agency’s funding structure, which was intended to foster its independence, is inconsistent with Article I, Section 9 of the Constitution, which instructs that “No money shall be withdrawn from the Treasury but in consequence of appropriations made by law.” In fact, the Fifth Circuit concluded that the CFPB’s funding is double insulated from Congress’ power under the Appropriations Clause because the agency not only receives its funding from the Federal Reserve but it, rather than Congress, determines the amount of that funding by requesting the amount that the CFPB director deems reasonably necessary to carry out the bureau’s duties.

Majority Opinion by Justice Thomas

In an opinion joined by Chief Justice Roberts and Justices Sotomayor, Kagan, Kavanaugh, Barrett and Jackson, Thomas explained that when the Constitution was ratified in the late 18th century, “appropriations were understood as a legislative means of authorizing expenditure from a source of public funds for designated purposes.” That understanding, Thomas continued, is supported by both early English history and early American history in the years leading up to the ratification of the Constitution. And although appropriations were needed to designate particular revenue for identified purposes, Thomas observed, legislatures in that era otherwise exercised a wide range of discretion. That practice also continued in the years immediately following the ratification of the Constitution, Thomas added. For example, with Congress allocating funding for some purposes up to certain amounts and allowing other federal agencies, such as the Customs Service and the Post Office, to fund themselves through the money that they collected. The CFPB’s funding scheme falls squarely within this definition of congressional appropriation, Thomas concluded. Congress specified the source — the Federal Reserve — from which the CFPB can draw funding and indicated how the CFPB is supported to use that funding. The court therefore reversed the Fifth Circuit’s decision, striking down as unconstitutional the CFPB’s funding mechanism.

Concurring Opinion by Justice Kagan

Although she joined the Thomas opinions for the court, Kagan also wrote separately, joined by Sotomayor, Kavanaugh and Barrett, but looked at appropriations through a broader historical lens than the Thomas decision. “Can you agree that the CFPB funding scheme, if transplanted back to the late 18th century, would have fit right now?” However, she emphasized, “the same would have been true at any other time in our nation’s history.” She described a continuing tradition in which Congress has created a variety of mechanisms to pay for government operations. Even if there was no exact replica for the CFPB in U.S. history, she stressed, its essentials are nothing new, and it was devised more than two centuries into an unbroken congressional practice, beginning at the beginning of innovation and adaptation in appropriating funds. That way our government has actually worked over our entire experience, and thus provides another reason to oppose Congress’ decision about how to fund the CFPB.

Concurring Opinion by Justice Jackson

In contrast, Justice Jackson would have taken a narrower approach. In her own concurrence, she wrote that she would have held that the CFPB’s funding scheme meets the minimum requirements of the Appropriations Clause without more. Indeed, she suggested, “There are good reasons to go no further” when someone specifically respects the Constitution’s allocation of powers among the three branches of government. Congress decided to fund the CFPB outside the normal appropriations process, she stressed, because it wanted to insulate the bureau from “the risk that powerful regulated entities might capture” through their process. The judicial branch should not, she contended, now second-guess Congress’ decision about how to respond to a pressing national concern.

Dissenting Opinion by Justice Alito

In his dissenting opinion, Alito rejected Thomas’ recounting of history, arguing that the drafters of the Constitution “would be shocked, even horrified, by” the CFPB’s funding scheme. Offering his own detailed version of history, Alito concluded that centuries of historical practice show that the Appropriations Clause demands legislative control over the source and disposition of the money used to finance government operations and projects. But the CFPB’s “unprecedented combination of funding features,” Alito wrote, “affords it the very kind of financial independence that the Appropriations Clause was designed to prevent. It is not an exaggeration to say that the CFPB enjoys a degree of financial autonomy that a king would envy.” And that autonomy, Alito continued, has real-world consequences. Alito noted several major changes to consumer protection law that the CFPB has recently announced include guidance indicating that financial institutions should not deny credit to consumers based on their immigration status, as well as a proposed rulemaking to cap overdraft fees and remove medical bills from credit reports. “These may or may not be wise policies,” Alito concluded, “but Congress did not specifically authorize any of them. And if the CFPB’s financing scheme is sustained, Congress cannot control or monitor the CFPB’s use of funds to implement such changes.”

Key Takeaways

So here’s the key takeaway. The CFPB is energized. As Director Chopra said immediately after the decision, “Yesterday, the Supreme Court rejected a radical theory that would have rattled financial markets by injecting uncertainty into all of the CFPB’s actions taken since day one. In its opinion, the court repudiated the argument of the payday loan lobby. The court’s ruling makes clear that the CFPB is here to stay.” Stay tuned for further programs as we identify and address the key issues and developments and provide strategies for success. I wish you continued success and a meaningful day. Thank you.