The U.S. Supreme Court may decide to cut off funding for the Consumer Financial Protection Bureau under a novel legal theory that the consumer watchdog is "doubly insulated" from congressional oversight. The case gives Republicans the best shot yet of gutting the agency and tying its funding to appropriations.
But regulatory experts say that a ruling against the CFPB would threaten the funding of other similarly structured agencies including the Federal Reserve Board, the Farm Credit System and other regulators that are funded through fees or assessments.
Central to the case is whether the CFPB's funding through the Federal Reserve System — and not through congressional appropriations — runs afoul of the appropriations clause, which states that "no money shall be drawn from the Treasury, but in consequence of appropriations made by law."
The specific lawsuit against the CFPB was filed in 2018 by two payday trade groups that
The CFPB argued in
In recent weeks, roughly three dozen legal briefs have poured in from constitutional scholars, federal regulatory experts, attorneys general and lawmakers weighing in on the case, CFPB v. Community Financial Services Association of America. The high court took the case after a three-judge panel of the U.S. Court of Appeals for the 5th Circuit
In March, the U.S. Court of Appeals for the 2nd Circuit held that the CFPB's funding structure is constitutional, which set up a split with the 5th Circuit. The 2nd Circuit said that it "cannot find any support," for the 5th Circuit's decision in either Supreme Court precedent, the text of the Constitution, or the history of the appropriations clause.
"Because the CFPB's funding structure was authorized by Congress and bound by specific statutory provisions, we find that the CFPB's funding does not offend the appropriations clause," the 2nd Circuit's
Many experts sought to address the 5th Circuit panel's core reasoning that the CFPB's funding is unprecedented because it has "double insulation" from Congress' purse strings. The appeals court panel found that, "[e]ven among self-funded agencies, the Bureau is unique," and that its structure represents "an innovation with no foothold in history or tradition."
Meanwhile supporters of the CFPB think the case is an effort by Republicans to get the judicial branch to change the agency's structure, having been unable to do so through the legislative branch, where dozens of bills have been proposed but none have gained traction in both houses of Congress.
If the case goes against the CFPB, it would also mean other federal agencies would be open to similar challenges. The Supreme Court could upend the status quo and create a sea change in how agencies are funded outside the congressional appropriations process.
"No federal bank regulator is funded through annual appropriations," said Adam J. Levitin, a professor at Georgetown University Law Center. "There is no principled way of distinguishing the CFPB's funding from the Federal Reserve Board, and it puts the constitutionality of the Federal Reserve Board into question."
Carolyn Shapiro, founder and co-director of the Institute on the Supreme Court of the United States and a professor at Chicago Kent College of Law, said a ruling against the CFPB could create budgetary problems for the U.S. Department of Veterans Affairs.
"Congress has historically employed funding mechanisms that vary widely in terms of duration, form, source, and specificity," Shapiro wrote. "In order to provide veterans with a wide array of benefits and services, the VA depends on mandatory and discretionary appropriations, advanced appropriations, permanent appropriations, revolving funds, trusts, special funds, etc., including funds derived from non-Treasury sources."
Others said that if the Supreme Court sides with the 5th Circuit, the high court would be second-guessing not only how Congress funds other federal agencies but also would be inviting legal challenges to agencies such as the Farm Credit Administration, which has a similar structure.
Rachel Fried, a lawyer for Democracy Forward Foundation, wrote an amicus brief on behalf of the Farm Credit Administration, which administers the Farm Credit System, the largest provider of credit to farmers and ranchers. The 5th Circuit took issue with language in the Dodd-Frank Act of 2010 that created the CFPB that is nearly identical to the language setting up farm credit funding, she said.
"The 5th Circuit's opinion could undermine the funding structures of myriad federal agencies," Fried wrote. "If you go to rural communities, the Farm Credit System is providing almost half of the credit for American agriculture. If you take that away, there would be a full-blown crisis in American agriculture in mostly Red states."
The CFPB was created in response to the financial crisis to protect consumers from abuses, particularly those that occurred in the mortgage market. But the agency has been a stand-in for partisan animosity. In the horse-trading around the passage of Dodd-Frank, lawmakers housed the CFPB within the Federal Reserve System, where it shares a common pension plan, inspector general and pay scale on par with the Federal Reserve Board, Levitin said.
