“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.” With these words, seven members of the Supreme Court upheld the constitutionality of the Consumer Financial Protection Bureau’s funding mechanism and forestalled the possibility that years of the CFPB’s rulemaking, supervisory, and enforcement activities might be wiped off the books. For now, the financial services industry can expect business as usual from the CFPB.
As we discussed previously, Community Financial Services Association of America v. CFPB concerned a 2017 challenge to the CFPB’s proposed Small-Dollar Rule. The plaintiffs contended, among other things, that the CFPB’s funding mechanism violated the Appropriations Clause of the U.S. Constitution. A panel of the Fifth Circuit agreed in October 2022. The Fifth Circuit vacated the rule, concluding that the Bureau’s allegedly unconstitutional funding scheme rendered it void. The logic of the Fifth Circuit’s opinion seemingly would have negated all of the CFPB’s actions since the agency’s creation. And what’s more, a strict application of the opinion could have raised doubts about the constitutionality of other agencies, such as the Federal Deposit Insurance Corporation and Federal Reserve Board, that receive their funding through processes other than regular congressional appropriations bills.
On May 16, 2024, however, the high court rejected all of the Fifth Circuit’s decision and instead upheld the CFPB’s funding mechanism. The appeal presented the Court with two issues: First, does the CFPB’s funding mechanism violate the Appropriations Clause of the federal Constitution? Second, if so, did the Fifth Circuit grant the appropriate relief? Because the Court found the agency’s funding mechanism constitutional, it did not need to reach the second question.
Ultimately, the Court’s decision turned on the meaning of “appropriations” as the term was understood at the time of the founding. After walking through centuries of English and American history, the majority concluded that Congress satisfies the Appropriations Clause so long as it authorizes expenditures from a specified source of public money for designated purposes.
The associations that challenged the CFPB argued that its funding mechanism, which permits the Bureau to receive up to 12% of the total operating expenses of the Federal Reserve System annually, removes too much control from Congress. According to them, the Appropriations Clause requires Congress to periodically review agency funding and forbids a perpetual funding mechanism by which an agency decides the amount of funding to draw. The majority rejected both contentions based on dictionaries, history, and analogous funding schemes for other agencies. The challengers also warned that a decision upholding the CFPB’s funding mechanism would permit the executive branch to operate free of any meaningful fiscal check. The majority again disagreed, noting that Congress’s control of the power of the purse included more than the Appropriations Clause.
While some sectors of the financial services industry cheered for the elimination (or, at least, restructuring) of the CFPB, others will breathe a sigh of relief with the Court’s decision. Many lenders and servicers have invested considerable resources into complying with the CFPB’s rules and preparing for the agency’s examinations; starting over from scratch would have rendered much of that investment a waste. Moreover, financial services providers depend on consistency in the regulatory regime to make critical decisions about their business and the proverbial axe swinging over the CFPB’s head made future planning very difficult. While future challenges are sure to come, the current existential threat appears to be over.