by Richard Horn
Reproduced with permission from GarrisHorn.com
Today, May 16, 2024, the U.S. Supreme Court issued its opinion in CFSA v. CFPB, a case that I’ve written about here. The Court, in a 7-2 decision (the majority opinion was written by Justice Thomas), held that the CFPB’s funding structure satisfies the Appropriations Clause of the U.S. Constitution. The CFPB will live another day. Although many may be disappointed with the result, because it represented a chance to stop an aggressive CFPB in its tracks, many will also breathe a sigh of relief, because an opinion that the CFPB’s funding was unconstitutional could have rendered all of the CFPB’s past actions invalid. The opinion is also not a surprise after the oral arguments before the Court last October, in which most of the Justices appeared skeptical of the CFSA’s arguments (even Justice Thomas, like when he asked the CFSA’s attorney to finish his sentence “Funding of the CFPB is --violates the Appropriations Clause because?”).
As a brief reminder, this case was an appeal by the CFPB of the 5th Circuit’s decision finding the CFPB’s funding structure to be unconstitutional. The CFSA had challenged in federal district court the CFPB’s payday loan rule, arguing, in part, that the CFPB’s funding violated the Appropriations Clause, which provides that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” Under the CFPB’s funding structure, which was created under the Dodd-Frank Act, the CFPB draws the amount of funds it decides it needs from the Federal Reserve annually, only up to a cap of 12% of the Federal Reserve’s total operating expenses, and any unused funds remain available in subsequent years. The 5th Circuit, on appeal from the district court, held that the CFPB’s funding structure violated the Appropriations Clause and vacated the payday loan rule because it was the result of unconstitutional funds.
The Court held that the CFPB’s funding under the Dodd-Frank Act satisfied the Appropriations Clause. Justice Thomas wrote the majority opinion. There were several concurring opinions. And Justice Alito issued a dissenting opinion in which Justice Gorscuh joined.
First, the Court found that the CFPB’s funding was subject to the Appropriations Clause because it draws funds from the Federal Reserve, which is required to deposit its own surplus funds into the Treasury. The Court stated that, “[w]hatever the scope of the term ‘Treasury’ in the Appropriations Clause, money otherwise destined for the general fund of the Treasury qualifies. The Bureau’s funding is therefore subject to the requirements of the Appropriations Clause.” After determining that the funding was subject to the Appropriations Clause, the Court stated that the issue in the case was whether the CFPB’s funding mechanism is an “Appropriation made by Law” under the Appropriations Clause.
On the issue of whether the funding satisfies the Appropriations Clause, the Court looked to the meaning of the term “appropriation” at the time the Constitution was ratified. The Court looked at dictionary definitions of the term at the time, and found that it was understood at the time to mean the legislature’s authorization of expenditures from a source of public funds for designated purposes. The Court also looked at the meaning of the term in England and the Colonies before the founding of the U.S. to show that the term was used to give broad discretion to the legislature and did not require specific amounts of money, time limits, or specific purposes for the funds. The Court also noted that more general appropriations were in use in the years after the founding of the country, including annual lump sum grants, and even permanent fee-based models for the original Customs Service and Post Office. Based on this, the Court found that the Appropriations Clause at the time the Constitution was ratified only required an identifiable source of public funds and a purpose.
The Court then held that the CFPB’s funding structure contains these requisite features, because it draws public funds from a particular source (the Federal Reserve) and specifies the purpose of those funds (to pay the CFPB’s expenses). The Court stated that this “fits comfortably with the First Congress’ appropriations practice.” The Court stated that the general purpose was similar to the first Congress’ lump-sum appropriations up to a “sum not exceeding” for certain general purposes of the government, and that the CFPB’s standing authorization to request funds each year was similar to the original Customs Service and Post Office standing appropriations based on fees and customs. The Court held that for these reasons, the CFPB’s funding structure satisfies the Appropriations Clause.
The Court then rejected the CFSA’s main arguments for why the CFPB’s funding structure violates the Appropriations Case. First, in response to the CFSA’s reason that the CFPB decides the amount of funds it draws from the Federal Reserve, the Court stated that because there is a cap on the CFPB’s funds, its funding is similar to the early appropriations after the country’s founding of “sums not exceeding” a certain amount. Second, in response to the reason that the structure is not time limited, the Court stated that the Constitution allows Congress to make standing appropriations, based on its time limit of two years for appropriations for an army, as well as the early practice of providing standing appropriations to the original Customs Service and Post Office. In response to the CFSA attempt to differentiate these fee-based agencies by arguing that the public could decide to not purchase their services, the Court dismissed the argument and essentially said that the CFSA did not explain why the public’s ability to not pay these agencies is relevant to the question of whether there is an appropriation under law.
Finally, with respect to the CFSA’s reason that CFPB’s funding violates separation of powers because the executive branch would not have any meaningful check from Congress’ power of the purpose, the Court stated that the Appropriations Clause does not itself provide the power of the purse, which comes from other parts of the Constitution. The Court stated that the Appropriations Clause is only a limitation that requires nothing more than the disbursement of specific funds for an identified purpose.
As I noted above, this decision will cause many in the consumer financial services industry to breathe a sigh of relief. If the Court had affirmed the 5th Circuit’s decision that found the CFPB’s funding structure unconstitutional, it could have thrown the industry into turmoil. The 5th Circuit’s opinion could have been used to vacate and invalidate all of the CFPB’s prior rules and official actions, because all of its funding came from the same supposed unconstitutional source. In addition, a decision for the CFSA in this case could have potentially been used to support challenges to other agency funding structures, especially financial regulatory agencies like the Federal Reserve and the FDIC. But with the Court’s opinion today, everyone can move on knowing that the CFPB is allowed to operate normally under its current funding structure.
That’s not to say there won’t be other challenges to the CFPB’s rulemakings, enforcement actions, and other activities on other bases in the future. Many such challenges to specific CFPB actions are pending today (including challenges our law firm is working on, like the CFPB’s appeal of our win in Townstone). In addition, the Supreme Court is set to make a landmark decision to either retain, reject, or restrict the judicial doctrine known as Chevron deference in two cases this summer, Loper Bright and Relentless. This doctrine, created in the 1980s by the Supreme Court in a case titled Chevron v. NRDC, provides that courts must defer to an administrative agency’s reasonable interpretation of an ambiguous statute. The Court’s opinion in these two cases could help reign in an increasingly aggressive administrative state, including the CFPB.
But for now, the CFPB lives to tell the tale.
