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The CFPB Is on Life Support

March 10, 2023

The Supreme Court in late February granted the Consumer Financial Protection Bureau’s (CFPB) request to review Consumer Financial Protection Bureau v. Community Financial Services Association of America, a constitutional challenge to CFPB’s funding structure. CFPB’s ability to continue functioning was placed in jeopardy by the Fifth Circuit’s decision in the case last October, so eventual Supreme Court review was inevitable.

What is surprising, however, is that the High Court to date has shunted aside repeated efforts by CFPB to expedite consideration of the case, despite CFPB’s insistence that delay threatens to inflict “immense” harms on the Bureau, consumers, and financial markets. The Court’s unwillingness to respond quickly to those warnings does not bode well for CFPB’s likelihood of success on appeal.

Round Two at the Court. Community Financial is the second constitutional challenge to CFPB’s structure to reach the Supreme Court. In its 2020 Seila Law decision, the Court held that the Bureau’s leadership structure violated separation-of-powers principles because Congress had concentrated authority in a single Director who could not be removed by the President except in very narrow circumstances—thereby posing a threat to Presidential control of an Executive Branch agency. In striking down the leadership structure, Seila Law observed that CFPB’s unprecedented funding structure “further aggravates the agency’s threat to Presidential control.” The remedy imposed by Seila Law—re-writing the Consumer Financial Protection Act to permit the President to fire CFPB’s Director at will—eliminated the threat to Presidential control, but it left the funding structure intact.

Unique Funding Structure. CFPB enforces a broad array of laws designed to protect consumers from abusive financial services practices. Most of those laws already existed when Congress created CFPB in 2010, but congressional backers of CFPB believed that those laws could only be enforced effectively by an agency freed from normal political pressures. A principal means by which the 2010 Congress freed CFPB from those pressures was to provide the Bureau with what in essence is a perpetual funding stream. Instead of having to turn to Congress for annual appropriations (as do virtually all other agencies), CFPB receives funding directly from the Federal Reserve, which is itself funded outside the appropriations process through bank assessments. Each year, the Bureau simply requests an amount determined by its Director to be reasonably necessary to carry out its functions. The Federal Reserve is required to transfer the requested amount so long as it does not exceed 12% of the Fed’s total expenses.

CFPB Funding Is Challenged. In the aftermath of Seila Law, many businesses targeted by CFPB enforcement actions began challenging the Bureau’s authority to act in light of its unique funding structure. The Fifth Circuit was the first federal appeals court to address the issue in the post-Seila Law era. The court held last fall in Community Financial that CFPB’s funding structure violates the Constitution’s Appropriations Clause, which directs that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” The appeals court held that the Appropriations Clause gives the power of the purse exclusively to Congress as a means of ensuring that the other branches of government do not overstep their authority, and that the 2010 Congress improperly gave away that power when it granted CFPB an independent, perpetual income stream.

The court stated that although later Congresses could theoretically amend the law to take back that power, doing so can be extremely difficult. For one thing, the court noted, the President has a vested interest in keeping that power within the Executive Branch and can veto any legislation that threatens his power.

The remedy imposed by the Fifth Circuit is a particular threat to business-as-usual at CFPB. The court concluded that without its ill-gotten funding, CFPB would have no means of exercising its powers. It therefore invalidated the Payday Lending Rule being challenged by the plaintiffs on the theory that the rule could not have been adopted without the funding CFPB received outside the normal appropriations process. By that reasoning, virtually any action taken by CFPB since its inception will be invalidated if challenged.

Supreme Court Review. CFPB’s alarm over the Fifth Circuit’s ruling is apparent from the speed with which it sought Supreme Court review. The Solicitor General filed CFPB’s certiorari petition in November, less than a month after the appeals court ruling. Moreover, she requested that briefs be filed on an expedited schedule so that the Court could consider the petition at its January 6, 2023, conference and hear the case during its regular April oral argument calendar. She warned the Court that any delays could inflict untold injury on financial markets.

The Court apparently was unmoved; it granted the Respondents a thirty-day extension of the deadline for responding to the petition. The Solicitor General tried again. In a letter to the Court, she requested that it grant the petition at its February 17 conference and then order an extremely expedited briefing schedule so that the case could be argued in April. She forecast dire consequences if the Court did not agree to hear and decide the case before the current Court term ends in June: “the [Fifth Circuit’s] sweeping holdings threaten the validity of virtually every action the CFPB has taken in the 12 years since it was created—as well as its on-going activities. Those holdings . . . have already created severe disruption and uncertainty.”

The Court’s Response. The Court continues to rebuff those warnings. In the weeks since it granted review on February 27, it has said nothing suggesting that it will hear the case this term. Most likely, the Court will conduct oral arguments in October or November.

The Court’s unwillingness to move quickly provides at least some indication that the Court has serious concerns with CFPB’s funding structure. If the Court were sympathetic to CFPB’s position and considered it likely that the Fifth Circuit’s holding would soon be overruled, one would expect the Court to agree to move quickly and thereby bring to an end the damage allegedly being inflicted by the appeals court’s decision.

But What About Remedies? The Court’s recent decisions have generally sided with parties seeking strict separation of the powers of the three branches of government. But the prevailing parties in those cases have often been awarded extremely limited remedies. For example, although the petitioner in Seila Law prevailed on its claim that CFPB’s leadership structure was unconstitutional, the lower courts ultimately denied the petitioner any meaningful remedy for the violation.

A ruling that CFPB’s funding structure is unconstitutional could have a far more lasting impact than have prior separation-of-powers decisions. While the Supreme Court has often searched for separation-of-powers remedies that do not severely disrupt agency operations, no such limited-impact remedies are readily apparent in Community Financial. If all of CFPB’s funding comes from illicit sources (that is, not from congressional appropriations), it is difficult to envision an appropriate remedy that does not entail invalidating actions that were financed by means of those funds.

More importantly, even if a reformed CFPB ultimately ratifies past CFPB regulations, CFPB will never go back to business as usual if a reformed CFPB means one that must seek its funding through the normal appropriations process. If that occurs, there is little doubt that CFPB’s annual budget will be substantially reduced once it is no longer able to dictate how much money it receives each year.

Any cut-back in CFPB enforcement activity will be a welcome relief for CFPB’s many critics. When government regulators are provided an unlimited budget, they often lose sight of the need to keep their enforcement efforts within reasonable bounds. One victim of CFPB excesses is Crystal Moroney, who operated a successful law firm that assisted lenders until being driven out of business by CFPB. The Bureau never accused Moroney of any wrongdoing. But she was forced to close her doors after CFPB hounded her with discovery requests that required her to devote hundreds of hours per year for several years to CFPB’s investigation. CFPB is still after her for more documents, and the New Civil Liberties Alliance (where I am Senior Litigation Counsel) is representing her in a challenge to CFPB’s funding structure now awaiting decision from the Second Circuit. Moroney’s funding-structure case is one of dozens pending in lower federal courts and awaiting the outcome of Community Financial.

Originally Published in The Federalist Society