The conservative Supreme Court could soon eviscerate a key part of Congress’ response to the 2008 global financial crisis, with payday lenders challenging the constitutionality of the Consumer Financial Protection Bureau in one of the first hearings of the court’s new term.
In its challenge to the CFPB, the Community Financial Services Association of America, a trade association for the payday lending industry, argues that the agency’s funding through the Federal Reserve is unconstitutional under the Constitution’s appropriations clause. It is the latest attack on the CFPB by the financial industry following a 5-4 decision in the 2020 case of Seila Law v. CFPB, which allowed the president to fire the CFPB director at will instead of giving them a defined six-year term.
Originally conceived of by now-Sen. Elizabeth Warren (D-Mass.) before she entered politics, Congress created the CFPB as part of the Dodd-Frank financial reform law in 2010. That law housed the CFPB inside the Federal Reserve and provided for it to be funded by up to 12% of the Fed’s 2009 operating costs — expenses that top out at $597.6 million per year. The CFPB director must also appear before Congress biannually to justify the agency’s programs and budget.
But the payday lenders claim that the appropriations clause requires the CFPB to be funded through annual appropriations alone and not through continuous funding mechanisms. In addition, the payday lenders, which have vociferously opposed a CFPB rule prohibiting illegal debits from bank accounts, want all enforcement and regulatory actions taken by the agency since its inception to be voided. The payday lenders, whose Supreme Court case is set to begin Tuesday, are supported in their push to gut the CFPB by 33 Republicans in the Senate, 99 Republicans in the House, 27 Republican state attorneys general, and big business lobbying groups like the Chamber of Commerce.
The problem with their argument is that it flies in the face of the text and history of the appropriations clause. The clause states, “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” Nowhere, however, does the clause state that appropriations must be made through the annual appropriations process.
Indeed, Congress has funded agencies in a similar manner to the CFPB going all the way back to the founding of the country. The Customs Service, the very first agency Congress created, was financed by an indefinite stream of funds collected through fees. The same was true of the Postal Service, then the largest component of the federal bureaucracy, and hundreds of agencies and programs created throughout the 18th and 19th centuries.
Sen. Elizabeth Warren (D-Mass.) came up with the idea for a consumer financial regulator before she entered politics. The Consumer Financial Protection Bureau was created by Congress in 2010.
And the same is true for a number of extremely important agencies operating today, including the Federal Reserve itself, which is funded through assessments on regional reserve banks. While the payday lenders want the court to only invalidate the CFPB’s funding mechanism, it’s hard to see how a brand-new interpretation of the appropriations clause would not threaten to destabilize funding for other vital agencies.
“The CFPB’s future is at stake in this court decision, along with the future of every other banking regulator,” Warren said Thursday in a speech at the Center for American Progress think tank. “And the possible fallout doesn’t stop there. Social Security and Medicare are also operated outside of annual appropriations. A bad decision by the Supreme Court could wreck the financial security of millions of families and turn our economy upside down.”
The case comes before the high court after two appeals courts reached different interpretations of the appropriations clause.
The 5th U.S. Circuit Court of Appeals, noted for its extreme conservative bent, last year sided with the payday lenders in declaring the CFPB’s funding unconstitutional and voided all of its enforcement actions.
Instead of dealing with the history of the appropriations clause, the 5th Circuit claimed that the CFPB’s funding mechanism circumvented the separation of powers by limiting Congress’ oversight and appropriations authority over the executive branch. The court asserted that the agency is protected by a “double insulation from Congress’s purse strings” because, the argument went, its funding comes from the Federal Reserve Board, which itself is funded by the Federal Reserve System.
To void the CFPB’s funding structure, the 5th Circuit created a new interpretation of the appropriations clause that requires Congress to only fund agencies under its “sufficient control.” What this term means is open to judicial interpretation.
“There is no textual basis for that argument,” said Aziz Huq, a professor at the University of Chicago Law School. “There is no historical basis for the argument that an appropriation is something more than a law that Congress passes authorizing a fiscal stream.”
The 2nd U.S. Circuit Court of Appeals, in a separate case citing the 2022 ruling, agreed that the 5th Circuit decision lacked any historical basis. In an opinion written earlier this year by Judge Richard Sullivan, who was nominated to the court by Donald Trump, the 2nd Circuit ruled that it “cannot find any support for the Fifth Circuit’s conclusion in Supreme Court precedent,” or in the “history” or “text” of the Constitution.
A sign warning of predatory payday lenders leans against a chair during a speech by then-CFPB Director Richard Cordray in 2015.
Huq and five other law and history professors filed a brief with the Supreme Court in the CFPB case detailing the actual history of the appropriations clause’s legal interpretation.
