[co-author: Micah Wallen]

On October 3, the Supreme Court heard oral argument in Consumer Financial Protection Bureau v. Community Financial Services Association of America, Limited, where the Court is reviewing the Fifth Circuit’s opinion that struck down the Payday Lending Rule because the Fifth Circuit found that the Consumer Financial Protection Bureau’s (the “Bureau”) funding structure is unconstitutional. While the Fifth Circuit decision was limited to the Payday Lending Rule, a ruling upholding the Fifth Circuit’s decision would have severe ramifications for the Bureau and could potentially lead to the demise of the agency without congressional action.

As a refresher, the Fifth Circuit held that the Bureau’s “unique” funding structure violates Article I of the Constitution—vesting Congress with appropriation power—because the agency is not funded through congressional appropriations. Rather, the Bureau receives its funding from the Federal Reserve, which is funded through bank assessments. In short, the Fifth Circuit found that Congress had abdicated its “power of the purse” and had run afoul of the nondelegation doctrine where it has no involvement in the CFPB’s ongoing funding.

For those subject to the Bureau’s increasingly broad interpretation of its own powers, several themes emerged from oral argument that may shed light on the future of the Bureau.

• Justices Thomas, Gorsuch, and Alito appeared highly skeptical of the Bureau’s claim that the Appropriations Clause allows for the Bureau’s funding to be a cap rather than a specified amount and for the Bureau to determine how much money it needs, rather than Congress

• Conversely, Justices Kagan, Sotomayor, and Jackson repeatedly challenged CFSA as to why the Appropriations Clause necessarily requires an exact funding number rather than a cap on spending

• Justice Barrett questioned both parties as to why statutes with standing appropriations are acceptable in some instances but not others. Justice Kavanaugh questioned both sides on the perpetual nature of the funding for the Bureau, while Chief Justice Roberts challenged only the Bureau’s views of whether the funding mechanism was a significant shift of power to the executive branch

Notably, the justices spent little time questioning the Bureau or CFSA on the appropriate remedy should the Court find the Bureau had been unconstitutionally funded. CFSA maintained that the Court should uphold the Fifth Circuit’s remedy, which was to invalidate the Payday Lending Rule, but denied advocating that all other Bureau actions should likewise be invalidated when the justices pressed CFSA on the implications of vacating all other Bureau actions made possible by funds drawn from its current funding scheme. Several justices seemed troubled by the fact that if the Court were to uphold the Fifth Circuit’s remedy, that would result in a huge market disruption. In light of the justices’ concern, CFSA proposed that the Court could stay its ruling pending a congressional fix. However, the lack of questioning on the appropriate remedy could be telling for those wanting to predict how the Court might lean in deciding this case.

As the Court contemplates its decision, companies affected by the Payday Lending Rule are well advised to start taking steps toward compliance. In the past, the Bureau has argued for shortened compliance timelines for rules with effective dates delayed by litigation. It has previously reasoned that, given the additional time during which that the rule’s effectiveness had been stayed by the litigation, companies should have already had enough time to prepare to comply with the rule. Given current Bureau leadership, it seems unlikely that the Bureau would deviate from this reasoning.

A broad ruling in favor of CFSA could send shockwaves through the financial services industry, as it is unclear what entity would exercise authority over the panoply of consumer financial services regulations in the Bureau’s absence. The Consumer Financial Protection Act (CFPA) transferred functions and authorities from several agencies—some of which, like the Office of Thrift Supervision, no longer exist. Furthermore, if the Court did invalidate all Bureau rules and regulations based on its allegedly unconstitutional funding structure, it is unclear whether such a ruling would require financial services companies to comply with versions of regulations, such as Regulation X or Z, in effect before the Bureau’s amendments and releases of guidance. If the ruling did require industry participants to adhere to prior versions of such regulations, the costs of compliance would be enormous for industry participants.

Enforcement of the consumer financial services laws and implementing regulations also hangs in the balance. Under Section 1024(c)(3) of the CFPA, the Federal Trade Commission (FTC) and the Bureau are required to “negotiate an agreement” for coordinating their enforcement actions to avoid duplication. If the Bureau could no longer enforce these laws through agency proceedings or in federal court, the FTC may be forced to pick up the slack. Moreover, the Bureau’s interpretive rule encouraging state enforcement of federal financial services laws could be at risk if the Bureau loses in the High Court, which would eliminate another source of enforcement. Because energetic state attorneys general historically have played a strong role in enforcement, this would be significant.

Finally, a ruling in favor of CFSA would benefit litigants in more than a dozen cases who are challenging the Bureau’s authority in other areas. For example, in 2022, the U.S. Chamber of Commerce (“Chamber”) challenged the Bureau’s updates to its Examination Manual that classified discrimination as a UDAAP violation on Appropriations Clause grounds. The Chamber prevailed on its motion for summary judgment against the Bureau, and the District Court vacated the Examination Manual updates, partly because of the District Court’s reliance on the Fifth Circuit’s ruling in the CFSA case. If the Supreme Court affirms the Fifth Circuit, that would conclusively resolve the matter in the Chamber’s favor.

A decision from the Court is expected by June 2024.