On March 23, 2023, the U.S. Court of Appeals for the Second Circuit held that the Consumer Financial Protection Bureau’s (the “CFPB”) funding structure is constitutional. The Second Circuit’s three-judge unanimous panel decision in the case, captioned Consumer Financial Protection Bureau v. Law Offices of Crystal Maroney, P.C., represents a split from the October 19, 2022 decision from the Fifth Circuit in Consumer Financial Services Association of America Ltd. v. Consumer Financial Protection Bureau (“CFSA”), holding that the CFPB’s funding structure violates the Appropriations Clause of the U.S. Constitution and separation of powers principles. The Fifth Circuit’s decision in CFSA received widespread attention given that it was the first time a federal court has held that a federal agency is unconstitutionally funded. It is no wonder, then, that on February 27, 2023 the U.S. Supreme Court granted certiorari to review the merits of the CFSA decision. Of course, while the Second Circuit’s decision in Maroney is not binding on the U.S. Supreme Court, it may provide a roadmap for how the U.S. Supreme Court could analyze and decide the CFPB funding issue once and for all.

The Second Circuit’s decision in Maroney arises out of a 2017 civil investigative demand (“CID”) issued by the CFPB to the Law Offices of Crystal Maroney, P.C. (“Maroney”), a law firm providing debt collection services in New York. The CID demanded the production of various documents related to Maroney’s debt collection services. After Maroney produced some documents, but refused to produce others, the CFPB filed an action to enforce the CID in the U.S. District Court for the Southern District of New York. The district court granted the CFPB’s petition and Maroney appealed, arguing (1) the CID was invalid because the CID was initiated during a period where the CFPB director could only be removed with a showing of cause, in violation of the Constitution, (2) Congress violated the nondelegation doctrine when it created the CFPB, (3) the CID is unduly burdensome, and (4) the CID was invalid because the CFPB’s funding structure was unconstitutional.

On appeal, the Second Circuit rejected each of Respondent’s arguments. First, the court held that the CFPB’s CID proceedings were not invalid simply because they were initiated during a period where the CFPB’s director removal provision was unconstitutional. Citing Seila Law v. Consumer Financial Protection Bureau, a 2020 U.S. Supreme Court decision holding that the CFPB’s for-cause-only director removal provision was unconstitutional, Maroney argued that the fact that the CID proceedings began while the CFPB’s director was only removable by unconstitutional means (i.e., only with a showing of cause) necessarily invalidated the CFPB’s CID proceedings against Maroney altogether. But, as the Second Circuit noted, the U.S. Supreme Court’s 2021 decision in Collins v. Yellen requires that for agency action to be invalid because it was initiated during a period when its director was only removable by unconstitutional means, the unconstitutional removal provision must have been the proximate cause of the challenged agency action (i.e., the agency might not have taken the challenged action if its director were removable without cause for any reason). The Second Circuit found that was not the case for the CID proceedings against Maroney and rejected this argument. Also relevant to the Second Circuit’s decision was the fact that the CFPB’s investigation into Maroney had spanned a time period wherein five separate individuals were appointed to head the CFPB, and by three separate presidents. Accordingly, it was clear to the court that the CFPB director’s apparent insulation from removal was not the but-for cause of the investigation and CID directed at Maroney.

Third, the Second Circuit held that Congress’s creation of the CFPB did not violate the nondelegation doctrine. The court noted that when creating an agency, as long as Congress lays down by legislative act “an intelligible principle to which the person or body authorized to [exercise the delegated authority] is directed to conform[,]” the creation of the agency will not give rise to an unconstitutional delegation of Congressional authority. J.W. Hampton, Jr., & Co. v. United States, 276 U.S. 394, 409 (1928). The Second Circuit found that Congress surmounted this hurdle in creating the CFPB and rejected Maroney’s argument in turn.

Third, the Second Circuit rejected Maroney’s argument that the CID was unduly burdensome as impermissibly demanding the production of documents related to the practice of law. Specifically, the court held that although the CFPB cannot enforce investigative demands against attorneys practicing law, the CID was focused on Maroney’s debt collection practices which are within the purview of the CFPB’s enforcement authority.

