On May 16, 2024, the United States Supreme Court issued its highly anticipated decision in Consumer Financial Protection Bureau v. Community Financial Services Association of America, determining once and for all that the Consumer Financial Protection Bureau’s (“CFPB”) self-funding mechanism is not unconstitutional. In a reversal from the decision from the U.S. Court of Appeals for the Fifth Circuit, the Supreme Court held that the process by which the CFPB is funded—whereby it draws its annual funding amount from the revenues of the Federal Reserve, an agency that is itself outside the Congressional appropriations process—fits within the confines of a proper “appropriation” pursuant to the Appropriations Clause of the U.S. Constitution. The decision breathes new life into the CFPB’s ability to operate as a federal agency and will surely prompt the passage of stronger regulations and the initiation of more and more enforcement actions across the consumer finance industry.

What You Need to Know:

• The CFPB is the primary federal agency responsible for regulating the consumer finance industry.
• While some other federal agencies operate under autonomous funding mechanisms outside the traditional Congressional appropriations process, the CFPB has a unique funding structure that takes it one step further from Congressional oversight, causing industry participants to question the CFPB’s accountability.
• In Consumer Financial Protection Bureau v Community Financial Services Association of America, the U.S. Court of Appeals for the Fifth Circuit held that this funding mechanism is unconstitutional.
• The U.S. Supreme Court accepted the case on the CFPB’s petition for writ of certiorari.

The Supreme Court took up this case to examine the unique method by which the CFPB obtains its funding, and to determine whether that funding scheme violates the U.S. Constitution. Unlike many other government agencies that obtain funding directly from Congressional appropriations, the CFPB is funded by the Federal Reserve—an agency which is itself outside the traditional appropriations process, in that it is funded (at least in part) by assessments it requires banks to pay. Specifically, the CFPB requests from the Federal Reserve an amount “determined by the Director to be reasonably necessary to carry out” the CFPB’s functions. 12 U.S.C. § 5497(a). The Federal Reserve must grant that request so long as it does not exceed 12 percent of the Federal Reserve’s “total operating expenses.” 12 U.S.C. § 5497(a)(1)–(2).12. Additionally, the CFPB maintains “a separate fund, . . . the ‘Bureau of Consumer Financial Protection Fund,’” which is “maintained and established at a Federal [R]eserve bank[]” and “under the control of the Director[.]” 12 U.S.C. § 5497(b)(1). These monies on deposit are permanently available to the CFPB director without any further act of Congress. Id. § 5497(c)(1). Critically, and to further the CFPB’s independence from Congressional appropriation, the “[f]unds obtained by or transferred to the [CFPB] Fund shall not be construed to be Government funds or appropriated monies.” Id. § 5497(c)(2). To emphasize this point even further, the Act states that “funds derived from the Federal Reserve System . . . shall not be subject to review by the Committees on Appropriations of the House of Representatives and the Senate.” Id. § 5497(a)(2)(C).

What this means is that in contrast to various other federal agencies, the CFPB is granted the right to determine its own annual funding amount and to draw those funds from the Federal Reserve without the obligation of accounting for them to Congress or refunding any surplus at the end of the fiscal year. In sum, through enacting the CFPB and implementing the funding procedure described herein, Congress not only ceded its ability to directly control the CFPB through the appropriations process, but also the ability to indirectly control it. The intention of this funding scheme was to insulate the CFPB from the Congressional appropriations process so the CFPB could focus solely on consumer protection and not worry about catering to its political proponents in order to ensure its future funding and viability. But, this unique funding structure drew criticism from many who argued that the CFPB’s removal from the traditional appropriations process rendered the CFPB effectively unaccountable to Congress and usurped many of the President’s executive functions.

Addressing these and other issues, the Fifth Circuit held that this funding scheme is unconstitutional. According to the Fifth Circuit, the Appropriations Clause “does more than reinforce Congress’s power over fiscal matters; it affirmatively obligates Congress to use that authority ‘to maintain the boundaries between the branches and preserve individual liberty from the encroachments of executive power.’” 51 F.4th 616, 637 (5th Cir. 2022). The Fifth Circuit further observed that by giving the Bureau its “self-actualizing, perpetual funding mechanism,” Congress effectively abandoned this obligation. Id. at 638. Moreover, it was not enough that Congress enacted the law authorizing the Bureau's funding, because a “law alone does not suffice—an appropriation is required.” Id. at 640.

