Five issues to watch in CFPB's Supreme Court constitutionality case

The case came before the Supreme Court after three judges on the U.S. Court of Appeals for the Fifth Circuit ruled last year that the CFPB's funding made it "doubly insulated" from congressional oversight. The three-judge panel, all appointed by President Trump, blamed Congress for ceding both direct and indirect control over the CFPB's budget by allowing the agency to determine its own funding from the Federal Reserve, outside of appropriations.



The Fifth Circuit said the bureau's funding constituted "a double insulation from Congress's purse strings," which runs "afoul of the separation of powers embodied in the Appropriations Clause." 



But in March, the Second Circuit Court of Appeals came to the opposite conclusion and found no precedent to support the Fifth Circuit's ruling. 



Judge Richard J. Sullivan, also a Trump appointee, wrote: "To the contrary, the Court has consistently interpreted the Appropriations Clause to mean simply that 'the payment of money from the Treasury must be authorized by a statute.' We are not aware of any Supreme Court decision holding (or even suggesting) that the Appropriations Clause requires more than this 'straightforward and explicit command.'"



Many lawyers and briefs in support of the CFPB claim there is nothing novel or unusual about Congress's decision to fund the CFPB outside of annual spending bills. 



"The essence of the controversy is the scope of the Appropriations Clause, which has a long history of permitting Congress to fund governmental functions through what are essentially user fees," said Joe Lynyak, a partner at Dorsey & Whitney LLP. 



One of the core arguments in legal briefs filed by Texas trade groups, which sued the CFPB in 2017 to invalidate the payday lending rule, has to do with the agency's budget being capped at 12% of the Federal Reserve System's 2009 budget, adjusted for inflation. 



The payday lenders argue that the CFPB's budget needs to be a specific number — an actual dollar amount — that must be authorized every year by Congress. The payday groups argue that each Congress, in setting funding levels through appropriations, is supposed to be able to overrule what the former Congress did. Tying the CFPB's budget to the Federal Reserve System in perpetuity means that current and future Congresses "are prisoners to the 2010 Congress that passed Dodd Frank," said Brett Natarelli, a member at the law firm Dykema Gossett PLLC. 



"Congress set the CFPB's funding level for all time, barring some complete takeover of government by a party willing to reverse that," he said.



Supporters of the CFPB note that Congress has determined "that the assurance of adequate funding, independent of the Congressional appropriations process, is absolutely essential to the independent operations of any financial regulator." 

In the horse-trading around the passage of the Dodd-Frank Act, lawmakers housed the CFPB within the Federal Reserve System largely because banks did not want to pay fees or assessments to fund the agency. Congress has historically given independence to financial regulators to protect the public interest and shield agencies from manipulation or self-dealing by lawmakers and industry.



A core argument that liberal justices may raise is what impact a ruling against the CFPB would have on other agencies such as the Federal Reserve and the Federal Housing Finance Agency that are similarly funded.



"The only thing that might cause the court some pause in finding a separation of powers problem here is the idea that all the other banking agencies might be impacted in the same way," said Scott Pearson, a partner and leader of the financial practice at the law firm Manatt. "There's going to be concern about that and the court might hesitate to rule in a manner that might affect more than just the bureau."



Pearson thinks other agencies that get their funding from the companies they regulate have more limited jurisdiction and power. 



"The bureau has much broader authority and broad police powers and the funding is not coming strictly from the entities they are regulating, so there is very little ability of Congress to check what the bureau is doing," he said. 



The conservative justices may focus on the intent of the 111th Congress in passing the Dodd-Frank Act in 2010 and whether the CFPB was purposely insulated from the appropriations process by design, some experts said. Unlike prudential bank regulators, the CFPB is not self-funded and does not have the ability to raise fees through assessments. 



"I think there's a way for the Supreme Court to say that the CFPB is unique and its funding mechanism can be invalidated," said Natarelli at Dykema.



Proponents of the CFPB have said the justices could open the door to having other regulators' constitutionality challenged including the Federal Reserve.



Currently the FDIC is funded from deposit insurance assessments on banks, while the OCC charges examination fees of nationally chartered banks. The Federal Reserve Board of Governors — and, by extension, the CFPB — is funded from revenue earned on the assessment on interest from securities held on the balance sheets of the regional Federal Reserve banks, which the Federal Open Market Committee uses to pursue the Fed's monetary policy objectives. 



However, the Fed, FHFA, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and the National Credit Union Administration all have uncapped budgetary autonomy. 

The U.S. Chamber of Commerce, American Bankers Association, Consumer Bankers Association and Independent Community Bankers of America, joined by six other trade groups, have argued that the CFPB has "vast authority" that makes it unique from other agencies. The trade groups claim that the CFPB's funding should be restricted because they view the bureau as having too much power.



But many supporters of the CFPB reject that argument, claiming that the payday lenders are conflating the CFPB's powers with its funding. 



"Congress has retained ample oversight of the CFPB but that oversight is not significantly different than those of other agencies and offices whose operating expenses are paid for in part by user fees and are not annually 'appropriated,'" said Lynyak. 



Meanwhile, Republican attorneys general in 27 states petitioned the Supreme Court to give them 10 minutes during oral arguments to describe "some of the painful consequences that have followed from giving the CFPB unilateral spending authority." 



The U.S. Chamber of Commerce, American Bankers Association, Consumer Bankers Association and Independent Community Bankers of America, joined by six other trade groups, argued that the CFPB has "vast authority" that makes it unique from other agencies. The trade groups claim that the CFPB's funding should be restricted because they view the bureau as having too much power.



Yet the bank trade groups stopped short of asking for the CFPB to be eliminated altogether. Instead they argue that the court should sever its funding mechanism from the Federal Reserve System and then stay its decision to give Congress time "to authorize temporary funding or permanently fix the constitutional defect."



The trade groups want the court to force a review of CFPB enforcement actions that have been put on hold while the Supreme Court decides the case. But generally the trade groups have said they do not want the agency eliminated entirely.



The CFPB administers eighteen enumerated consumer-protection laws previously overseen by the Federal Reserve and six other federal agencies, virtually all of which are also independent.