As the financial services industry continues to digest what is known so far about election results, a new twist for 2023 emerged this week when the Consumer Financial Protection Bureau (CFPB) put the question of the constitutionality of its funding mechanism squarely before the Supreme Court. As Brownstein previously reported at the end of October, the U.S. Court of Appeals for the Fifth Circuit recently ruled in CFSA et al. v. CFPB that the CFPB funding mechanism is unconstitutional.

Instead of seeking rehearing with the full Fifth Circuit, the CFPB filed a petition for certiorari with the Supreme Court. In its petition, the CFPB argues that its funding—directly from Federal Reserve revenues instead of congressional appropriations—is constitutionally sound.

The CFPB’s petition seeks to cast the Fifth Circuit’s decision as an outlier, asserting that “[n]o other court has ever held that Congress violated the Appropriations Clause by passing a statute authorizing spending.” The CFPB contends that, because “Congress enacted a statute explicitly authorizing [it] to use a specified amount of funds from a specified source for specified purposes[,]” there is no Appropriations Clause issue. According to the bureau, “[t]he Appropriations Clause requires nothing more.” The CFPB also takes issue with the Fifth Circuit’s remedy of vacating the Payday Lending Rule because it was promulgated using unconstitutional funds, arguing that the court should have severed any unconstitutional funding provisions and left the rule intact. Notably, the bureau recognizes that the Fifth Circuit’s “remedial approach . . . calls into question virtually every action the CFPB has taken in the 12 years since it was created.”

Timing and Remedies

The CFPB accelerated the filing of its cert petition, filing it less than one month after the Fifth Circuit’s CFSA decision. The reason for doing so is clear: the CFPB wants the Supreme Court to hear and decide the case this term. If the Supreme Court agrees to hear the case this term, we will have a decision on the constitutional question by the end of June 2023.

One possible result is the Supreme Court could strike language in the Dodd Frank Act that provides direct funding to the CFPB from the Federal Reserve for the amount determined by the Director to be reasonably necessary, “subject to a cap of twelve percent of the Federal Reserve’s budget.” The Supreme Court could theoretically cure deficiencies in the statute but doing so on its own will create remedial complexities. For example, simply striking the language would prospectively leave the CFPB without an intact funding mechanism, which could disband the agency without further congressional action. It might be advisable for Congress to consider alternative funding mechanisms now and take action prior to the Supreme Court deciding the issue.

Putting the Issue Back on Congress’ Plate

If the Supreme Court sends the funding question back to Congress, last week’s election results present a complicated scenario. With split chambers, where Republicans are in the majority in the House of Representatives and Democrats will be in the majority in the Senate, compromise is essential. Republicans have historically pushed for changes to the CFPB’s structure including placing it under the appropriations process, while Democrats have pushed for it to retain its independent structure including its funding. The president also very likely aligns with Democrats and would be unlikely to sign anything placing the CFPB under the appropriations process.

Without congressional action, it is possible the CFPB’s funding could remain in limbo creating uncertainty for consumers and regulated entities alike. In this case, even though there would likely not be consensus, the lack of clarity in the financial services market might be so problematic for everyone that both parties agree that it needs to be addressed.

Brownstein’s Take

Financial institutions should quickly determine their desired results and prepare to advocate for legislative action. Unless, and until, the Fifth Circuit or the Supreme Court stays the CFSA decision, there remains arguments about whether actions the CFPB previously took and is taking are constitutional, particularly in the Fifth Circuit. As of the date of this alert, no motion to stay has been filed. On the other hand, the CFPB has shown no signs of slowing down and alternatively continues to issue controversial policymaking, much of which is outside the scope of the notice-and-comment rulemaking process.

It is very possible that despite the uncertainty surrounding the CFPB’s ability to act right now, it will move full steam ahead in the regulatory and enforcement space in coming months. As such, financial service providers should consider their options for review of agency actions and stay updated about the work of Congress and the judiciary in sorting all this out.