Finally, and perhaps most importantly, the Second Circuit rejected Maroney’s argument that the CFPB is unconstitutionally funded. As discussed in our prior alerts on this topic (5th Circuit Court Alert, CFSA v. CFPB Alert), the CFPB obtains its funding through a unique funding mechanism. Specifically, the CFPB is not funded by the traditional Congressional Appropriations process, but instead receives its funding from the Federal Reserve, a federal agency that is itself outside the Congressional Appropriations process as it receives a significant portion of its funding through bank assessments. Maroney argued this funding mechanism violates the Appropriations Clause, the text of which provides that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” U.S. Const. art. I, § 9, cl. 7. According to the U.S. Supreme Court, the Appropriations Clause “was intended as a restriction upon the disbursing authority of the Executive department” and “means simply that no money can be paid out of the Treasury unless it has been appropriated by an act of Congress.” Cincinnati Soap Co. v. United States, 301 U.S. 308, 321, 57 S.Ct. 764, 81 L.Ed. 1122 (1937). “[I]n other words, the payment of money from the Treasury must be authorized by a statute.” Off. of Pers. Mgmt. v. Richmond, 496 U.S. 414, 424, 110 S.Ct. 2465, 110 L.Ed.2d 387 (1990). 

Addressing the funding challenge, the Second Circuit held that the CFPB’s funding structure is not unconstitutional, primarily because it was enacted by a valid act of Congress. Summarizing the relevant provisions of the Consumer Financial Protection Act (the statutory scheme creating the CFPB), the court noted that:

Congress provided that “[f]unds obtained by, transferred to, or credited to the [CFPB] ... shall remain available until expended[ ] to pay the expenses of the [CFPB] in carrying out its duties and responsibilities.” 12 U.S.C. § 5497(c)(1). Congress also limited the amount of funding the CFPB can draw from the Federal Reserve System to – at most – twelve percent of the Federal Reserve System's 2009 Operating Expenses with adjustments for increases in labor costs. Id. § 5497(a)(2)(A)–(B). To receive funding in addition to the twelve-percent limit, the CFPB must seek Congressional appropriations through the annual appropriations process. Id. § 5497(e). Because the CFPB's funding structure was authorized by Congress and bound by specific statutory provisions, we find that the CFPB's funding structure does not offend the Appropriations Clause.

The Second Circuit’s decision in Maroney marks an express split from the Fifth Circuit’s decision in CFSA. As described in our prior summary of the CFSA decision, the Fifth Circuit held that the CFPB’s funding structure is unconstitutional because it renders the CFPB “double-insulation” from Congressional control and oversight, which runs afoul of the Appropriations Clause. Addressing this issue, the Second Circuit disagreed, holding that there is no Appropriations Clause violation because the CFPB’s funding structure was put in place by a valid act of Congress (which is all that the Second Circuit believed to be necessary for constitutional compliance).

The Second Circuit also disagreed with the Fifth Circuit’s finding that the absence of any time limitation on the CFPB’s funding renders it unconstitutional. Departing from the Fifth Circuit on this issue, the Second Circuit noted that the U.S. Constitution—in the section immediately preceding the Appropriations Clause—states that “no Appropriation of Money” to raise and support an army “shall be for a longer Term than two Years.” U.S. Const. art. I, § 8, cl. 12. According to the Second Circuit, the inclusion of a time limitation in this section of the constitutional text means that the framers understood how to enact time-limited budgetary restrictions and—by negative implication—if they had wanted to impose a time restriction on the Appropriations Clause then they could have and would have done so.

In summarizing the constitutional propriety of the CFPB’s funding mechanism, the Second Circuit also held that it is consistent with the historical purpose of the Appropriations Clause. Citing the writings of Alexander Hamilton on this issue, the Second Circuit noted that “[t]he design of the Constitution in [the Appropriations Clause] was ... to secure ... that the purpose, the limit, and the fund of every expenditure should be ascertained by a previous law.” 7 Alexander Hamilton, The Works of Alexander Hamilton 532 (John C. Hamilton ed. 1851). Here, it was clear to the Second Circuit that Congress sufficiently articulated the purpose of the CFPB in enacting its objectives, which include that “(1) consumers are provided with timely and understandable information ... about financial transactions; (2) consumers are protected from unfair, deceptive, or abusive acts ... and from discrimination; (3) outdated, unnecessary, or unduly burdensome regulations are regularly identified and addressed ... ; (4) Federal consumer financial law is enforced consistently ... ; and (5) markets for consumer financial products and services operate transparently and efficiently.” 12 U.S.C. § 5511(b)(1)–(5). The CFPB’s “limit” and “fund” were also adequately supported, as Congress directed the Board of Governors to “transfer to the [CFPB] from the combined earnings of the Federal Reserve System [an] amount determined by the [CFPB's] Director to be reasonably necessary to carry out [its] authorities,” (12 U.S.C. § 5497(a)(1)), but which amount “shall not exceed [twelve percent] of the total operating expenses of the Federal Reserve System, as reported in the Annual Report, 2009, of the Board of Governors[.]” Id. § 5497(a)(2)(A). Having found no constitutional violation in the CFPB’s funding, the Second Circuit respectfully split.

