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The Business Lawyer

Spring 2024 | Volume 79, Issue 2

CFPB Structure Returns to the Supreme Court

Joseph Yenouskas and Collin M Grier

CFPB Structure Returns to the Supreme Court WONG

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In its October 2023 term, the Supreme Court will again consider whether the structure of the Consumer Financial Protection Bureau (“CFPB”) is constitutional.

This time, the Supreme Court will decide whether the CFPB’s unique funding mechanism violates the Appropriations Clause of Article I of the Constitution.

This survey discusses the funding structure, the Fifth Circuit decision finding the structure unconstitutional, and the Second Circuit’s contrary decision in CFPB v. Law Offices of Crystal Maroney, P.C.


In its October 2023 term, the Supreme Court will again consider whether the structure of the Consumer Financial Protection Bureau (“CFPB”) is constitutional. This time, the Supreme Court will decide whether the CFPB’s unique funding mechanism violates the Appropriations Clause of Article I of the Constitution. This survey discusses the funding structure, the Fifth Circuit decision finding the structure unconstitutional, and the Second Circuit’s contrary decision in CFPB v. Law Offices of Crystal Maroney, P.C. These developments exemplify the legal challenges to the CFPB’s unique design that are in the case now before it.

The CFPB Funding Structure

The CFPB’s funding scheme “is unique across the myriad independent executive agencies across the federal government.” Rather than Congress funding the CFPB through the annual appropriations process, the CFPB’s funding comes from the Federal Reserve system. Specifically,

Each year (or quarter of such year) . . . the [Federal Reserve] Board of Governors shall transfer to the Bureau from the combined earnings of the Federal Reserve System, the amount determined by the [CFPB] Director to be reasonably necessary to carry out the authorities of the Bureau under Federal consumer financial law, taking into account such other sums made available to the Bureau from the preceding year (or quarter of such year).

The amount of funding available is restricted to a “fixed percentage of the total operating expenses of the Federal Reserve System” that is “adjusted annually” based on “the employment cost index for total compensation for State and local government workers published by the Federal Government.”

Importantly, Congress also provided that “the funds derived from the Federal Reserve System . . . shall not be subject to review by the Committees on Appropriations of the House of Representatives and the Senate.” However, the Government Accountability Office (“GAO”) “shall annually audit” the CFPB’s “financial transactions,” the precise scope of which is not defined by the statute but includes reviewing “all books, accounts, documents, papers, records (including electronic records), reports, files and all other papers, automated data, things, or property” that enable the GAO to “verify[] transactions with the balances or securities held by depositories, fiscal agents, and custodians.” The Comptroller General of the United States must “submit to the Congress a report of each annual audit” including “the statement of sources and application of funds and such comments and information as may be deemed necessary to inform Congress of the financial operations and condition of the Bureau.”

The CFPB’s accounts are separated into two separate funds, the Bureau Fund and the Consumer Financial Civil Penalty Fund. The Bureau Fund is a special account “established in the Federal Reserve” for the purpose of transferring funds requested by the Director. The statute provides that once money is transferred into the Bureau Fund it becomes the property of the Bureau. “Funds obtained by, transferred to, or credited to the Bureau Fund shall be immediately available to the Bureau and under the control of the Director, and shall remain available until expended, to pay the expenses of the Bureau in carrying out its duties and responsibilities.” This includes for the payment of the salaries of the CFPB Director and other CFPB employees as well as any other expenses. The funds in this account that “in the judgment of the Bureau” are not required to meet the CFPB’s “current needs” may be invested by the Federal Reserve Board. “Funds obtained by or transferred to the Bureau Fund shall not be construed to be . . . appropriated monies.”

Monies recovered by the CFPB through judicial and administrative actions are deposited in the Consumer Financial Civil Penalty Fund, also maintained by the Federal Reserve. Funds in the Civil Penalty Fund are only to be used for “payments to the victims of activities for which civil penalties have been imposed under the Federal consumer financial laws” and for “consumer education and financial literacy programs.”

In the event that the CFPB Director determines that the CFPB’s funding by transfer from the Federal Reserve would be insufficient “to carry out the authorities of the Bureau under Federal consumer financial law for the upcoming year,” the Director may request additional funding from Congress via a report to the House and Senate Appropriations Committees. The Director is also required to prepare an annual report to the Appropriations Committees “regarding the financial operating plans and forecasts of the Director, the financial condition and results of operations of the Bureau, and the sources and applications of funds for the Bureau.”

The Appropriations Clause

Article I, Section 9 of the Constitution contains the Appropriations Clause. It reads: “No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.” The Supreme Court has interpreted the clause to mean that “no money can be paid out of the Treasury unless it has been appropriated by an act of Congress.” This means that “[h]owever much money may be in the Treasury at any one time, not a dollar of it can be used in the payment of anything not thus previously sanctioned.”

In a more modern context, in Office of Personnel Management v. Richmond, the Court interpreted the Appropriations Clause strictly to require statutory authorization before an agency could release funds, even if ordered to do so by an Article III court. There, a federal retiree “sought advice from a federal employee and received erroneous information” concerning the retiree’s maximum income that the retiree could earn and still receive his full federal disability benefits. The retiree acted in reliance on this advice and took a job in which he made an income that exceeded the statutory limit, resulting in a loss of benefits. The Federal Circuit held that the government’s “affirmative misconduct” resulted in unfairness to the retiree and “required payment of disability benefits despite the statutory provision to the contrary.” The Supreme Court reversed and held that even “judicial use of the equitable doctrine of estoppel cannot grant [a party] a money remedy that Congress has not authorized.” Instead, the Court said that “[i]f agents of the Executive were able, by their unauthorized oral or written statements to citizens, to obligate the Treasury for the payment of funds, the control over public funds that the Clause reposes in Congress in effect could be transferred to the executive.”