“At the Founding, as today, to ‘appropriate’ money ‘by law’ simply meant to designate a purpose for that money in legislation that has satisfied the requirements for a bill to ‘become a Law,’” the brief states.
That means that agencies must be funded through congressionally approved legislation, and that funds for those agencies can be appropriated as Congress sees fit. Congress did this with the Customs Service in 1789. It did it with the Postal Service in 1792. And it does so now with the CFPB, the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, the Farm Credit Administration, and the Public Company Accounting Oversight Board, among numerous other executive branch offices.
“The Fifth Circuit called it ‘novel’ and ‘anomalous’ to give a powerful agency ‘perpetual funding’ in its enabling statute, to finance the agency ‘from a source that is itself outside the appropriations process,’ and to allow its leader to set the agency’s budget within a statutory cap,” states the professors’ brief. “These claims are belied by the nation’s earliest laws, ‘contemporaneous and weighty evidence of the Constitution’s meaning.’”
The 5th Circuit’s decision also relied on a misinterpretation of the CFPB’s funding source in its claim about a “double insulation from Congress’s purse strings.” This argument states that the CFPB’s funding comes from the Federal Reserve Board and not “the Federal Reserve,” which, it claims, acts as an inappropriate financing body circumventing Congress’ constitutional role.
But the CFPB is not funded by the Federal Reserve Board; it is funded by the Federal Reserve System, of which the board is a part. The board plays a “purely ministerial” role in transferring the funds that Congress set out in the Dodd-Frank law that it could receive from the Federal Reserve System, according to a brief filed by 10 financial regulatory experts.
“Although the Federal Reserve Banks send the CFPB’s assessment to the Federal Reserve Board, the Board merely [routes] ... the CFPB’s funds to the CFPB,” states the regulatory experts’ brief. “The Board acts as the CFPB’s payment processor, not its financier.”
For the Supreme Court to invalidate the CFPB’s funding and void its enforcement decisions, it would need to “lie about the facts,” and “make up a distinction that doesn’t exist,” according to Huq. It would also need to ignore the express will of Congress — yet again seizing power from the legislative branch on behalf of the judiciary.
The decision by Congress to fund the CFPB outside of the annual appropriations process was the product of extensive research and numerous hearings following the 2008 financial crash. In its investigation of that crisis, Congress determined that a key driver was the sale of risky financial products, like adjustable-rate home mortgages, based on misleading information. Congress also discovered that a federal housing watchdog failed to provide proper oversight and was hamstrung by the annual appropriations process.
Payday lenders are set to challenge the funding mechanism of the CFPB in a case before the Supreme Court on Tuesday.
“Armed with its assessment of what went wrong in the financial crisis, Congress determined that to be effective, the CFPB needed independence from unpredictable annual funding cycles,” 140 current and former members of Congress, including the authors of the Dodd-Frank law, said in a brief filed with the court.
Beyond the fact that the arguments made against the CFPB’s funding lack any support in the history and text of the Constitution or in the court’s precedent, a decision to gut the agency’s funding source and void its enforcement and regulatory actions would have substantial negative effects on consumer finances and the financial system.
Since its inception, the CFPB has won $17.5 billion in restitution from companies that, among other things, defrauded homeowners and veterans, engaged in racial discrimination, imposed illegal overdraft fees and put erroneous information on people’s credit scores. This would all be void if the court agrees with the payday lenders’ arguments.
Financial lenders are already using the 5th Circuit’s decision to try and evade CFPB actions. Federal judges are currently delaying a case in New York against an auto lender and a CFPB case against the payday lender MoneyGram. Meanwhile, credit reporting company TransUnionis using the decision to stymie a CFPB investigation.
If the court decides to overturn the CFPB’s funding structure or also void its enforcement actions, it would create significant uncertainty in a financial system that has organized itself around rules the agency has put forward. Such a decision “could set off a wave of challenges and the housing market could descend into chaos, to the detriment of all mortgage borrowers,” according to a brief filed by the Mortgage Bankers Association, an industry group.
“There’s going to be a lot of uncertainty if this goes the way we don’t want it to go,” said Elyse Hicks, counsel for Americans for Financial Reform Education Fund, a pro-financial regulation group that joined a brief in support of the CFPB.
Furthermore, voiding the CFPB’s funding mechanism cannot be done without calling into question the funding for the entire financial regulatory apparatus, from the Federal Reserve on down.
“You cannot invalidate the CFPB’s funding mechanism without invalidating the funding mechanism of the Federal Reserve,” Huq said.
This question of real-world outcomes hangs over the Supreme Court as it weighs more theoretical arguments about the original meaning and text of the Constitution’s appropriations clause.