Supreme Court Justices Question Challenge to CFPB

A U.S. Supreme Court decision that might unravel the Consumer Financial Protection Bureau (CFPB) might lean heavily on how it interprets 16 words in the Constitution.

CUNA and NAFCU filed a brief in July supporting the suit brought by payday lenders that says CFPB rules are invalid because the agency’s funding violates the Constitution’s Appropriations Clause.

During 94 minutes of oral arguments before the court Tuesday, justices from Clarence Thomas to Brett M. Kavanaugh of the conservative majority to Sonia Sotomayor and Ketanji Brown Jackson of liberal minority questioned whether the Appropriations Clause could be used to uphold a 2022 ruling by the Fifth Circuit supporting payday lenders. A ruling is expected next spring.

The Appropriations Clause states: “No money shall be drawn from the treasury, but in consequence of appropriations made by law.”

Congress created the CFPB though the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in the wake of the Great Recession. Congress ordered that the CFPB be funded by a capped amount of the Federal Reserve System’s annual funds in a way that gave the Fed no control over its disbursement. In fiscal year 2022, the CFPB received $641.5 million of the $734 million allowed by the cap.

One issue in the payday lenders’ original 2018 suit was swept away by an earlier Supreme Court ruling that said the CFPB’s single-director governance was unconstitutional. Congress changed the agency’s governance to comply.

Payday lenders filed an amended complaint in 2020 that included an argument the CFPB was unconstitutional because it was not funded by an annual appropriation by Congress. After the Fifth Circuit’s ruling, the CFPB asked the Supreme Court to review the case, which it did in February.

Payday lenders were represented Tuesday by Noel Francisco, who was U.S. solicitor general under President Trump, and has returned to his previous employer, Jones Day in Washington, D.C.

The CFPB was represented Tuesday by U.S. Solicitor General Elizabeth B. Prelogar, who was appointed by President Joe Biden in 2021. She said the CFPB was created in line with both the text of the Appropriations Clause and its history of use. About 60% of federal spending comes from outside of annual appropriations by Congress.

She said the court should reject payday lenders’ “attempt to gerrymandering a rule to fit the CFPB alone without providing a coherent theory about how to interpret and apply the appropriations clause. “

Justice Thomas asked Francisco: “Just briefly, I’d like you to complete this sentence. ‘Funding of the CFPB violates the appropriations clause because …’”

Francisco: “Because Congress has not determined the amount that this agency should be spending. Instead, it is delegated to the director, the authority to pick his own appropriation subject only to an upper limit that’s so high, it’s rarely meaningful.”

At another point, Francisco said that appropriations should be annual. He said because Congress’ funding formula for the CFPB was perpetual, Congress had abandoned its role in maintaining the separation of powers by surrendering its control over spending to the executive branch.

Justice Kavanaugh said Congress can’t “entrench a funding scheme” that “no future Congress could alter for 10 years or 100 years.”

Prelogar agreed with Kavanaugh, and pointed out examples where Congress had rescinded standing appropriations, including some within the Inflation Reduction Act signed by President Biden.

Kavanaugh brought the issue up again in questioning Francisco.

“The word ‘perpetual.’ I’m having trouble with 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,” Kavanaugh said.

Justice Sotomayor asked Prelogar to comment on the Fifth Circuit ruling that anything the CFPB has done since its founding is invalid, rather than just the payday lending rule that started the case.

Prelogar said the Fifth Circuit had bypassed the law’s severability clause, and was creating a situation that would “create profound disruption in various economic markets that would hurt the regulated entities themselves.”

Prelogar referred to the May 15 brief filed by the Mortgage Bankers Association that argued many mortgage lenders and others rely on rules from the CFPB.

“These create safe harbors for lenders so that they will be deemed to be in compliance with statutory requirements on things like ability to pay and on disclosure requirements,” Prelogar said. “And if the Fifth Circuit is right and there’s the prospect that all of these actions should be unwound, it would create profound disruption in various economic markets that would hurt the regulated entities themselves.”

Justice Jackson said upholding the Fifth Circuit would put the Supreme Court on a “slippery slope” of “telling Congress when and under what circumstances it can exercise its own prerogatives concerning funding.”

Jackson asked Francisco how the courts should avoid becoming “a super legislator” telling Congress whether its funding decisions pass muster for each agency.

Jackson: “Where are these limits in the law?”

Francisco: “The judiciary has always played a vital role in policing the separation of powers. Because the whole point is not to protect Congress from the president or President from the Congress, it’s to protect liberty.”