What happens when the CFPB's funding question hits the Supreme Court?

The Consumer Financial Protection Bureau is widely expected to end up back before the Supreme Court defending itself for a second time in yet another review of whether the agency's structure is constitutional. 

Legal experts are gaming out the various options for the CFPB after a three-judge panel of the U.S. Court of Appeals for the 5th Circuit ruled on Oct. 19 that the bureau's funding is unconstitutional. Three justices appointed by former President Donald Trump unanimously found that the CFPB's funding through the Federal Reserve violates the separation of powers clause because it occurs outside the congressional appropriations process. 

Constitutional scholars and legal experts said the Supreme Court is likely to expedite a review of the case as early as next year, in its current term, given the potential impact on other federal agencies — particularly the Federal Reserve.

Eric Lee/Bloomberg

"It is still possible for the court to [hear the case] in this term, and there is precedent in separation of powers challenges for the court to expedite this case," said Deepak Gupta, a Supreme Court and appellate advocate at the law firm Gupta Wessler. "This is the kind of decision that needs to be done in an orderly fashion because there is a lot of chaos in the near term."

How the case unfolds may hinge on the outcome of the midterm elections. A Democratically controlled lame-duck Congress may feel an urgency to pass legislation that subjects the CFPB to congressional appropriations. Or if Republicans retake the House, the CFPB's funding structure could be a bargaining chip in future legislative compromises. Some lawyers even say the CFPB could end up in fiscal limbo with no funding after a Supreme Court ruling.

"The CFPB is between the proverbial rock and a hard place," said Alan Kaplinsky, senior counsel at the law firm Ballard Spahr. "If a Republican-controlled Congress doesn't like what the CFPB is doing, they could certainly prohibit the agency from doing certain things."

America needs a do-something Congress

The case, Community Financial Services Association of America v. CFPB, began in 2018 when two Texas trade groups sought to overturn the bureau's payday lending rule. The CFPB had the authority to issue the small-dollar payday rule, the judges argued, but Congress's funding mechanism meant the agency was operating unconstitutionally when the rule was enacted. The appeals panel technically invalidated the payday rule in three states — Texas, Louisiana and Mississippi.

The panel of judges wrote that Congress ceded its own control over the CFPB's budget by tying its funding to the Federal Reserve, stating that because the Fed's own funding also is outside the appropriations process that Congress had created a "double-insulated funding mechanism"— key buzzwords at the heart of the constitutionality case. 

Tucked into the trade groups' early brief were 368 words laying out their argument that the CFPB's funding was unconstitutional, Gupta said on a recent webinar, as he sought to explain the logic behind the panel's ruling. 

"The challengers barely made the argument" about the CFPB's funding, Gupta said, because "it is precisely the same funding design that the [Fed] itself has."

The CFPB has two options going forward. It could appeal the panel's decision by requesting an en banc review for the case to be heard by the full 5th Circuit. But most observers think the bureau could bypass the appeals court entirely and ask the Supreme Court directly to grant a review. 

Though the CFPB has its own independent litigation authority, technically the U.S. Solicitor General's Office represents the CFPB before the Supreme Court. Many experts think the bureau will seek a stay of the 5th Circuit panel's decision coordinated with the solicitor general, Gupta said.

"There's no question that the solicitor general's office will be seeking review," Gupta added. 

En banc review 'very difficult'

Bypassing the 5th Circuit is a logical choice given the odds of the current political makeup of the appeals court, lawyers said. The 5th Circuit is not considered a friendly jurisdiction for the CFPB because seven of its 16 judges have already decided that the bureau is unconstitutional. Besides the three judges who ruled in the current case, another four joined in another opinion, CFPB v. All American Check Cashing, that reached a similar conclusion. 

Of the remaining 16 judges in the 5th Circuit, four were appointed by Democratic administrations and five by Republican administrations. That math means it's very possible for a majority of nine judges in the circuit to deny a CFPB motion for en banc review. 

"I think it's going to be very difficult," Kaplinsky said. 

Having already declared the CFPB's single director structure unconstitutional once in 2020, the Supreme Court already has an interest in the current challenge, some lawyers argue. The high court's conservative justices are uniquely interested in the powers of administrative agencies and in separation of powers. In the split 5-4 decision in the 2020 case, Seila Law v. CFPB, written by Chief Justice John Roberts, the Supreme Court found that the agency's structure vested too much power in the hands of a single director, and that the president has broad authority to appoint and remove agency heads. 

