Supreme Court Hears Oral Argument On The Constitutionality Of The Funding Of The CFPB

• Jurisdiction: United States,Federal
• Law Firm: Goodwin Procter LLP
• Subject Matter: Finance and Banking, Consumer Protection, Financial Services, Dodd-Frank, Consumer Protection Act
• Author: Allison Funk
• Published date: 23 October 2023

The Supreme Court heard oral arguments on October 3, 2023 in Consumer Financial Protection Bureau v. Community Financial Services Association of America, Ltd. The issue before the Court is whether the CFPB's funding mechanism violaties the U.S. Constitution's Appropriations Clause (U.S. Const. art. I, ' 9, cl. 7). Solicitor General, Elizabeth Prelogar argued on behalf of the CFPB and Noel Francisco (a former Solicitor General) argued for the Community Financial Services Association of America, Ltd. (CFSA).

The CFPB's distinct funding mechanism is promulgated in the Dodd-Frank Act of 2010. Unlike other federal agencies, the CFPB's funding is drawn directly from the Federal Reserve System. The CFPB requests funding on an annual basis, according to what the CFPB's director finds "reasonably necessary to carry out" the authorities of the CFPB under Federal consumer financial law. 12 U.S.C. 5497(a)(1). The CFPB is subject to a cap of 12% of the Federal Reserve System's total operating expenses.

In 2017, the CFPB promulgated a rule (Rule) regulating "payday" loans, which are typically short-term, high interest loans, as well as other short-term loans, including certain vehicle title and high-cost installment loans. 12 C.F.R. 1041.

The following year, the CFSA and the Consumer Service Alliance of Texas (CSA) filed a lawsuit challenging the Rule, alleging that the CFPB's funding mechanism violations the U.S. Constitution because the Appropriations Clause requires that any money paid out of the Treasury must be "appropriated by an act of Congress." Therefore, CFSA and CSA argued, the Rule should be vacated because it was promulgated at the time the CFPB was receiving funding in violation of the Appropriations Clause.

In 2021, the District Court of Western Texas held that the bureau's self-funding mechanism was constitutional, finding that the Dodd-Frank Act of 2010, passed by Congress properly authorized the CFPB to receive funds up to a certain cap and was not a violation of the Appropriations Clause. Cmty. Fin. Servs. Ass'n of Am., Ltd. v. Consumer Fin. Prot. Bureau, 558 F. Supp. 3d 350, 367 (W.D. Tex. 2021). On appeal, the Fifth Circuit reversed, holding that it was not enough that Congress created the CFPB's funding scheme, because the "appropriation" was too far divorced from Congressional oversight. 51 F.4th at 640. In reaching its conclusion, the Court of Appeals considered the CFPB's "insulation from congressional budgetary review," its single director...