BLOG: As Wrong as It is Dangerous: The Fifth Circuit’s Decision Holding the CFPB Funding Structure Unconstitutional
Last week, a three-judge panel of the Fifth Circuit Court of Appeals issued a breathtaking decision that, if allowed to stand, would impair the ability of the Consumer Financial Protection Bureau (CFPB) to carry out its important work combatting financial exploitation. According to the Fifth Circuit, the fact that the Bureau is not funded by periodic appropriations from Congress violates the Constitution. The court therefore vacated the Bureau’s Payday Lending Rule, which was adopted to prevent lenders from collecting payments from borrowers’ bank accounts in ways that lead to excessive fees. If this ruling is not reversed, the CFPB’s other regulations and enforcement actions will likely suffer the same fate in future cases in the Fifth Circuit.
The Fifth Circuit’s decision is as wrong as it is dangerous. The decision is wrong because it is at odds with the plain text of the Constitution, not to mention clear Supreme Court precedent. It is dangerous because it will impede the ability of the CFPB to do its critically important work of protecting America’s consumers—and because its reasoning calls into question the actions of countless other federal financial regulators, including the Federal Reserve Board.
First, some quick background to put the Fifth Circuit’s decision in context: In the aftermath of the financial meltdown of 2008, Congress sought to prevent the reoccurrence of another economy-crushing financial crisis. These efforts led Congress to create a new regulatory agency that would enforce a variety of financial protection laws: the CFPB. Recognizing that some under-funded agencies had failed to fulfill their duties before the financial crisis, Congress acknowledged that a funding scheme outside the annual appropriations process “is absolutely essential to the independent operations of any financial regulator,” and it chose to fund the Bureau through an alternative structure. In doing so, Congress made the CFPB one of a long line of financial regulators – such as the Federal Reserve Board and Federal Deposit Insurance Corporation, among others – that are funded outside the annual appropriations process.
Importantly, though, while the CFPB does not rely on annual congressional appropriations for its funding, it is still subject to congressionally imposed limits. The CFPB receives most of its funding from the Federal Reserve System, which itself is financed by interest on securities and fees paid by banks. When Congress created the Bureau, it established a cap on this funding, which annually cannot exceed 12 percent of the Fed’s operating expenses in 2009, adjusted for inflation. To receive funding beyond this cap, the CFPB must seek additional appropriations from Congress. The Bureau’s finances are also audited annually by the Government Accounting Office, an arm of Congress.
Regulated entities have challenged this funding structure several times, and every other federal court that has considered the question has held that there is nothing problematic about the CFPB’s funding. The Fifth Circuit, however, determined that the CFPB’s funding violates the Constitution’s “Appropriations Clause and the clause’s underpinning, the constitutional separation of powers.” This conclusion is at odds with the Constitution’s text and history.
To start, nothing in the Appropriations Clause even arguably requires agencies to be funded by annual appropriations. The Clause merely provides that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” As the Supreme Court has explained, the Clause “means simply that no money can be paid out of the Treasury unless it has been appropriated by an act of Congress.” Or, to put it differently, “the payment of money from the Treasury must be authorized by a statute.” In other words, the executive branch may not unilaterally spend the nation’s money; Congress gets a critical say in how the nation’s money is spent. And that is exactly what happened here. Congress provided that the CFPB should be funded as necessary, up to a certain amount, by the Federal Reserve, which does not draw money from the Treasury. But if the Bureau ever needs additional funds, it has to come to Congress for an appropriation. As a result, no money is drawn from the Treasury except as a consequence of appropriations made by law. And that is all the Appropriations Clause requires.
The Fifth Circuit, however, concluded that the Appropriations Clause means something other than what it says. According to the Fifth Circuit, the Clause actually requires that all agencies be funded by the Treasury through congressional appropriations. Not only is that requirement nowhere to be found in the constitutional text, it is contrary to established practice going back to the beginning of the nation—something the Fifth Circuit did not even mention, much less grapple with.
Congress has long exercised the flexibility the Constitution gives it to fund agencies through means other than appropriations from the Treasury. As early as the 1790s, Congress authorized the post office to operate using permanent revolving funds, rather than withdrawals from the Treasury. In more recent years, Congress has similarly chosen to use independent funding sources for agencies such as the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Housing Finance Agency, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Public Company Accounting Oversight Board.
Instead of meaningfully engaging with constitutional text and history, the Fifth Circuit panel relied primarily on rhetoric about the importance of “separations of powers principles” and Congress’s “power of the purse,” citing Founding-era documents making those general points. But nothing in those general principles prevents Congress from determining how best to exercise its power of the purse. Here, Congress made the considered decision that the capped funding source it established would best accomplish its goals, and it retains the power to change that going forward. And nothing in those general principles justifies the Fifth Circuit’s decision to impose a very specific limitation on Congress – that it can only fund agencies through periodic appropriations.
The Fifth Circuit itself seemed to recognize the devastating consequences that could emerge from striking down the funding practices of all independently funded government agencies, and so it attempted to limit its reasoning to the CFPB. It claimed that the CFPB’s authority is unlike those of other federal regulators, and that its funding independence “goes a significant step further.” But even assuming the Fifth Circuit is right that there are differences between the CFPB and other agencies, it never explains why those differences are constitutionally significant. And despite the court’s attempt to carve out a special rule for the CFPB, its reasoning would seemingly apply to the host of other financial regulators that are independently funded, including the Federal Reserve Board, which supervises and regulates numerous banking institutions. Indeed, notwithstanding its protestations to the contrary, the panel hints at the broad implications of its decision by quoting an earlier Fifth Circuit concurrence which lamented that “if the [Bureau]’s funding mechanism is constitutional, then what would stop Congress from similarly divorcing other agencies from the hurly burly of the appropriations process?”
In short, the Fifth Circuit’s outlier decision is both wrongly decided and incredibly dangerous. Its reasoning, if accepted, would invite challenges to a host of other federal financial regulators and could wreak havoc on the nation’s economy. And nothing in the law requires this result: the decision is at odds with constitutional text and history, Supreme Court precedent, and long-standing historical practice.