The Supreme Court on May 16 rejected a challenge to the constitutionality of the unusual means Congress uses to fund the powerful Consumer Financial Protection Bureau (CFPB) by a vote of 7–2.
Some had speculated that the court’s conservative majority would use the opportunity to continue its campaign to restrain the so-called administrative state by curtailing the authority of regulators. Critics call the administrative state, which empowers unelected bureaucrats, an illegitimate fourth branch of government.
At the same time, some in the financial sector had expressed concern that there would be upheaval if the Supreme Court ruled the funding mechanism was unconstitutional.
The federal agency, which regulates consumer financial products such as credit cards, mortgages, and car loans, was the brainchild of Sen. Elizabeth Warren (D-Mass.).
Democrats fiercely defend the CFPB, formed after the financial crisis of 2008–09, saying it serves a useful function as a check on corporate power. The agency was created in 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Republicans and conservatives accuse the CFPB of overreach. The Trump administration had targeted the agency.
The U.S. Court of Appeals for the Fifth Circuit agreed with the Community Financial Services Association of America’s (CFSA’s) argument that the unusual funding mechanism authorized by Congress was unconstitutional.
The idea behind the funding scheme was that it would keep the agency independent. Although it may seek funding from Congress, the agency is excluded from the normal congressional appropriations process, and, instead, receives most of the money it needs to operate from the Federal Reserve System, which collects fees from member banks.
However, that independence is precisely what makes the funding system unconstitutional, the Fifth Circuit held. According to the appeals court, the mechanism violates the U.S. Constitution’s appropriations clause, which states, “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.”
The clause “ensures Congress’s exclusive power over the federal purse,” which is needed to ensure that other branches of government don’t exceed their authority, the appeals court stated.
“Wherever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it,” the Fifth Circuit stated.
The CFSA, which represents payday lenders, had sued over the CFPB’s rule that prevented lenders from trying to withdraw payments from borrowers’ bank accounts after two consecutive attempts failed because of insufficient funds.
A payday loan is a short-term loan, typically for a small amount such as $500 or less, that is expected to be repaid with the borrower’s upcoming paycheck. The high-interest loans, which generally require proof of identity, income, and a bank account, appeal to borrowers with bad credit. The lender usually requires a signed check or permission to electronically withdraw money from the borrower’s bank account.
Although most federal agencies receive funding from Congress on an annual basis, lawmakers authorized the CFPB to draw from the Federal Reserve System the amount the agency’s director deems “reasonably necessary to carry out” the agency’s mission, subject only to an inflation-adjusted cap, Justice Thomas stated.
“In this case, we must decide the narrow question whether this funding mechanism complies with the Appropriations Clause. We hold that it does,” he wrote.
Under the clause, “an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes.” The statute that provides for the funding mechanism “meets these requirements.”
“Although there may be other constitutional checks on Congress’ authority to create and fund an administrative agency, specifying the source and purpose is all the control the Appropriations Clause requires,” the justice wrote.
The Supreme Court reversed the judgment of the Fifth Circuit and remanded the case “for further proceedings consistent with this opinion.”
Justice Elena Kagan filed a concurring opinion that was joined by Justices Sonia Sotomayor, Brett Kavanaugh, and Amy Coney Barrett. Justice Ketanji Brown Jackson filed a separate concurring opinion.
Justice Alito filed a dissenting opinion that was joined by Justice Gorsuch.
The court majority turns the clause “into a minor vestige,” Justice Alito wrote, allowing the “powerful” CFPB to “bankroll its own agenda without any congressional control or oversight.”
The majority finds there is “apparently nothing wrong with a law that empowers the Executive to draw as much money as it wants from any identified source for any permissible purpose until the end of time,” which is not what the clause was understood to mean when it was adopted, he said.
“In England, Parliament had won the power over the purse only after centuries of struggle with the Crown. Steeped in English constitutional history, the Framers placed the Appropriations Clause in the Constitution to protect this hard-won legislative power,” he wrote.
The clause mandates “legislative control over the source and disposition of the money used to finance Government operations and projects,” the justice wrote.
Stakeholders reacted to the new decision.
Bill Himpler, president and CEO of the American Financial Services Association, said that while CFPB oversight is needed, the new ruling “does nothing to bring clarity or transparency for consumers, the consumer credit marketplace or Congressional oversight.”
“The result may well be continued confusion over unclear CFPB guidance, ongoing uncertainty with rulemaking by blog post and selective enforcement actions, and an agency not bound by robust congressional oversight,” he said in a statement.
Richard Dubois, executive director of the National Consumer Law Center, praised the ruling.
“The CFPB can now fully focus on its essential work protecting hard-working people from predatory practices and discrimination in financial services,” he said in a statement.
CFPB v. CSFA was the second challenge in four years to the constitutionality of the CFPB to have reached the Supreme Court.
The Supreme Court issued a ruling in June 2020 altering the bureau’s structure but upholding its constitutionality.
In Seila Law LLC v. CFPB, the court held 5–4 that the structure of the CFPB was unconstitutional because its director, who must be confirmed by the U.S. Senate, couldn’t be fired by the president at will and that the agency was therefore insulated from political accountability. The court held that the agency could continue to exist under new rules that allowed the president to fire the director at will.
In the Seila Law ruling, the court noted the existence of the controversial funding system but didn’t topple it, as some critics of the agency had hoped.