The Second Circuit’s decision in Maroney and the Fifth Circuit’s decision in CFSA now represent the only two federal appellate court majority opinions addressing the constitutionality of the CFPB’s funding system. Despite the split, we should soon get clarification from the U.S. Supreme Court on the funding issue given it has decided to review CFSA on the merits. Further, given that the U.S. Supreme Court declined to review CFSA on an expedited basis, we may see Maroney file a petition for writ of certiorari to the U.S. Supreme Court as well. Should the U.S. Supreme Court grant certiorari to Maroney, we may see the U.S. Supreme Court consolidate the cases and decide them together. Moreover, and whether or not Maroney reaches the U.S. Supreme Court, the Second Circuit’s decision may provide the U.S. Supreme Court with an analytical roadmap it needs if it decides to ultimately reverse CFSA and declare the CFPB funding mechanism constitutionally compliant. Indeed, the Second Circuit’s decision tees up a holding that the CFPB is properly funded and provides an analytical framework for doing so.

Another implication of the Second Circuit’s decision in Maroney is that it provides the CFPB with support to continue its enforcement efforts outside the Fifth Circuit’s jurisdiction. Indeed, before the Second Circuit’s decision in Maroney last Thursday, CFSA remained the only occasion in which a federal appellate court had addressed the propriety of the CFPB’s funding scheme. This meant that according to the highest judicial authority to address the issue, the CFPB’s funding was unconstitutional. While CFPB leadership seemed unphased, the Fifth Circuit’s decision in CFSA surely called into question whether the CFPB could continue its enforcement efforts at all. Of course, those enforcement efforts require the use of funds, and if the funds were held to be unconstitutionally obtained, it may result in the invalidation of the CFPB’s enforcement efforts altogether. With the Second Circuit now having disagreed with the Fifth Circuit, the balance may shift back in the CFPB’s favor (or at least present an equal playing field). Whatever the interim result on the CFPB’s functions, the U.S. Supreme Court’s review and decision in CFSA will provide the CFPB and those subject to its authority needed guidance on how to proceed.

The Consumer Financial Services practice at Saul Ewing will continue to monitor this decision and its impacts. In the interim, those with questions or seeking guidance should consult with a Saul Ewing attorney.

Bullet Points

• The Consumer Financial Protection Bureau (“CFPB”) is the primary federal agency responsible for regulating the consumer finance industry
• While other federal agencies operate under autonomous funding mechanisms, the CFPB has a unique funding structure that takes it one step further outside the traditional Congressional appropriations process, causing industry participants to question the CFPB’s accountability
• In Consumer Financial Services Association of America, Limited v. Consumer Financial Protection Bureau, the U.S. Court of Appeals for the Fifth Circuit held that the method in which the CFPB obtains is funding is unconstitutional

Summary

In Consumer Financial Protection Bureau v. Law Offices of Crystal Maroney, P.C., the U.S. Court of Appeals for the Second Circuit held that the Consumer Financial Protection Bureau’s (“CFPB”) unique funding mechanism is not unconstitutional. This decision marks an express and direct split from the October 2022 decision from the Fifth Circuit in Consumer Financial Services Association of America, Ltd. v. Consumer Financial Protection Bureau, where the Fifth Circuit held that the CFPB’s receipt of funds through channels outside the traditional Congressional Appropriations process—specifically, from the Federal Reserve, an agency which is itself outside the Congressional Appropriations process—violated the Appropriations Clause of the U.S. Constitution and separation of powers principles. The U.S Supreme Court has since granted certiorari to review the Fifth Circuit’s decision and decide the constitutionality of the CFPB’s funding once and for all, and the Second Circuit’s decision may help justify the CFPB’s continued enforcement efforts while the Supreme Court decides the case.