The latest constitutional challenge to the Consumer Financial Protection Bureau hinges on whether the agency's funding through the Federal Reserve System differs dramatically from the funding of other government agencies, experts say.
The CFPB asked the U.S. Supreme Court last month
Some experts think the CFPB's funding through the Federal Reserve — and not directly through annual congressional appropriations — could be the chink in the armor of the Dodd-Frank Act that created the CFPB in 2010. The Supreme Court is
"Given the political composition of the court with its 6-3 conservative majority, and that they don't like administrative agencies, the justices are going to be highly motivated to decide this case against the CFPB," said Alan Kaplinsky, senior counsel at Ballard Spahr.
On Capitol Hill this week, Republican lawmakers grilled CFPB Director Rohit Chopra about the agency's funding. Republicans appeared confident that they can negotiate major changes to the CFPB on the assumption that the Supreme Court accepts the case and upholds the 5th Circuit panel's decision. At a Senate Banking Committee
Constitutional scholars also
The 5th Circuit's ruling invalidated the CFPB's payday lending rule in three states — Texas, Louisiana and Mississippi — by claiming the CFPB was unconstitutionally funded when the payday rule was enacted. The case, Community Financial Services Association of America v. CFPB, was filed in 2018 by two Texas trade groups that
Todd Zywicki, a law professor at the Antonin Scalia Law School at George Mason University, said that if the Supreme Court accepts the CFPB's appeal, the justices are likely to look at the distinctions in funding of federal agencies. One important difference is that the CFPB is not self-funded and does not have the ability to raise fees through assessments unlike prudential bank regulators.
The Federal Reserve Board of Governors — and, by extension, the CFPB — earns revenue primarily from an assessment on interest from securities held by the regional Fed banks on their balance sheets, which the Federal Open Market Committee uses to pursue the Fed's monetary policy objectives. The Federal Deposit Insurance Corp. is funded from deposit insurance assessments on banks, while the Office of the Comptroller of the Currency charges examination fees of nationally chartered banks.
When a new consumer bureau was first proposed in the throes of the financial crisis, the idea was for a new consumer financial protection bureau to be housed inside the Fed, similar to how the Federal Trade Commission has its own consumer protection division, Zywicki said.
"It was actually the banks that pushed for the CFPB to be made into a bureau of the Fed with its budget drawn from the Fed," Zywicki said.
When Dodd-Frank was written, however, the result was the creation of a separate, independent agency within the Fed, which has no control over the CFPB's budget. In fiscal year 2022, Chopra requested $641.5 million from the Fed to fund the CFPB's operations out of a potential $734 million in funding, according to the
"The CFPB is an independent agency located inside another independent agency, the Fed," said Zywicki. "Can you have an executive agency funded by an independent agency and neither the president nor Congress directly controls the budget?"
Lawmakers also were asking similar questions. At a House Financial Services Committee
"Director Chopra, are the funds of the CFPB congressionally appropriated?" Barr asked.
Chopra initially responded by citing the appropriations clause. "No money shall be drawn from the Treasury, but as a consequence of appropriations made by law," Chopra said. "That is the subject of a Supreme Court appeal by the solicitor general. That is an open issue."
Chopra also referred to U.S. Solicitor General Elizabeth B. Prelogar, who is representing the CFPB in its appeal to the Supreme Court. Prelogar, in the
When Chopra was asked whether a bipartisan board of directors with diverse opinions would better serve consumers, he responded by comparing the CFPB, with its single director, to the OCC, which also has a single director.
"For 120 years the Office of the Comptroller of the Currency — which has far more employees and far a bigger budget and far bigger remit — has been led by a single director," Chopra said. "That's part of the reason why Congress modeled" the CFPB after the OCC, he said.
He also reminded lawmakers that he previously served as a member of the Federal Trade Commission.
"Congress decides how it wants to create the governance of its agencies," Chopra said. "There are many single directors, there are many multimember boards. I think there are a lot of cons to multimember boards, having served on one."
To be sure, some legal experts think the Supreme Court, if it accepts the appeal, would be wading into the thorny issue of how Congress funds agencies. Many federal agencies — from the U.S. Postal Service to the United States Patent and Trademark Office — are funded through fees or licenses that are outside congressional appropriations.
There also are many idiosyncrasies among federal agencies. Scholars "are not aware of how weird and independent a lot of these financial regulators are and the extent to which their de facto practices differ from their legal authority," Zywicki said.
The 5th Circuit's ruling is already having an impact on the CFPB's enforcement actions. Of the roughly 70 companies currently in litigation with CFPB, many have asked for their cases to be put on hold pending the appeal, said Kaplinsky. Legal experts also claim the CFPB's issuance of civil investigative demands has ground to a halt.
The case and its outcome "will give the Republicans a lot of leverage," Kaplinsky said.