Noel Francisco, the former solicitor general in the Trump administration, said in his arguments on behalf of the payday trade groups that the high court should exempt the Federal Reserve System from its calculus in looking at agency funding overall largely because the Fed has different functions.
"The Federal Reserve System's primary functions are not quintessential executive powers, or even inherently governmental ones," Francisco wrote. "The Board implements monetary policy mainly through traditional banking activities, such as loaning money and directing open-market transactions. Such activities are not the exclusive province of government agencies."
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.
"The Bureau's preferred comparators are also far more limited in their reach, regulating only narrow corners of a particular industry. That distinction provides yet another reason why the Bureau needs greater oversight," the trade groups said. "None of these other agencies have near the same array of powers as the Bureau."
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 also want the court to pause and force a review of CFPB enforcement actions that were put on hold when the Supreme Court agreed to take the case. A high court ruling is expected in July 2024 before the next presidential election.
"We do not want to see the CFPB eliminated in any sense, it is really just a matter of putting some type of check and balance on the bureau," said David Pommerehn, general counsel and senior vice president at the Consumer Bankers Association. "The CFPB is so entrenched in the industry now that it plays a critical role and eliminating it altogether would have consequences not only for consumers but for the [banking] industry as a whole."
Joe Lynyak, a partner at Dorsey & Whitney LLP, said that many of the legal arguments filed in the case conflate the CFPB's powers with its funding.
"What some of the respondents are saying is that they think this is a really, really scary agency and Congress shouldn't have appropriated it, and they want the Supreme Court to dismiss the comparisons with other agencies," said Lynyak. "Congress has had many chances to go back and amend the appropriation or engage in greater scrutiny of the CFPB, which is far different from whether Congress exercised its authority correctly in the first place."
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."
"If the CFPB is going to take up the mantle of consumer defender," the attorneys general wrote, "then the States should be permitted to explain why their consumers actually suffer when the agency is not kept sufficiently accountable. An unbounded CFPB ultimately strikes at the States' powers over the financial markets."
Levitin, at Georgetown University Law Center, said the 5th Circuit did not fully understand how the Federal Reserve System works and erred in explaining the CFPB's funding. Both the CFPB and Federal Reserve Board are funded from assessments on the Federal Reserve Banks. Congress directed the Federal Reserve Board to transfer funds to the CFPB for its operations, serving merely as a conduit, Levitin said. The CFPB's budget is capped at 12% of the Federal Reserve System's 2009 budget, adjusted for inflation. The CFPB received $642 million in fiscal 2022.
"The Fed's audited financial statements show that there is an assessment on the reserve banks for both the Federal Reserve Board and for the CFPB and they are parallel items," Levitin said. "There is no double insulation because the Federal Reserve Board has no discretion over the CFPB's funding."
The Federal Deposit Insurance Corp and Office of the Comptroller of the Currency also fund their operations through fees or assessments paid by regulated entities: The OCC is funded through fees assessed on nationally chartered banks, while the FDIC is funded from deposit insurance assessments on banks.
"The question is whether the Supreme Court can find a way to clip the CFPB's wings without collateral damage to other agencies," Levitin said. "It puts the constitutionality of the Federal Reserve Board in doubt, and if the CFPB is held to be unconstitutional, the next time somebody doesn't like one of the Board's bank regulations, we will see that argument raised."
The Supreme Court previously ruled in 2020 that the CFPB was unconstitutional, ruling that the bureau's single director who could only be fired "for cause," by the president, violated the separation of powers. In that case, the court struck down one provision of Dodd-Frank and kept the agency intact.
Many expect five of the six conservative justices to rule against the CFPB with Chief Justice John Roberts as a potential holdout. Justice Brett Kavanaugh in particular has a keen interest in the bureau, having called the CFPB an "out-of-control agency," when he was a judge on the U.S. Court of Appeals for the D.C. Circuit.
Lynyak said the Supreme Court would be entering dangerous territory if it sets standards for what constitutes an appropriation.
"If the court lays out a set of rules regarding what an appropriation is, that is almost in the nature of the Supreme Court legislating," Lynyak said, "so it would be crossing over the lanes to an extreme degree, which I suspect they're not going to want to do."
