Supreme Court Upholds the CFPB's Funding Mechanism (CFPB v. CFSA)

CFPB v. Community Financial Services Association of America

On May 16, 2024, the U.S. Supreme Court affirmed the mechanism established by Congress to fund the Consumer Financial Protection Bureau (CFPB). The case was brought by trade associations whose members were adversely impacted by a CFPB rule. The plaintiffs argued that the method by which funds are made available to the CFPB violates the Constitutional Appropriations Clause that provides that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” By a 7 to 2 majority, the Supreme Court disagreed, and upheld the constitutionality of the funding system. Justice Thomas authored the opinion for the Court. Justices Alito and Gorsuch filed a dissenting opinion.

Background

The CFPB was established by Title X of the Dodd-Frank Act as an independent financial regulator within the Federal Reserve System. The Bureau was given enforcement and rulemaking authority for 18 consumer protection laws previously allocated to the banking agencies, as well as new authority to designate and prohibit unfair, deceptive or abusive financial practices and products. (§5536(a)(1)(B))

In order to give the Bureau more independence from the political branches of the Government, the Dodd-Frank Act provides the Bureau with a standing source of funding outside the ordinary annual appropriations process. Each year, the Bureau may requisition from the earnings of the Federal Reserve System the amount determined by the Bureau’s Director to be reasonably necessary to carry out its duties, subject to a statutory cap.

The funding mechanism was challenged by the plaintiff trade associations on the basis that the Bureau “takes federal government money without an appropriations act” in violation of the Appropriations Clause. The Court of Appeals for the Fifth Circuit agreed, but the Supreme Court reversed for the reasons explained below.

Majority Opinion

The Court determined that the Appropriations Clause simply means that expenditures from a specific source of public money for a designated purpose must be made by statute. The Dodd-Frank Act serves this purpose, and therefore the funding mechanism is authorized through a statutory appropriation.

In reaching this decision, the Court noted that surplus funds in the Federal Reserve System are deposited into the general fund of the Treasury, and therefore the diversion of any amount of these funds to the Bureau is in effect the same as taking funds from the Treasury for a specific purpose (funding the CFPB), and therefore subject to the Appropriations Clause.

Tracing the history of the Appropriations Clause, including the appropriations practices in the British Parliament and in the Colonies, as well as in early state legislatures, the Court found that legislatures typically had a wide range of discretion in how to appropriate funds, including appropriations that were not time limited and appropriations that were open-ended but subject to a cap. The Court also cited appropriations measures passed during the early years of our Republic that provided the recipient department or agency with various types of authority, including statutes that allowed agencies to indefinitely fund themselves directly from revenue collected.

The Court concluded that the Bureau’s funding statute contains the requisite features to be deemed a “congressional appropriation.” The statute authorizes the Bureau to draw public funds from a particular source—“the combined earnings of the Federal Reserve System,” in an amount not exceeding an inflation-adjusted cap. And it specifies the objects for which the Bureau can use those funds—to “pay the expenses of the Bureau in carrying out its duties and responsibilities.” The Court noted that this funding process was similar to funding schemes that Congress adopted as early as the First Congress, as evidence that it is consistent with the Appropriations Clause. In particular, the Court noted that allowing an agency to receive funds up to a cap, and allowing a standing appropriation that is not time limited, are provisions that have a long history in the United States.

Finally, the Court addressed the concern that the Bureau’s funding mechanism provides a blueprint for destroying the separation of powers, and that it invites tyranny by allowing the Executive agency to operate free of any meaningful fiscal check. In other words, the concern is that a standing appropriation allows an Executive agency to engage in activities without the ability of Congress to “check” the agency through the power of the purse. The Court dismissed this argument by noting that the Appropriations Clause is simply a limitation on Congress’ power over the purse and requires no more than a law that authorizes the disbursement of specified funds for identified purposes.

