U.S. Supreme Court to Hear Case on Constitutionality of CFPB’s Funding
Today, February 27, 2023, the U.S. Supreme Court granted the CFPB’s petition for review of the October 19, 2022 opinion by the 5th Circuit of the U.S. Court of Appeals in Community Financial Services Association v. CFPB, which held that the CFPB’s funding mechanism violates the U.S. Constitution’s Appropriations Clause and vacated the CFPB’s Payday Loan rulemaking. The Court denied the CFSA’s cross-petition asking the Court to review two other issues raised in the 5th Circuit case: (1) whether the rule should be vacated based on it being issued by former Director Cordray when he was only removable by the President for cause, which structure was previously found unconstitutional by the Court in Seila Law; and (2) whether the payment provisions of the rule fall under the definitions of “unfair” or “abusive” conduct under the Dodd-Frank Act’s unfair, deceptive, or abusive acts or practices (“UDAAP”) rulemaking authority granted to the CFPB. The Court will hear the case in the next term starting in October 2023, rather than the current term, meaning we won’t have a decision in this case until likely June 2024.
I will briefly describe below the history of this case, the issues raised on appeal and to the Supreme Court, and my thoughts on the impacts of this pending case on the CFPB.
A. Background
The CFPB issued the final Payday Loan rule in 2017 under former Director Cordray, which imposed an “ability to repay” requirement for payday loans and prohibited a payday lender from attempting to withdraw payments under preauthorized access to a consumer’s account after two consecutive attempts failed due to lack of sufficient funds. Both of these provisions were based on the CFPB’s UDAAP rulemaking authority. The CFSA sued the CFPB in 2018 in federal district court seeking to invalidate the CFPB’s Payday Loan rule on several grounds, arguing that: (1) the rule exceeds the CFPB’s UDAAP authority under the Dodd-Frank Act; (2) the rule was promogulated by former Director Cordray when he was protected by the unconstitutional single-director structure with only “for cause” removal; (3) the Dodd-Frank Act’s delegation of UDAAP rulemaking authority is unconstitutional because it violates the nondelegation doctrine; and (4) the CFPB’s self-funding mechanism violates the Appropriations Clause and is unconstitutional.
The CFSA’s lawsuit had been stayed for a couple years, because former Acting Director Mulvaney had indicated he would review and likely withdraw the rulemaking. When former Director Kraninger subsequently became CFPB Director, she initiated a rulemaking process to revisit the Cordray-era rule. Then in July 2020, after the Court in Seila Law found the CFPB’s single-director structure unconstitutional, former Director Kraninger ratified certain past regulatory actions. For the Payday Loan Rule, the CFPB issued a rule rescinding the Payday Loan rule’s “ability to repay” requirements, and a separate notice stating that it had ratified the Payday Loan rule’s payment restrictions. As a result of this ratification, in August 2020, the district court lifted its stay of the case, and in 2021, the district court found for the CFPB on each of the aforementioned claims. The 5th Circuit Court of Appeals affirmed the district court’s opinion on all of the claims, except for the Appropriations Clause claim, which it found unconstitutional.
B. The CFPB’s Funding Mechanism
The Dodd-Frank Act created the CFPB as an independent bureau within the Federal Reserve System (“Federal Reserve”). 12 U.S.C. § 5491(a). At issue in the 5th Circuit decision was the fact that the CFPB is authorized to receive from the Federal Reserve, upon the CFPB Director’s request, up to 12% of the Federal Reserve’s operating budget each year, without any appropriations passed by Congress.
Specifically, the Dodd-Frank Act provides that the CFPB receives its funds directly from the Federal Reserve. The Dodd-Frank Act provides that the Federal Reserve “shall transfer to the Bureau from the combined earnings of the Federal Reserve System, the amount determined by the Director to be reasonably necessary to carry out the authorities of the Bureau.” 12 U.S.C. § 5497(a)(1). The Dodd-Frank Act places limits on the amount funding the CFPB can request, which is 12% of the Federal Reserve’s total operating expenses as reported in the Federal Reserve’s 2009 Annual Report, which amount is adjusted annually. 12 U.S.C. § 5497(a)(2). The Dodd-Frank Act expressly provides that this amount of funds “shall not be subject to review by the Committees on Appropriations of the House of Representatives and the Senate.” Id.
C. The 5th Circuit Appropriations Clause Decision
The 5th Circuit court’s October 2022 opinion found the CFPB’s funding mechanism unconstitutional and vacated the Payday Loan rule. In its opinion, the 5th Circuit provided a short discussion of the history and reasoning behind the Appropriations Clause. The Appropriations Clause is in Article I, Section 9, Clause 7 of the U.S. Constitution, and states that:
No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.
