Second Circuit rules that CFPB's funding is constitutional

Samuel Corum/Bloomberg

A federal appeals court ruled Thursday that the Consumer Financial Protection Bureau's funding is constitutional, adding another twist to a separate challenge to the agency's funding that the Supreme Court has agreed to hear.

A three-judge panel of the U.S. Court of Appeals for the Second Circuit not only upheld a lower court's ruling in favor of the CFPB, but it also specifically rejected arguments made last year by the Fifth Circuit Court of Appeals.

The Fifth Circuit found that the CFPB's funding through the Federal Reserve Board — and not through annual congressional appropriations — violates the Constitution's separation of powers doctrine.

The Supreme Court agreed in February to hear the Fifth Circuit case, which has led to speculation that all of the bureau's past actions and rules could be undone, or that Congress would have to fund the bureau through appropriations. The Supreme Court is expected to hear oral arguments in the highly anticipated case in October.

The Fifth Circuit concluded that Congress ceded direct control over the CFPB's budget by insulating it from the annual appropriations process and instead funding it through the Federal Reserve, which it said constitutes "a double insulation from Congress's purse strings." The Fifth Circuit covers Texas, Louisiana and Mississippi.

But the Second Circuit, which covers the states of New York, Connecticut and Vermont, said it "cannot find any support for the Fifth Circuit's conclusion in Supreme Court precedent." 

Instead, the Second Circuit said that Congress expressly authorized the bureau's funding and that no Supreme Court decision has ever suggested that any more needs to be done. The appeals court said the Constitution's appropriations clause "means simply that no money can be paid out of the Treasury unless it has been appropriated by an act of Congress."

"We are not aware of any Supreme Court decision holding (or even suggesting) that the appropriations clause requires more than this 'straightforward and explicit command,'" the appeal court stated. "Here, Congress expressly appropriated the CFPB's funding … and we are "not at liberty to depart from binding Supreme Court precedent, 'unless and until the [Supreme] Court reinterprets' [such] precedent" itself."

In the case before the Second Circuit, CFPB vs. the Law Offices of Crystal Moroney PC, the law firm argued that the CFPB could not enforce a civil subpoena, in part because the agency's funding structure was unconstitutional. The CFPB had sought to serve a civil subpoena against Moroney's law firm, which handles debt collection cases, back in 2017.

Though the Second Circuit's case is separate from the Supreme Court case, the debt collection law firm could petition the high court to review its case as well.

Can the Supreme Court distinguish the CFPB's funding from other agencies'?

"The Second Circuit is staking out a position that in their view there isn't any support for the Fifth Circuit's reasoning. Between the Fifth Circuit and the Second Circuit, someone is wrong," said Dustin Nofziger, an attorney at the law firm Pryor Cashman. "I think it may have an impact because it's a well-reasoned decision."

In 2020, the Supreme Court struck down the CFPB's single-director structure, calling it  unconstitutional, but stopped short of disbanding the bureau or invalidating the Dodd-Frank Act of 2010, which created the agency.

The split 5-4 decision, written by Chief Justice John Roberts, gave a sitting president the ability to fire a CFPB director without cause, but it kept the rest of the law and the agency intact. The high court's 2020 ruling had no impact on the CFPB's rulemakings, decisions and enforcement actions.