The CFPB Survives: Our Take on the Supreme Court Decision

On May 16, 2024, the United States Supreme Court, in a 7-2 opinion authored by Justice Clarence Thomas, upheld the constitutionality of the funding mechanism of the Consumer Financial Protection Bureau (“CFPB” or “Bureau”). In CFPB v. Community Financial Services Association of America, the Court overturned a 2022 Fifth Circuit decision, to hold that the CFPB’s funding mechanism was an “appropriations” under the Appropriations Clause because it is funded under “a law that authorizes expenditures from a specified source of public money for designated purposes.” The Court held that because the Bureau’s funding is drawn from a particular source (“the combined earnings of the Federal Reserve”) and has a designated purpose (to “pay the expenses of the Bureau in carrying out its duties and responsibilities”), its funding mechanism meets the definition of an appropriations and sits comfortably within the historical appropriations practices. As such, the Court determined that the Bureau’s funding structure is constitutional under the Appropriations Clause. 

The Fifth Circuit ruling, which was overturned, had found that the CFPB’s funding structure was unconstitutional.  Unlike most other executive agencies that are dependent on congressional appropriations for annual funding, the Bureau draws money directly from the Federal Reserve for its operating expenses. The Fifth Circuit held that this funding mechanism allowed the Bureau to be too independent of the Congressional appropriations process and violated the Appropriations Clause because it (1) affords the Bureau too much discretion over its own budget, (2) provides it with a perpetual source of funding, and (3) eliminates Congress’ “power of the purse,” therefore violating the separation of powers. 

The Supreme Court dismissed each of these arguments. First, it explained that the Bureau’s funding is capped at a fixed percentage of the Federal Reserve System’s operating expenses, thus the only discretion the Bureau has is to “draw less than the statutory cap.” Second, it rejected the contention that “perpetual” funding is inappropriate, noting that the “Constitution’s text suggests that, at least in some circumstances, Congress can make standing appropriations.” And, third, it held that it is wrong to “reduc[e] the power of the purse to only the principle expressed in the Appropriations Clause.” The Court held that the Appropriations Clause does not require “more than a law that authorizes the disbursement of specified funds for identified purposes.” The Court concluded: “The statute that authorizes the Bureau to draw money from the combined earnings of the Federal Reserve System to carry out its duties satisfies the Appropriations Clause.”

After the decision’s release, the Bureau published a press release reiterating its mission: “This ruling upholds the fact that the CFPB’s funding structure is not novel or unusual, but in fact an essential part of the nation’s financial regulatory system, providing stability and continuity for the agencies and the system as a whole. As we have done since our inception, the CFPB will continue carrying out the vital consumer protection work Congress charged us to perform for the American people.”

Takeaways

• The CFPB has been embroiled in litigation regarding a number of its new rules, the implementation of which have been enjoined, due in part to this pending case.  These cases will move forward, and in turn, have the potential to significantly impact the rules that govern core consumer financial products and services.
• The Bureau faces a significant legal challenge to the scope of its UDAAP authority in examinations, which will have major implications for potential CFPB overreach.  This litigation had been stayed after a lower court ruling against the CFPB, and that stay will presumably soon be lifted.
• The Bureau also is involved in litigation in more than a dozen enforcement matters that have been stayed pending the outcome of this case.  In the next few weeks, we anticipate that the Bureau will seek to lift these stays, restarting litigation related to a variety of consumer financial products and services.
• Finally, we may also see a renewed willingness from the Bureau to litigate and use its enforcement function, particularly in view of its recent hiring spree in the enforcement division.

Please join the Paul Hastings Consumer Financial Services Group for a webinar addressing these issues and more on Monday, May 20 at 2 pm! (Register here)