The 5th Circuit stated that this clause makes clear that any power granted by the Constitution in the other branches of government are limited by Congress’ control over the appropriation of funds from the U.S. Treasury. The court then noted that the clause also takes away from Congress the option to not require appropriations prior to expenditure. The court stated that the Appropriations Clause affirmatively obligates Congress to use its appropriations authority to protect individual liberty.
The court then discussed the CFPB’s “vast” authorities, including rulemaking, enforcement, and adjudicatory authority over a significant portion of the U.S. economy. The court noted that the CFPB has the authority to conduct investigations, issue Civil Investigative Demands (“CIDs”), and bring civil actions in courts or administrative adjudications, seeking penalties, restitution, and disgorgement. The court stated that Congress placed a “staggering amalgam of legislative, judicial, and executive power in the hands of a single Director, rather than a multimember board or commission.”
The court then discussed the CFPB’s funding outside of Congressional appropriations, stating that it is “self-actualizing, perpetual funding mechanism.” The court stated that, “the funds siphoned by the Bureau” from the Federal Reserve “in effect, reduce amounts that would otherwise flow to the general fund of the Treasury, as the Federal Reserve is required to remit surplus funds in excess of a limit set by Congress.” The court determined that through this mechanism, Congress ceded both direct control over the CFPB’s budget, and indirect control because the CFPB’s funds are “drawn from a source that is itself outside the appropriations process-a double insulation from Congress's purse strings that is unprecedented across the government.” In addition, the court cited to the fact that the CFPB does not hold its funds in an account at the U.S. Treasury, but instead maintains a separate fund at a Federal Reserve Bank that is under the control of and permanently available to the Director without any act of Congress. The court also cited to the fact that the Dodd-Frank Act expressly states that the funds are not subject to review by the Appropriations Committees of Congress. The court held that this structure violates the Appropriations Clause, and that this problem was “more acute” because of the CFPB’s vast powers and “capacious portfolio.”
In response to what may be the CFPB’s best counterargument, that other financial regulatory agencies (such as the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation) are also funded outside of appropriations, the court stated that the CFPB’s double insulation goes a “significant step further” than the funding of these other agencies, and that these other agencies do not have “remotely comparable” enforcement or regulatory authority. The court concluded that the Bureau’s double insulation, single-Director answerable to the President, and regulatory and enforcement authorities render the CFPB outside of history or tradition.
The court’s remedy in this case was to invalidate the Payday Loan rule. In deciding on this remedy, the court looked to a recent U.S. Supreme Court decision, Collins v. Yellen (in which the Supreme Court found the Federal Housing Finance Agency’s single-Director structure that only allowed “for cause” removal of the Director unconstitutional, like in Seila Law for the CFPB). In Collins, the Supreme Court addressed the remedy for acts taken by a Director subject to an unconstitutional removal provision, stating a party can be entitled to relief if they can demonstrate that the unconstitutional provision inflicted compensable harm. The 5th Circuit court followed this framework because it found that the issue of the constitutionality of the appropriations was similar to the removal issue in Collins (in that the agency had the authority for the underlying action aside from a separation of powers problem). The 5th Circuit stated that, like in Collins, “to obtain a remedy, a plaintiff must prove more than the existence of an unconstitutional provision; she must prove that the challenged action actually ‘inflicted harm.’” The 5th Circuit found that the showing of harm was “straightforward” in this case, because the funding used to engage in the rulemaking was unconstitutional because it was unappropriated. The 5th Circuit stated that, “without its unconstitutional funding, the Bureau lacked any other means to promulgate the rule.” Thus, the 5th Circuit “vacate[d] the Payday Loan Rule as the product of the Bureau’s unconstitutional funding scheme.”
D. The Parties’ Petitions to the Supreme Court and the Court’s Order
The CFPB appealed this decision to the U.S. Supreme Court, filing a petition for a writ of certiorari on November 14, 2022. The CFPB asked the Supreme Court to hear the cases during its April 2023 sitting for the current October 2022 term. The CFSA filed a cross-petition for a writ of certiorari on January 13, 2023, asking the Court to add the aforementioned two additional questions (regarding the rule being issued by former Director Cordray when he was protected from removal by the unconstitutional removal provision, and the lack of authority under UDAAP to promulgate the payment provisions of the rule). The CFSA also argued in its brief in opposition to the CFPB’s petition that the 5th Circuit correctly decided the appropriations issue and that the Court should not grant the CFPB’s petition. These are very dense and detailed petitions, but I will very generally and briefly describe some of the most interesting arguments raised in the petitions below.
