Supreme Court upholds funding structure for CFPB

Washington — The Supreme Court on Thursday upheld the funding structure for the Consumer Financial Protection Bureau, or CFPB, rescuing the consumer finance agency from another effort by its critics to weaken it.

The court said in a 7-2 decision that the agency's funding structure complies with the Constitution's Appropriations Clause. Justice Clarence Thomas authored the majority opinion. Justices Samuel Alito and Neil Gorsuch dissented.

"Under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes," Thomas wrote. "The statute that provides the bureau's funding meets these requirements. We therefore conclude that the bureau's funding mechanism does not violate the Appropriations Clause."

The decision reverses a ruling from the U.S. Court of Appeals for the 5th Circuit that concluded the mechanism for funding the consumer agency was unconstitutional. 

Thomas wrote that the statute laying out how the CFPB gets its funding — from the Federal Reserve — fits with the appropriations practices dating back to the First Congress and is similar to schemes used to fund the Post Office and Customs Service, which were established in the late 1700s.

In a dissenting opinion, Alito said the ruling in favor of the CFPB "turns the Appropriations Clause into a minor vestige." He said that under the funding scheme upheld by the court, the consumer watchdog can "bankroll its own agenda without any congressional control or oversight."

"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," Alito wrote. "That is not what the Appropriations Clause was understood to mean when it was adopted."

The Framers, he said, "would be shocked, even horrified," by the way the CFPB receives its funding.

President Biden cheered the decision, calling it an "unmistakable win for American consumers."

"In the face of years of attacks from extreme Republicans and special interests, the court made clear that the CFPB's funding authority is constitutional and that its strong record of consumer protection will not be undone," he said in a statement.

The clash over the CFPB

The dispute, brought by two trade associations, posed a significant threat to the agency and its continued operations, and defenders of the CFPB warned a broad decision could jeopardize regulatory and enforcement actions it's taken since its creation 14 years ago and disrupt markets.

At issue in the case was the mechanism through which the CFPB receives its funding. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the bureau receives a capped amount of money annually from the Federal Reserve. In fiscal year 2022, the CFPB drew roughly $641.5 million from the Fed, less than the roughly $734 million available, according to court filings.

That scheme is different from how other federal agencies receive their funding, which is through the annual appropriations process in Congress.

The legal battle over how the CFPB is funded stemmed from a challenge to a 2017 payday lending rule issued by the CFPB brought by the two trade groups, which represent payday lenders. 

A federal district court sided with the CFPB, but the federal appeals court in New Orleans reversed and invalidated the regulation because it was "drawn through the agency's unconstitutional funding scheme."

The 5th Circuit determined that the CFPB's funding structure violated the Constitution's Appropriations Clause, which states that "no money shall be drawn from the Treasury, but in consequence of appropriations made by law." It ruled that Congress abdicated its appropriations power and ceded it to the bureau, insulating it from the legislative branch's purse strings.

The Biden administration appealed to the Supreme Court, and warned that a decision striking down the CFPB's structure put at risk other agencies that receive their funding in a similar manner, such as the Federal Housing Finance Agency and Federal Deposit Insurance Corporation.

The case was heard on the second day of the Supreme Court's current term, and during arguments, several expressed skepticism over the notion that the CFPB's funding structure was unconstitutional. It was also one of several disputes before the justices that involved challenges to federal regulatory agencies.

In a concurring opinion, Justice Elena Kagan wrote that the CFPB's funding structure, "if transplanted back to the late-18th century, would have fit right in." But she said there is a long tradition of Congress creating a variety of mechanisms to pay for federal operations. Joining Kagan in her concurrence were Justices Sonia Sotomayor, Brett Kavanaugh and Amy Coney Barrett.

"For over 200 years now, Congress has exercised broad discretion in crafting appropriations. Sometimes it has authorized the expenditure of a sum certain for an itemized purpose on an annual basis. And sometimes it has departed from that model in one or more ways," she wrote. "All the flexibility and diversity evident in the founding period has thus continued unabated, making it ever more obvious that the CFPB's funding accords with the Constitution."

Devised by Sen. Elizabeth Warren, a Massachusetts Democrat, to regulate consumer financial products, the CFPB has weathered several legal challenges from opponents of the agency.

In a 2020 ruling, the Supreme Court found the bureau's structure — led by a single director who could be removed only under certain criteria — to be incompatible with the Constitution. But the court stopped short of dismantling the agency and instead said it could continue operating, though with a director who could be removed by the president at will.

Warren said in response to the Supreme Court's latest ruling that "the CFPB is here to stay."

"This isn't the last attack on the CFPB we'll see from Wall Street, the banks, and their Republican allies," she said in a statement. "When an agency is this effective at sticking up for working families against industry's consumer abuses, it's an obvious target for multi-million dollar lobbying campaigns. The CFPB will keep on doing its work to slash junk fees, fight giant banks when they cheat people, and level the playing field for everyone in this country."