While that ruling eliminated the "for cause" provision in Dodd-Frank, it kept the rest of the law and the agency intact. The ruling also had no impact on the CFPB's past nine years of rulemakings, decisions and enforcement actions, which were later ratified by former CFPB Director Kathy Kraninger, a Trump appointee.

CFPB lays out possible counter to Fifth Circuit funding decision

Reading the tea leaves

Some CFPB experts suggest that because the Supreme Court took a measured approach in the last constitutionality case, the justices may continue that approach by considering the long-term viability of the agency.

"It's really hard to read the tea leaves at the Supreme Court," said Christopher Peterson, the John J. Flynn Professor of Law at the University of Utah and former advisor to the CFPB. "It's not a foregone conclusion that the Supreme Court is going to strike down the agency. It's not totally obvious that they have five votes to strike down the bureau's funding mechanism when there's so little distinction between the CFPB's funding and the Federal Reserve's."

A second CFPB constitutionality case could have far-reaching ramifications for the funding of other agencies including the Fed, Federal Deposit Insurance Corp., the National Credit Union Administration and the Office of the Comptroller of the Currency, none of which are funded through appropriations. The Fed is a self-funding government agency, earning revenue primarily from interest on securities it holds on its portfolio as part of its monetary policy operations. The FDIC is funded from deposit insurance assessments on banks, while the OCC charges examination fees from nationally chartered banks. 

The CFPB, by comparison, does not have the ability to raise fees through assessments like the FDIC and OCC or acquire additional securities like the Fed. The CFPB is funded through direct monetary transfers from the Fed based on the CFPB director's request and a statutory funding cap. 

Some lawyers suggest the CFPB's bypassing of the congressional appropriations process could be likened to the funding mechanisms for Social Security and Medicare — just one indication of how high the stakes for Supreme Court review of the case could be. 

The implications for banks, mortgage lenders, and financial institutions of all kinds is far-reaching,  leading many CFPB watchers to conclude that gutting the agency is not in the cards. Consumer advocates and mortgage experts are warning of "confusion and chaos" if the CFPB's 12 years of rulemakings and enforcement actions are threatened or undone. 

"I don't think it's going to turn out to be that the CFPB is invalid and everything they did is for nothing," said Jay Beitel, a principal Polunsky Beitel Green, a San Antonio law firm focused on mortgage lending. "That's not a possibility. Some way or another, they are going to say that Congress needs to patch the whole thing and [the funding] doesn't nullify everything else." 

Over the years, Congress has established a lot of different programs funded outside of appropriations. Some experts even suggest that if the Supreme Court takes the case, the justices could accomplish what electoral politics never could: a radical restructuring of the spending power of Congress. But many still say a measured approach is more likely.

"At the end of the day, I cannot imagine this Supreme Court throwing out all the other agencies," said Kaplinsky. "There is much more dislike and antipathy for the CFPB and they will be the immediate target here." 

Gupta, the constitutional lawyer, said the court case could turn on the meaning of the appropriations clause.

The 5th Circuit panel's decision, he said, "doesn't even attempt to show that there's any historical evidence that the appropriations clause was intended to function as a limitation on Congress' ability to affect ongoing appropriations or to allow agencies to be self-funding."

Moreover, lawyers continue to argue over the notion of double insulation, since both the bureau and the Fed essentially draw funds from the same source. The funding issue never percolated in the courts before largely because other judges did not see a problem with Congress determining the structure of the agency's funding. 

When Congress passed the Dodd-Frank Act in 2010, it allowed the CFPB to request funding every quarter from the Federal Reserve, with the amount capped at 12% of the Fed's annual budget. In its most recent budget, the CFPB said that transfers from the Fed were capped at $717.5 million this year, at $734.0 million in fiscal 2022 and $750.9 million in fiscal 2023.

Even if the high court takes the case, many say Congress will have to decide the ultimate outcome.

"How does Congress respond if it turns out that the funding mechanism is unconstitutional?" said Peterson. "One of the things that could lead to an impetus to stop funding the agency is that if the agency is unconstitutional, and can't go forward, what happens to all the work that financial institutions rely on?"