Concurring Opinion by Justice Kagan, with whom Justices Sotomayor, Kavanaugh and Barrett join

The concurring opinion was written to emphasize that throughout the history of the United States, Congress has exercised broad discretion in crafting appropriations, making it ever more obvious that the CFPB’s funding accords with the Constitution.

Concurring Opinion by Justice Jackson

Justice Jackson notes that the plain meaning of the text of the Appropriations Clause is that an appropriation is simply a law that authorizes expenditures from a specific source of public money for designated purposes. The statute that Congress passed to fund the Consumer Financial Protection Bureau easily meets the Appropriations Clause’s minimal requirements. In Justice Jackson’s view, nothing more is needed to decide this case.

Dissent By Justice Alito, with whom Justice Gorsuch joins

In dissent, Justices Alito and Gorsuch argue that the Appropriations Clause is designed to ensure that the people’s elected representatives monitor and control the expenditure of public funds and the projects they finance, and it imposes on Congress an important duty that it cannot sign away. Under the majority opinion, the Appropriations Clause imposes no temporal limit that would prevent Congress from authorizing the Executive to spend public funds in perpetuity. Likewise, there is no limit on the amount of funding that could be authorized.

The dissent also reviewed the history of the Appropriations Clause, including how it developed in Britain and enactments made early in the history of the United States, but came up with the opposite conclusion. According to the dissent, centuries of historical practice show that the Appropriations Clause demands legislative control over the source and disposition of the money used to finance Government operations and projects, and that the examples cited by the majority were outliers.

Significantly, Justices Alito and Gorsuch note that the CFPB funding scheme contains a number of unique features that have never been found in a single agency before. These include: (1) the funding applies in perpetuity; (2) the CFPB has discretion to select the amount of funding that it receives, up to a statutory cap; (3) the funds taken by the CFPB come from the Federal Reserve Banks; (4) the Federal Reserve Banks are self-funded corporations that obtain their funding from fees on private parties, “not departments of the Government”; (5) the CFPB is not required to return unspent funds or transfer them to the Treasury; and (6) the funds may be placed in a separate fund that earns interest and may be used to pay the CFPB’s expenses in the future. According to the dissent, “No other agency—old or new—has enjoyed so many layers of insulation from accountability to Congress.” Further, it was “carefully designed to give the Bureau maximum unaccountability.”

The dissent concluded by noting that:

[T]he CFPB is a powerful agency with the authority to impose substantive rules [on] a wide swath of industries and levy knee-buckling penalties against private citizens. In the last several months alone, the Bureau has announced plans to effectuate not one, but three major changes in consumer protection law. The CFPB has issued guidance cautioning financial institutions from “denying credit to individuals based on their [illegal] immigration status, regardless of their personal circumstances and demonstrated ability to repay.” It has also begun “a rulemaking process to remove medical bills from Americans’ credit reports” and to cap overdraft fees “at an established benchmark—as low as $3.” These may or may not be wise policies, but Congress did not specifically authorize any of them, and if the CFPB’s financing scheme is sustained, Congress cannot control or monitor the CFPB’s use of funds to implement such changes. That is precisely what the Appropriations Clause was meant to prevent.

Impact on Pending Litigation

Various regulations that were stayed pending the Supreme Court’s decision on the Appropriations Clause issue can now proceed. In particular, a suit by the ABA and the Texas Bankers Association will continue and may be decided by the end of 2024. The CFPB’s appeal of a lower court decision voiding the agency’s UDAAP compliance manual will also be revived. Finally, the U.S. Chamber of Commerce and other plaintiffs will be evaluating how to proceed against CFPB’s credit card late fees rule. When the injunction was granted, the district court held that it was not necessary to consider non-Appropriations Clause arguments against the rule. Since the Appropriations Clause question has now been resolved in favor of the agency, the statutory arguments against the rule that were not decided in the prior proceeding now become relevant if the parties decide to pursue the case.