Rule of Law

CFPB’s Future at Stake as Supreme Court Hears Funding Arguments

Oral arguments in a battle over the Consumer Financial Protection Bureau’s funding scheme are likely to provide clues about how far the Supreme Court’s conservative majority is willing to go in reshaping federal agencies and the rules they enforce.

The arguments in Consumer Financial Protection Bureau v. Community Financial Services Association of America set for Tuesday will focus on whether the CFPB’s funding through the Federal Reserve violates the Constitution’s appropriations clause.

The blockbuster case threatens to subject the agency to Congress’s annual spending fights, which could in turn upend the funding process for the Federal Reserve and other key financial regulators. Created in the Dodd-Frank Act following the 2008 financial crisis, the CFPB regulates larger banks, mortgage and student loan companies, and payday lenders, among others, and has been a frequent target of challenges from Republicans and industry trade groups.

Court watchers are eager to see if three justices in particular—Chief Justice John Roberts and Justices Brett Kavanaugh and Amy Coney Barrett—are willing to go as far as the US Court of Appeals for the Fifth Circuit did last October when it declared the CFPB’s funding unconstitutional.

“The chief has seemingly not really loved enormously disruptive rulings,” said Jaime Santos, a partner in Goodwin Procter LLP’s appellate and Supreme Court litigation practice.

The conservative majority may attempt to find some way to show its displeasure with the agency’s funding mechanism, without raising questions about other regulators’ funding or CFPB regulations.

The recent specter of a government shutdown, and the potential for another in around six weeks, highlights the potential costs of putting the CFPB on the annual appropriations cycle.

Insulation Talk

The CFPB’s funding comes from the Fed, which itself isn’t subject to appropriations. The heart of the Fifth Circuit’s ruling, and the payday lending trade group’s briefs, is that the consumer finance watchdog’s standing source of funding results in a “double insulation” from congressional accountability.

How Roberts, Kavanaugh, and Barrett handle that question will be a key factor in the case.

“If these justices start asking a bunch of questions about whether the CFPB is too insulated, the CFSA may be in business,” said David Zaring, a professor at the University of Pennsylvania’s Wharton School of Business, referring to the payday lending group that’s challenging the agency’s funding structure.

Solicitor General Elizabeth Prelogar and her team focused the government’s argument on two factors, according to briefs filed with the high court.

The first is that the appropriations clause was meant to be a check on the executive branch, not on Congress. The second part revolves around Congress’s centuries-old use of standing appropriations, dating back to funding for the Customs Service, Postal Service, and other agencies in the first Congress.

That kind of historical argument is meant to draw in justices who consider themselves “originalists,” Santos said.

“If this were 15 years ago, we would not see that type of extensive discussion as we’ve seen in this kind of case,” she said.

If the court peppers the CFSA’s attorneys—including former Solicitor General Noel Francisco of Jones Day—with questions about the first Congress’s use of standing appropriations, it could indicate skepticism about the Fifth Circuit’s ruling.

Downstream Effects

The CFPB and its supporters have raised a host of concerns about how declaring the agency’s independent funding unconstitutional would affect other agencies that don’t rely on congressional appropriations—principally, the Fed, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency.

“A number of the justices would have to be very concerned about the downstream consequences of a decision here,” said Brianne Gorod, chief counsel at the Constitutional Accountability Center, a progressive legal advocacy group.

Gorod co-wrote an amicus brief from historians and constitutional law professors supporting the CFPB.

Subjecting the Fed’s monetary policy function to appropriations may be unpalatable to the justices, but they could look at congressional funding for other critical agencies like the Department of Defense for a counterbalance.

The payday group and its supporters will be pleased “if the justices start saying, ‘Annual appropriations work fine for DoD, why doesn’t it work fine for all other government agencies?’” Zaring said.

The court will also have to consider what would happen to any rules the CFPB finalized prior to a decision that its funding was unconstitutional. In the CFSA case, the Fifth Circuit invalidated a payday lending regulation, arguing the CFPB shouldn’t have had the funding to promulgate it in the first place.

The Mortgage Bankers Association submitted an amicus brief backing neither party but raising concerns about the effect on the mortgage market if the CFPB’s existing rules for lenders and servicers are ruled invalid by the high court, or successfully challenged as a result. Top of mind for mortgage lenders is the CFPB’s qualified mortgage rule, which shields lenders from lawsuits if they comply with standards to assess borrowers’ ability to repay.

“The regulated industries have a stake in seeing the bureau survive in some form,” said William Jay, who leads Goodwin Procter’s appellate and Supreme Court practice.

The justices may explore ways to limit the blast radius of a decision, said Misha Tseytlin, the head of Troutman Pepper Hamilton Sanders LLP’s appellate and Supreme Court practice group.

Tseytlin co-wrote an amicus brief on behalf of the Third Party Payment Processors Association supporting the Fifth Circuit’s opinion.

“What we tried to give the court is a pathway to striking down the payday lending rule, and not ones that were finalized more than six years ago,” he said.

But limiting the effects of a ruling may not be a simple task for the justices, and their questions could focus on the potentially widespread consequences of overturning the CFPB’s funding, Zaring, the Wharton professor, said.

Dysfunction Junction

The central issue in the case is whether the CFPB should go through annual appropriations like the Securities and Exchange Commission and a host of other agencies.

The argument comes on the heels of a near-shutdown of the federal government that threatened to hamstring the SEC and other regulators caught up in regular congressional spending fights.

The spending bill signed by President Joe Biden over the weekend lasts only 45 days, so another funding fight looms over the arguments.

While politics are theoretically not supposed to be a part of the decision-making, the outside world may intrude, Zaring said.

“The court’s just not going to want to open up a can of worms on appropriations,” he said. “The shutdown optics may weigh on some of these centrist justices.”

The case is CFPB v. Community Financial Services Association of America, U.S., No. 22-448, Oral Arguments 10/3/23.