On May 16, 2024, the U.S. Supreme Court issued a significant opinion in Consumer Financial Protection Bureau v. Community Financial Services Association of America, Ltd., upholding the funding structure of the Consumer Financial Protection Bureau (CFPB). 601 U.S. 416. In a previous post, we reported that on October 3, 2023, the Supreme Court heard oral arguments in this matter on the issue of whether the CFPB's funding mechanism violates the Appropriations Clause of the U.S. Constitution (U.S. Const. art I § 9, cl. 7). In a 7-2 decision, the Supreme Court held that the statute which authorized the CFPB to obtain funds from the earnings of the Federal Reserve satisfied the Appropriations Clause. As maintained by the CFPB in its opening brief, this challenge to the CFPB's funding structure "threaten[ed] profound disruption by calling into question virtually every action the CFPB has taken in the 12 years since its creation." Justice Thomas delivered the opinion for the Court, and Justices Kagan and Jackson each issued concurring opinions; Justice Alito issued a dissenting opinion.
In contrast to the funding structures of other federal agencies, for which Congress provides funding on an annual basis, the funding for the CFPB, as provided by Congress, allows the CFPB to draw from the Federal Reserve System an amount which its Director considers to be "reasonably necessary to carry out" the CFPB's functions. 12 U.S.C. §§5497(a)(1). The only limit to this funding is an inflation-adjusted cap. 12 U.S.C. §§5497(a)(2). A direct challenge to this funding structure occurred after the CFPB promulgated a rule in 2017 which regulated preauthorized payments in the context of "payday" loans, vehicle title loans, and other high-cost installment loans. 12 CFR part 1041. Two trade associations, the Community Financial Services Association of America and Consumer Service Alliance of Texas, challenged this rule, arguing in part that the rule was void ab initio on the ground that the CFPB itself was "unconstitutionally structured" because its funding mechanism usurped Congress's role in the appropriation of federal funds, thereby violating the Appropriations Clause. 558 F. Supp. 3d 350, 358 (W.D. Tx. 2021). The District Court for the Western District of Texas rejected the trade associations' argument and granted summary judgment in favor of the CFPB, concluding that for a statute directing an appropriation to be Constitutional, it need only "authorize[] an agency to receive funds up to a certain cap." Id. at 364. On appeal, the Court of Appeals for the Fifth Circuit reversed, holding that the CFPB's funding mechanism violated the Appropriations Clause on separations of powers grounds since, in that court's view, the CFPB's budgetary autonomy failed to "meet the Framers' salutary aims of separating and checking powers and preserving accountability to the people." 51 F. 4th 616, 640-41 (5th Cir. 2022). The Supreme Court granted certiorari, and oral argument was held on October 3, 2023.
In a 7-2 decision, the Supreme Court reversed the decision of the Fifth Circuit. Justice Thomas, writing for the majority, provided three reasons why the CFPB's funding structure satisfied the Appropriations Clause. First, the Supreme Court found the funding structure was supported by the plain language of the Appropriations Clause. Relying on the definition of "appropriation" at the time the Constitution was ratified, the majority found that the ordinary usage of the term suggested that an appropriation was simply understood as "a legislative means of authorizing expenditure from a source of public funds for designated purposes." 601 U.S. 416, 427.
Second, the Supreme Court found that the historical context for the Appropriations Clause supported the constitutionality of the funding structure. After tracing the history of English and early American appropriations law throughout colonial times, the majority concluded that, at the time of the origin of the Appropriations Clause, "appropriations needed to designate particular revenue for designated purposes," and that early legislative bodies sometimes required the expenditure of a specific amount, but also that sometimes the recipient of the appropriation was simply allowed to spend the appropriation up to a cap, as with the CFPB's funding model. Id. at 431.
Third, the Supreme Court found that Congress's early practice in implementing the Appropriations Clause immediately following the ratification of the Constitution further supported the Constitutionality of CFPB's funding structure. Id. at 426. Again, looking closely at historical practice, the majority found that the CFPB's "authorization to draw an amount that the Director deems reasonably necessary to carry out the agency's responsibilities, subject to a cap, is similar to the First Congress's lump-sum appropriations." Id. at 435. The Supreme Court thus concluded that an appropriation "need only identify a source of public funds and authorize the expenditure of those funds for designated purposes to satisfy the Appropriations Clause" and that, measured against the analytical framework provided by the Court, the "[CFPB's] funding statute contains the requisite features of a congressional appropriation." Id. at 426, 435. In so holding, the Supreme Court rejected the trade associations' arguments that the CFPB's funding structure was unconstitutional, finding each argument attempted to graft an additional, and unnecessary, requirement onto the Appropriations Clause.
The Court accordingly reversed the judgment of the Fifth Circuit and remanded the case for further proceedings. This decision promises to reinvigorate the CFPB's enforcement work, some of which was put on hold during the pendency of this case in the Supreme Court, and to enable the CFPB to maintain its focus on curbing junk fees and combating what the CFPB deems to be excessive late fees on credit cards, as well as excessive overdraft fees and fees for insufficient funds.
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