Yesterday morning, the U.S. Supreme Court held oral argument in Community Financial Services Association of America Ltd. v. Consumer Financial Protection Bureau, a case we have been following closely on Consumer Finance Monitor because of its profound potential implications for the future of the CFPB.  In the case, the Court will rule on whether the CFPB’s funding mechanism violates the U.S. Constitution’s Appropriations Clause and, if so, what the appropriate remedy should be.  Elizabeth Prelogar, the Solicitor General, argued for the CFPB, and Noel Francisco, a former Solicitor General, argued for the CFSA.

In the Dodd-Frank Act, Congress provided that the CFPB would receive annual funding from the combined earnings of the Federal Reserve System.  Each year, the Federal Reserve Board is directed to transfer to the CFPB an amount determined by the CFPB Director to be reasonably necessary to carry out the CFPB’s authorities, with that amount not to exceed 12% of the Federal Reserve’s total operating expenses as reported in 2009 (approximately $600 million) as adjusted for inflation.   

The essence of the CFSA’s position is that the CFPB’s funding violates the Appropriations Clause because it allows the CFPB, in perpetuity, to self-determine how much funding it needs each year subject only to an illusory cap set so high that the CFPB has never come close to hitting it, a unification of “sword and purse” contrary to the intent of the Framers.  CFSA argues that the funding of historical and other modern agencies can be distinguished because those agencies operated or operate on a fee-for-services model, whereas the CFPB’s funding mechanism is unprecedented.  According to the CFSA, if the Appropriations Clause is read to allow the CFPB’s funding mechanism, it would leave Congress free to write the President a blank check payable each year forever to set the budget for the entire federal government (except the Army, because of a separate Constitutional Clause limiting appropriations to the Army to terms no longer than two years).  

The essence of the CFPB’s position is that the Appropriations Clause’s text does not limit Congress’s authority to determine the specificity, duration, and source of appropriations and that the CFPB’s funding mechanism is consistent with the constitutional text, history, and precedent.  According to the CFPB, since the nation’s founding, Congress has made lump-sum appropriations committed to the discretion of the Executive Branch, provided federal agencies with standing appropriations that remain in place unless and until Congress repeals them, and funded agencies through fees, assessments, investments, and other similar sources.  Because Dodd-Frank prescribes the amount, duration, source, and purpose of the CFPB’s funding, it satisfies the classic elements of an appropriation and falls easily within Congress’s historical practice.

The focus of many of the conservative Justices’ questions was on what are the limits that the Appropriations Clause places on Congress and the role of appropriations in the separation of powers.  The questions asked by Justices Thomas, Gorsuch, and Alito suggested that they were concerned about the implications of a reading of the Appropriations Clause that places as few constraints on Congress as would the CFPB’s reading of the Clause, such as allowing standing or uncapped appropriations. 

Chief Justice Roberts indicated that the CFPB had “a very aggressive view of Congress’s authority under the Appropriations Clause” and that he “didn’t see any compelling historical analogues” to the CFPB’s funding mechanism.  Similarly, Justice Alito asked the Solicitor General whether the unprecedented nature of the CFPB’s funding (i.e. an agency that draws its money from another agency”) was relevant to its constitutionality.  Justice Thomas, however, suggested that the novelty of the CFPB’s funding did not raise constitutional problems, stating that that even if Congress has “never gone this far [it] is not a constitutional problem” but “may be a problem with analogues.” 

Justice Barrett’s questions suggested some skepticism with the CFSA’s position, such as whether there is textual support for the limits on Congress’s appropriations power asserted by CFSA or whether standing appropriations are constitutionally problematic.  Justice Kavanaugh appeared to take issue with the CFSA’s characterization of the CFPB’s funding as “perpetual” stating:

I’m having trouble with [that characterization] because it implies that it’s entrenched and that a future Congress couldn’t  change it.  But Congress could change it tomorrow and there’s nothing perpetual or permanent or–about this.

Justice Kagan’s, Justice Jackson’s, and Justice Sotomayor’s questions suggested they were comfortable with the CFPB’s funding structure, with Justice Jackson suggesting that it was CFSA’s burden to establish what limits exist on Congress’s appropriations power and that the CFPB’s funding mechanism violated those limits.  Justice Jackson also suggested that an absence of historical precedent for the CFPB’s funding mechanism would not be sufficient to establish that Congress did not have the prerogative to structure the CFPB’s funding as it did in Dodd-Frank.  Justice Kagan took issue with the CFSA’s characterization of the CFPB’s funding cap as “a number so high it’s almost never relevant.”  She called $600 million “a rounding error in the federal budget” and suggested that, as the CFPB’s programs develop over time, its funding needs could reach the cap.  In addressing a CFSA argument that the lack of durational limits on the CFPB funding is particularly problematic, Justice Sotomayor stated “I’m sorry. I’m trying to understand your argument, and I’m at a total loss.”

It is noteworthy that despite the potential implications of a ruling by the Supreme Court that the CFPB’s funding is unconstitutional, only Justice Sotomayor asked questions about what the appropriate remedy would be for a constitutional violation.  In particular, Justice Sotomayor asked whether the Fifth Circuit’s implicit sweeping remedy of invalidating not only the payday lending rule but all other CFPB actions was appropriate.  She also asked about the possibility of using a severability analysis.

We can sometimes predict the outcome of a Supreme Court case based on the oral argument and the tenor of the questions asked by the Justices.  However, particularly in light of what seemed to be restrained questioning of the Solicitor General by the conservative Justices, this case does not readily allow us to predict an outcome.  All we can say with certainty is that the Court will issue a decision before the end of its term in June 2024.

On October 17, 2023, from 2:00 p.m. to 3:30 p.m. ET, Ballard Spahr will hold a special webinar roundtable, “The U.S. Supreme Court’s Decision in CFSA v. CFPB: Who Will Win and What Does It Mean?”  The webinar brings together six attorneys who filed amicus briefs with the Supreme Court.  To register, click here.