The CFPB petitioned the Supreme Court for a writ of certiorari, which the Supreme Court granted on February 27, 2023. Meanwhile, and while no other federal appellate court had held that the CFPB’s funding scheme was unconstitutional, courts across the country began staying CFPB enforcement matters pending the Supreme Court’s decision.

On May 16, 2024, the Supreme Court issued its decision. The 7-2 majority opinion, authored by Justice Thomas, reverses the Fifth Circuit’s decision and holds that the CFPB’s funding process is constitutionally permissible. Analyzing the language of the Appropriations Clause, the history against which the text was enacted, and congressional practice and interpretation of the Appropriations Clause since its passage, the Court found that the CFPB’s funding scheme fits within the confines of a permissible appropriation.

As the Court observed, the Appropriations Clause provides that: “no money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” While the parties agreed that the CFPB’s funding must comply with the Appropriations Clause, the Court’s task was determining whether the funding constitutes an “Appropriation made by Law.” Looking to various historical definitions of the term “appropriation,” the Court determined that a permissible “appropriation” is “a law authorizing the expenditure of particular funds for specified ends.” This general conception of what constitutes an appropriation cast a wide net into which the CFPB’s funding mechanism easily fit. Nevertheless, for good measure, the Court also undertook a historical analysis of how various forms of government raised funds over the course of recent history and how they characterized their doing so. Indeed, the Court noted that from the Middle Ages through ratification of the U.S. Constitution—from parliamentary rule through colonial practice—governmental “appropriation” needed only to identify a source of funds for some specified use in order to pass muster.

Compiling these patterns and practices, the Court surmised:

In short, the origins of the Appropriations Clause confirm that appropriations needed to designate particular revenues for identified purposes. Beyond that, however, early legislative bodies exercised a wide range of discretion. Some appropriations required expenditure of a particular amount, while others allowed the recipient of the appropriated money to spend up to a cap. Some appropriations were time limited, others were not. And, the specificity with which appropriations designated the objects of the expenditures varied greatly.

The Court also noted the post-ratification onset of various fee- and commission-based funding schemes for government operations (such as for the Post Office and organizations tasked with overseeing shipping imports), concluding that these mechanisms too “adhered to the minimum requirements of an identifiable source of public funds and purpose.”

Applying these definitions and understandings of a permissible “appropriation,” the Court found that the CFPB’s funding scheme embodies all the characteristics of a congressional appropriation. Namely, the underlying statute authorizes the CFPB to draw funds from a particular source—the earnings of the Federal Reserve, in an amount not exceeding an inflation-adjusted cap. The statute further specifies the purpose or object for which the CFPB can use those funds—the payment of the CFPB’s expenses. With these criteria satisfied, the Court held that the CFPB’s funding mechanism is a permissible “appropriation” within the limits authorized by the Appropriations Clause of the U.S. Constitution.

The Court then turned its attention to the plaintiffs’ three main arguments, rejecting each in turn. First, the Court rejected the contention that the CFPB’s funding is not “drawn . . . in Consequence of Appropriations Made by Law” because the CFPB, rather than Congress itself, decides the amount of annual funding that it will receive (up to the statutorily prescribed limit). Plaintiffs essentially argued that because the CFPB can select the amount it will draw from the Federal Reserve, up to a statutory cap, its funding is not subject to any Congressional oversight or control. The Court disagreed, however, and found that because the statute includes a cap, the CFPB’s purported discretion in choosing its funding amount is not boundless. The fact that the CFPB may select an amount within that cap to ultimately draw does not change this result.

Second, the Court rejected the plaintiffs’ argument that the CFPB’s funding is not a permissible appropriation because it is not time limited. As the Court observed, the Constitution’s text allows Congress to enact—at least in some circumstances—standing appropriations. Moreover, other federal agencies such as the Customs Service and the Post Office have received appropriations without time limits, a fact which the Court construed to mean that Congress intentionally did not intend for all appropriations to be assigned a given time limit.

