• Supreme Court determined CFPB funding was constitutional
• Fed, other banking regulators faced risks if CFPB had lost

In upholding the Consumer Financial Protection Bureau’s funding mechanism, a quartet of US Supreme Court justices across the ideological spectrum made clear they would take a similar stand in any challenge involving other financial regulators.

A ruling against the CFPB’s independent funding, which comes through the Federal Reserve instead of yearly congressional appropriations, could have exposed the Fed itself, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency to suits over their own funding arrangements.

The high court, in a 7-2 opinion on May 16, held the CFPB’s funding is constitutional. In a concurring opinion, Justice Elena Kagan made clear that the court was likely to take the same position on the funding streams for the other regulators.

“They are signaling to other potential litigants and challengers that future claims against the Fed are not likely to fare any better than this one did against the CFPB,” said Brian Frazelle, deputy chief counsel at the Constitutional Accountability Center, a progressive legal advocacy group.

The CFPB, created in the 2010 Dodd-Frank Act, is allowed to withdraw funds from the Fed up to an annual inflation-adjusted cap. Though the specifics differ, the other banking regulators all have lawmakers’ blessing to assess fees on the banks they supervise to pay for their operating costs.

Kagan, joined by Justices Sonia Sotomayor, Amy Coney Barrett and Brett Kavanaugh, highlighted how Congress has chosen different mechanisms to fund federal agencies outside of the annual appropriations process throughout US history.

The constitutionality of such measures were never in serious doubt “in part because of their prevalence,” Kagan said.

In the case of banking regulators, the Fed, the FDIC, and the OCC have never been on the yearly appropriations cycle, Kagan noted.

“So it is not surprising that the CFPB also inherited a bank-funded scheme enabling it to allocate moneys, at its own discretion, to carry out its responsibilities,” she wrote.

Bipartisan Backing

Tying the CFPB to its sister regulators was a key part of Kagan’s concurrence, as was her effort to show that independent funding has been a feature of US regulatory agencies throughout the country’s history, said David Zaring, a professor of legal studies and business ethics at the University of Pennsylvania’s Wharton School of Business.

It also sends a signal that enough justices are on board with Kagan’s reading of the Constitution’s appropriations clause to thwart any challenge to the banking regulators’ funding, he said.

“It may be a sign that four justices don’t have to have things done in an originalist way and it’s a full-throated defense of the way financial regulation has been set up,” Zaring said.

Even the dissenting justices signaled that while they disagreed with the majority, they see the other agencies’ funding methods as not as constitutionally problematic.

“The Federal Reserve’s earnings represent ‘specific charges for specific services to specific individuals or companies,’” Justice Samuel Alito wrote in a dissent joined by Justice Neil Gorsuch. Alito made a similar observation about the FDIC and the OCC, among other agencies that are “funded in whole or in part by fees charged those who make use of their services or are subject to their regulation.”

Alito described all the ways the CFPB’s funding stands out among other regulators, further shielding it from congressional oversight. The CFPB has the unique ability to tap the Fed for funds and doesn’t have to return any unspent money to the Treasury, Alito wrote.

“If you couldn’t persuade the court that the combination of all those factors was unconstitutional, you’re not going to be able to persuade the court that agencies with fewer factors are,” said Eric Mogilnicki, a partner at Covington & Burling LLP who has represented financial institutions before the CFPB and other banking regulators. “The bureau was the outlier there.”

The case is CFPB v. Community Financial Services Association of America, U.S., No. 22-448, Opinion 5/16/24.

To contact the reporter on this story: Evan Weinberger in New York at eweinberger@bloombergindustry.com

To contact the editors responsible for this story: Michael Smallberg at msmallberg@bloombergindustry.com; Keith Perine at kperine@bloombergindustry.com