Supreme Court justices appear skeptical of challenge to CFPB's funding structure

Washington — The Supreme Court on Tuesday weighed the constitutionality of the Consumer Financial Protection Bureau's funding structure in what is the most significant test of the agency's 13-year existence, with several of the justices expressing skepticism toward arguments that the mechanism is outside the bounds of the Constitution.

The question in the case is whether the way in which the CFPB receives its funding violates the Appropriations Clause of the Constitution. A federal appeals court found it does, but some of the justices indicated they were struggling to grasp the argument put forth by Noel Francisco, who argued on behalf of two trade associations that brought the case. The groups say Congress must approve annual appropriations for the CFPB.

"We're all struggling to figure out what's the standard that you would use," Justice Amy Coney Barrett said. Justice Sonia Sotomayor said she was at a "total loss," noting that more than 60% of appropriations from Congress are standing appropriations, meaning they don't require annual renewal.

"There's nothing in the Appropriations Clause itself or in the word appropriations that imposes the limits that you're talking about," Barrett told Francisco.

Justice Brett Kavanaugh noted that Congress as soon as tomorrow could change how the CFPB receives its funding, adding there's "nothing perpetual or permanent about this," a reference to the trade groups' claims that the bureau's funding stream exists in perpetuity.

Refuting an argument from Francisco that the Constitution requires annual, line-item appropriations approved by Congress, Justice Elena Kagan said his assertion was "flying in the face of 250 years of history."

The CFPB, which was the brainchild of Sen. Elizabeth Warren, was created by a Democratic-led Congress in 2010 and has long been criticized by Republicans who have over the years sought to weaken the bureau. 

Defenders of the bureau warned the case before the high court could jeopardize the CFPB's future and actions the agency has taken since its creation. Solicitor General Elizabeth Prelogar, who argued on behalf of the Biden administration, said a decision that called into question its prior actions would have a "profound disruption" on economic markets.

At the crux of the dispute was the scheme through which the CFPB is funded, which was laid out through the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in response to the 2008 financial crisis. Under the law, the bureau receives up to a capped amount of funding annually from the Federal Reserve. In fiscal year 2022, the CFPB drew roughly $641.5 million from the Fed, below the inflation-adjusted cap of about $734 million, according to court filings.

The funding structure for the CFPB differs from other federal agencies, which receive money through the congressional appropriations process.

Kagan noted that in prior years, the CFPB has requested and received less than the maximum amount allowed under the law, but could develop programs in the future that require it to meet the cap.

"The CFPB is not being wasteful and it's using what it should be using in its view and generously basically saying, 'not the rest,'" she said. 

The legal fight over the CFPB

The legal fight arose from a challenge to a 2017 payday lending rule issued by the CFPB that was brought by a pair of trade associations. The groups argued in part that the rule is invalid because the bureau's funding mechanism violates the Constitution. A federal district court ruled in favor of the CFPB, but the U.S. Court of Appeals for the 5th Circuit reversed the lower court's decision and invalidated provisions of the payday lending rule as "the product of the bureau's unconstitutional funding structure."

The appeals court found that Congress abdicated "its appropriations power under the Constitution" and ceded its "power of the purse to the bureau." The three-judge panel concluded that the CFPB's funding structure to be a violation of the Appropriations Clause, which states that "no money shall be drawn from the Treasury, but in consequence of appropriations made by law."

The Biden administration appealed the 5th Circuit's decision and asked the justices to consider whether the lower court erred when it found the statute providing funding to the CFPB to be unconstitutional.

Prelogar told the justices that Congress has adopted funding mechanisms similar to the CFPB's for numerous other agencies, such as the Federal Deposit Insurance Corporation and Federal Housing Finance Agency, and said doing so is "firmly grounded in constitutional text."

Kagan, too, noted that there has been "enormous variation" throughout history in the kinds of appropriations Congress has made, while Justice Ketanji Brown Jackson noted that there is a "statute in which the legislature has exercised" its power of the purse.

The Biden administration noted in a filing that because Congress specified that the CFPB receives a capped amount of funding and included when and how the money can be spent, the law "satisfies the classic elements of an appropriation and falls comfortably within Congress's historical practice."

But the trade associations claimed in a brief filed with the Supreme Court that Congress in 2010 "crafted the CFPB to operate free of any political accountability, including fiscal oversight," and criticized the agency's funding stream as "perpetual."

The CFPB is "unprecedented" in terms of how it receives its funding, Francisco said, and he argued the current structure united the purse and the sword in an executive branch agency.

The case attracted input from red states and blue states, as well as Republican and Democratic members of Congress.

In a friend-of-the-court brief, more than 140 current and former lawmakers, including Warren, argued that by appropriating funds on a standing basis, instead of annually, Congress used a funding structure for the CFPB that it had already found effective for other financial regulators, but with more constraints on the bureau.

"Congress's long-exercised authority to structure appropriations as it sees fit to solve a wide array of national problems is as crucial now as it was at the Founding," they argued. "The history underpinning the establishment of the Consumer Financial Protection Bureau (CFPB) well illustrates Congress's authority to craft appropriations that are tailored to the problem at hand."

But on the other side of the aisle, a group of 132 Republican members of Congress argued that Dodd-Frank included many provisions that were designed to insulate the CFPB from the appropriations process, which amounted to a transfer of congressional power to an executive agency.

"Dodd-Frank worked a stunning role reversal, with the CFPB dictating its own level of funding each year, while Congress remained largely out of the picture," they told the court. "The CFPB certainly believes itself to be in the driver's seat."

Defenders of the CFPB told the court that its funding scheme creates "stability and predictability," to the benefit of smaller financial institutions that often have less access to the political decision-makers than big banks.

"The CFPB has played — and continues to play — precisely the role that Congress envisioned: by listening and being responsive to all participants within the financial system, the CFPB has protected the stability of the system as a whole. The CFPB's funding mechanism has played a key role in this success," a coalition of community development credit unions, community development financial institutions and other industry groups, told the court in a friend-of-the-court brief.

A trio of organizations representing the mortgage industry, housing industry and realtors urged the Supreme Court to exercise caution if it invalidates the 2017 payday lending rule by issuing a ruling that "does not call into question other crucial regulations" issued by the CFPB.

Warning of the "potentially catastrophic consequences" of a decision impacting the mortgage and real-estate markets, they told the high court that a broad decision "could set off a wave of challenges and the housing market could descend into chaos, to the detriment of all mortgage borrowers."

The CFPB has escaped a potentially harmful ruling from the Supreme Court before — in 2020, the high court found its structure to be unconstitutional, but stopped short of dismantling the agency. In a decision authored by Chief Justice John Roberts, the court said the agency could continue operating, but concluded that its director had to be removable by the president.

A decision from the Supreme Court is expected before the end of June 2024.