Finally, the Court rejected the plaintiffs’ argument that condoning the CFPB’s funding structure would give Congress the metaphorical blueprints for uniting the sword and the purse to thereby create autonomous federal agencies unbound by either Congress or the President; a result the Appropriations Clause was designed to forbid. In rejecting this argument, the Court noted that while the Appropriations Clause presupposes Congress’ power over the purse, it is not the source of those powers. The Appropriations Clause requires only a law that authorizes the disbursement of specific funds for an identified purpose, and the plaintiffs’ argument—even if correct—would not take the CFPB’s funding structure outside the confines of that framework.

The Court’s final paragraphs were devoted to explaining its disagreement with the dissenting opinion co-authored by Justices Alito and Gorsuch. These dissenting justices disagreed with the majority’s broad interpretation of the term “appropriation” developed through the cited dictionary and historical sources. The dissent also declared that the Appropriations Clause requires more than a mere source and purpose of drawn funds, and instead mandates some level of Congressional control over those funds. The majority disagreed, however, finding the dissent’s theories divorced from the historical understandings and applications of the Appropriations Clause and unsupported by any alternative and well-reasoned definition of what an “appropriation” truly is. Having distinguished the plaintiff’s arguments and explained its rationale for deviating from the dissent, the Court concluded that the CFPB’s funding mechanism is subject to the Appropriations Clause and constitutes a permissible appropriation, thereby reversing the Fifth Circuit’s decision.

The CFPB issued a statement praising the Court’s decision:

For years, lawbreaking companies and Wall Street lobbyists have been scheming to defund essential consumer protection enforcement. The Supreme Court has rejected their radical theory that would have devastated the American financial markets. The Court repudiated the arguments of the payday loan lobby and made it clear that the CFPB is here to stay. . . . Today’s decision is a resounding victory for American families and honest businesses alike, ensuring that consumers are protected from predatory corporations and that markets are fair, transparent, and competitive. This ruling upholds the fact that the CFPB’s funding structure is not novel or unusual, but in fact an essential part of the nation’s financial regulatory system, providing stability and continuity for the agencies and the system as a whole. As we have done since our inception, the CFPB will continue carrying out the vital consumer protection work Congress charged us to perform for the American people.

https://www.consumerfinance.gov/about-us/newsroom/statement-on-supreme-court-decision-in-cfpb-v-cfsa/. CFPB Director Rohit Chopra, in prepared remarks issued on the CFPB’s website, echoed similar concerns and support:

[T]he 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 arguments
of the payday loan lobby. The Court’s ruling makes clear the CFPB is here
to stay.

https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-of-cfpb-director-rohit-chopra-regarding-the-supreme-courts-decision-in-cfpb-v-cfsa/. In his comments, Director Chopra laid out the CFPB’s coming plan of action in light of the Court’s decision.

• First, the CFPB will forge ahead with lifting the stays on any enforcement actions that were paused pending the Court’s decision. There are at least 16 such actions pending, some of which have been stayed since the fall of 2022. So far, the CFPB has already filed numerous briefs in various courts across the country requesting a lift of these stays, and respondents in those cases are scrambling to find any legal rationale to cite in opposition.
• Second, the CFPB will continue in its well-publicized efforts to curb the assessment of junk fees across the consumer finance and broader consumer goods businesses. This would include its efforts to place a limit on the amounts that credit card companies can charge as late fees or overdraft fees.
• Third, the CFPB will take further action with respect to credit reports and credit scores by—in large part—examining methods for removing medical debt from said reports or allowing this debt to negatively impact consumers’ scores.
• Finally, and in order to move forward with these initiatives, the CFPB intends to expand its arsenal of enforcement agents by hiring approximately 75 personnel by the end of the calendar year.

The Consumer Financial Services practice at Saul Ewing will continue to monitor these and other related developments in the consumer finance industry.

This is the third in a series of articles on the Supreme Court’s review of the CFPB’s funding mechanism. Part 1 can be found here, and Part 2 can be found here.