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Advisory


SUPREME COURT FINDS CFPB FUNDING CONSTITUTIONAL



May 16, 2024

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In a 7-2 decision that was widely expected after oral argument, the US Supreme
Court issued its decision in Consumer Financial Protection Bureau v. Community
Financial Services Association of America, Ltd. on May 16, holding that the
Consumer Financial Protection Bureau's funding mechanism, as set forth in Title
X of the Dodd–Frank Wall Street Reform Consumer Protection Act,1 is
constitutional.2

Authored by Justice Clarence Thomas, the decision finds that the Dodd–Frank
Act's funding scheme for the CFPA complies with the US Constitution's
Appropriations Clause, which states that "[n]o Money shall be drawn from the
Treasury, but in Consequence of Appropriations made by Law."3 In evaluating the
CFPB's funding structure against the Constitution's requirements, the Court
found that the agency's appropriation mechanism is constitutionally permissible
given that it includes an identifiable source of public money and a designated
purpose. To that end, the opinion holds that "[b]ased on the Constitution's
text, the history against which that text was enacted, and congressional
practice immediately following ratification, . . . appropriations need only
identify a source of public funds and authorize the expenditure of those funds
for designated purposes to satisfy the Appropriations Clause."

Background

The case arises from a challenge by the Community Financial Services Association
of America (CFSA), a nonbank consumer lender trade association, related to
certain provisions in final rules adopted by the CFPB related to consumer
payment authorizations on higher interest, short-term consumer lending
products.4 In its challenge to the CFPB's adoption of the Payday Rule, the CFSA
raised a number of arguments, including one that challenged the CFPB's funding
mechanism as violative of the Appropriations Cause. Specifically, the CFSA
posited that the CFPB's funding mechanism "usurp[ed] Congress's role in the
appropriation of federal funds," arguing further that such funding was too
open-ended and inconsistent with other federal agencies that require annual
funding authorization from Congress. The US District Court in the Western
District of Texas initially held that the CFPB's funding mechanism did not
create an "Appropriation Clause issue."5 The US Court of Appeals for the Fifth
Circuit agreed with CFSA, however, finding the CFPB's funding mechanism violated
the Appropriations Clause.6

The CFPB appealed and oral argument was held on October 3, 2023.

What This Means

 * Cases that were stayed pending the Supreme Court's decision in this case will
   now become actively litigated. This includes the payment authorization
   provisions at the heart of the CFSA case as well as other cases that have
   been stayed or had injunctions issued based upon the Fifth Circuit decision.
   For example, the preliminary injunction that was recently entered in the
   lawsuit challenging the CFPB's final rule limiting credit card late fees for
   certain large issuers to $8 could be dissolved, thereby paving the way for
   the rule to go into effect. The same is true for the numerous federal cases
   challenging the CFPB's final rules implementing Section 1071 of the
   Dodd–Frank Act (requiring small business lenders to gather numerous data
   points in connection with applications for credit provided by small
   businesses).7
 * Although it appears that many avenues to challenge the Dodd–Frank Act's
   statutory provisions as they relate to the creation and administration of the
   CFPB have now been assessed by the Supreme Court and found to be
   constitutional,8 there are still other avenues available to individuals or
   entities that have bases for challenging the CFPB's actions. For example, as
   is true in the underlying CFSA case, the facts at issue may support
   challenges raised in connection with a potential violation of the federal
   Administrative Procedures Act (whereby federal agency actions can be set
   aside if they are found to be arbitrary, capricious, an abuse of discretion,
   or "otherwise not in accordance with law").
 * Other agencies that obtain funds in a manner that is not tied to
   Congressional appropriations can breathe a momentary, collective "sigh of
   relief." Some (likely rightly) believed that the funding mechanism of the
   Office of the Comptroller of the Currency (the primary federal regulator of
   national banks) and the Federal Deposit Insurance Corporation, as well as
   other federal agencies like the US Postal System, could find their funding
   methods challenged if the CFSA's argument had resonated with the Supreme
   Court.
 * With this decision, the CFPB will now reignite its enforcement actions, which
   had likely been limited given this open Constitutional question. As disclosed
   in 2023, the CFPB has already begun a "hiring spree" to fill 75 new full-time
   positions in the agency's Enforcement Division.9 All individuals and persons
   who fit within the definition of "covered person" (as set forth in Title X of
   the Dodd–Frank Act) should prepare accordingly.

--------------------------------------------------------------------------------

1 Public Law 111-203.
2 The Dodd–Frank Act generally provides that the CFPB is funded through
requested draws from the Board of Governors of the Federal Reserve System in an
amount the agency's director deems "reasonably necessary to carry out" the
agency's duties, subject to a statutory cap tied to the Federal Reserve System's
operating expenses. As the Court noted in its opinion, "[i]n fiscal year 2022,
that cap was about $734 million."
3 Art. I, § 9.
4 12 CFR Part 1041 (Subpart C- Payments) (Payday Rule). The CFSA was joined in
the action by the Consumer Service Alliance of Texas.
5 Cmty. Fin. Servs. Ass'n of Am., Ltd. v. CFPB, No. 1:18-cv-00295 (W.D. Tex.
Aug. 31, 2021).
6 51 F. 4th 616 (5th Cir. 2022) (en banc).
7 CFPB, "Small Business Lending under the Equal Credit Opportunity Act
(Regulation B)" (March 30, 2023), available here.
8 Seila Law, LLC, v. Consumer Financial Protection Bureau, June 29, 2020,
addressed and remediated constitutional challenges to the CFPB director's
appointment.
9 American Banker, "CFPB Plans to Hire 50% More Enforcement Attorneys, Support
Staff" (October 5, 2023), available here.

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