The CFPB argued that the 5th Circuit misinterpreted the Appropriations Clause, and pointed out that similar agencies liked the Federal Reserve, OCC, and FDIC, are funded outside of appropriations. The CFPB also argued that, although the 5th Circuit relied on the CFPB having a “capacious portfolio” with regulatory and enforcement authority, the banking agencies also have similar authorities.
In addition, the CFPB argued that the 5th Circuit’s remedy was incorrect. The CFPB argued that the 5th Circuit could have more simply severed the particular statutory provisions it found to cross the line and run afoul of the Appropriations Clause, leaving the remainder of the CFPB’s funding scheme intact. In addition, the CFPB stated that the 5th Circuit, if it found the entire funding scheme unconstitutional, could have merely halted further spending, rather than unwinding past acts that were otherwise authorized. The CFPB noted that invalidating past agency acts does not actually unwind any spending on expenses or salaries. The CFPB also argued that the 5th Circuit misapplied the Collins opinion. The CFPB stated that the Collins opinion did not say that a showing of harm from the unconstitutional provision was sufficient to invalidate an agency action, but that it was only a prerequisite, and that other forms of relief could be considered by the courts. The CFPB further argued that under Collins, the 5th Circuit should have asked whether the CFPB would not have promulgated the Payday Loan Rule if it had been validly funded under the Appropriations Clause, rather than only whether the Payday Loan Rule was paid for with unappropriated funds.
In its opposing brief, the CFSA noted that the CFPB’s funding mechanism is unique because, unlike any other agency, the CFPB can “roll over” unused funds, and even invest them, creating a “permanently available endowment without any further act of Congress.” The CFSA also noted that the CFPB’s funding structure has no “temporal limitation” and “operated in perpetuity,” and thus, it would continue unless stopped by Congress or the President, which is an “inversion of the Appropriations Clause.” The CFSA noted that the Framers of the Constitution were concerned about this type of “funding in perpetuity” and even limited appropriations for the army to two years. The CFSA also argued that the Appropriations Clause requires more than just Congress authorizing spending, but instead requires an appropriation of funds.
The CFSA also argued that other agencies cited by the CFPB as having similar funding structures are “in an entirely unrelated family.” The CFSA noted that some agencies, like the Post office and the National Mint, are funded by the fees they charge for the services they render, which was set up in the earliest Congresses of the founding of the country, which is evidence that that structure was not troubling to the Framers of the Constitution. The CFSA noted that the OCC, Federal Reserve, and FDIC are “close cousins” to these types of agencies, because they are funded by assessments on entities they regulate. The CFSA then pointed out how the CFPB was different from these agencies, noting that the CFPB’s funds from the Federal Reserve are “entirely unrelated to its own conduct.”
The CFSA also argued against the CFPB’s argument that certain provisions of the Dodd-Frank Act can be severed, or that there are other remedies for this issue that would leave the rule and the CFPB intact and operational. The CFSA also argued that if the Supreme Court takes the case, it should hear the case during the next term, rather than the current term as requested by the CFPB. As noted above, the Supreme Court granted the CFPB’s petition, but denied the CFSA’s cross-petition and does not appear to have added the two additional questions requested by the CFSA. The Supreme Court apparently has agreed to hear the case in the next term beginning this October, meaning a decision is likely in June 2024.
E. How a Supreme Court Decision Affirming the 5th Circuit Might Affect the CFPB
The impact of a decision by the Supreme Court affirming the 5th Circuit’s opinion would practically be much broader than one CFPB rule. Under the 5th Circuit’s reasoning, all of the CFPB’s past, present, and future rulemakings could be invalidated because they were funded with unappropriated funds. In addition, investigations and enforcement actions could be impacted, because the staff that conducts these actions and the related expenses are also paid with unappropriated funds. Further, all other CFPB activities could be affected, such as the CFPB’s supervisory activity or market monitoring functions. Do I think this will slow the CFPB down? Most likely not. They have a very aggressive rulemaking agenda with very significant new rules (as I’ve written about here, here, and here) and are still active in the enforcement arena. It would be prudent for anyone who is concerned about a particular CFPB rulemaking, enforcement action, or other activity to consider a challenge based on this funding issue.
Because of this, there will be a cloud over the CFPB while the appeal to the Supreme Court is pending. It is difficult to overstate the impacts and regulatory uncertainty from this pending appeal. To fix the CFPB’s funding mechanism, Congress would have to enact legislation, and it isn’t certain that Congress could be relied on to work in a bipartisan manner to mend the CFPB. That being said, there have been many proposed bills to make wise changes to the CFPB’s structure, including putting the CFPB under appropriations and placing a board or commission over the agency.
It will be important to watch this case and any pending legislation that may alter the CFPB’s funding and/or structure. We will do so and keep you updated.
If you would like to discuss any issues in this blog post, please email me at rich@garrishorn.com.