While on the D.C. Circuit, then-Judge Kavanaugh called the Appropriations Clause “a bulwark of the Constitution’s separation of powers among the three branches of the National Government” in U.S. Department of the Navy v. Federal Labor Relations Authority. The court vacated an arbitration order from the Federal Labor Relations Authority requiring the Navy to provide bottled water to workers at its facilities in Newport, Rhode Island, because Congress only provided for the Navy to purchase bottled water upon a showing that the purchase was a “necessary expense” under a separate doctrinal analysis. Notably, however, Judge Kavanaugh’s decision held that Congress, through a statute, rather than through the Appropriations Clause, prohibited the use of these funds other than for “the purpose of the obligation or expenditure must be authorized.” By resolving the case on statutory grounds, the D.C. Circuit did not answer the question of what an “appropriation” is for purposes of the Clause. This gap has left a paucity of precedent for the Supreme Court’s consideration this term. Congress, for its part, has defined “appropriations” as “appropriated amounts,” which include “(A) funds; (B) authority to make obligations by contract before appropriations; and (C) other authority making amounts available for obligation or expenditure.” Such a definition may provide more questions than answers in terms of whether the CFPB’s funding structure is unconstitutional.

Community Financial Services Association of America v. CFPB

The Supreme Court has previously ruled on the CFPB’s structure and found it unconstitutional. In Seila Law LLC v. CFPB, the Supreme Court held that “for cause” removal protection unconstitutionally insulated the CFPB Director from presidential oversight and “violates the separation of powers.” In so doing, the Supreme Court held that this insulation, established by Congress to promote agency independence, “contravenes [a] carefully calibrated system by vesting significant governmental power in the hands of a single individual accountable to no one.” However, instead of holding that all of the CFPB’s actions were invalid, the Court severed the unconstitutional provisions and allowed the CFPB Director, now lacking “for cause” protection, to “ratify” prior agency decisions.

The CFPB, under the leadership of then-Director Richard Cordray, issued a rule entitled “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (“Payday Lending Rule”) in November 2017. Two trade associations representing the financial services industry, the Community Financial Services Association of America (“CFSA”) and the Consumer Service Alliance of Texas, filed a lawsuit in the Western District of Texas seeking to enjoin the CFPB from enforcing the Payday Lending Rule. The plaintiffs challenged the enforcement of the Rule on the grounds that: the CFPB’s structure violated the separation of powers; the authority granted to the CFPB in its enabling act was an unconstitutional delegation of legislative power to an executive agency; the CFPB exceeded its statutory authority in promulgating the Payday Lending Rule; the rule was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” in violation of the Administrative Procedures Act (“APA”); the Payday Lending Rule was invalid under the cost-benefit analysis provisions of the Consumer Financial Protection Act (“CFPA”); and the CFPB failed to follow procedure required by the APA.

The plaintiffs’ constitutional attack on the CFPB’s structure consisted of two discrete arguments. First, the plaintiffs argued that the CFPB Director was unconstitutionally insulated from Presidential oversight because the Director could only be removed “for cause.” This was the argument accepted by the Supreme Court in Seila Law, in which the Supreme Court severed the CFPA’s removal restriction from the CFPA. Second, the plaintiffs argued that the CFPB’s funding structure violated the Appropriations Clause because the CFPB’s funding does not come from the Congressional appropriations process. Although the Supreme Court said that “[t]he “CFPB’s receipt of funds outside the appropriations process aggravate[d] the agency’s threat to Presidential Control,” the Court’s analysis in Seila Law did not directly address the constitutionality of the funding structure standing alone.

After the Supreme Court decided Seila Law, the parties filed cross-motions for summary judgment in late 2020. The district court denied the plaintiffs’ motion for summary judgment and granted the CFPB’s motion for summary judgment on each of the plaintiffs’ theories of relief. Among its rulings, the district court rejected the plaintiffs’ constitutional challenge to the CFPB’s funding structure with little substantive analysis, holding that where “a statute authorizes an agency to receive funds up to a certain cap, there is no Appropriations Clause issue.”

On appeal, the Fifth Circuit affirmed the district court on all grounds except for the plaintiffs’ Appropriations Clause challenge. In concluding that “the Bureau’s funding mechanism contravenes the Constitution’s separation of powers,” the Fifth Circuit panel relied on an earlier concurrence from an en banc review of a similar constitutional challenge to the CFPB’s funding structure, in which five of the court’s seventeen judges concluded, in a concurrence, that the CFPB’s funding structure violated the Appropriations Clause.

The Community Financial Services court began its decision by invoking constitutional history. The court noted that “[t]he Appropriations Clause’s ‘straightforward and explicit command’ ensures Congress’s exclusive power over the federal purse.” The court said that “[t]he Appropriations clause . . . does more than reinforce Congress’s power over fiscal matters; it affirmatively obligates Congress to use that authority ‘to maintain the boundaries between the branches and preserve individual liberty from the encroachments of executive power.’” Indeed, to the court, “the Appropriations Clause expressly ‘was intended as a restriction upon the disbursing authority of the Executive department.’”

With respect to the CFPB’s “self-actualizing, perpetual funding mechanism,” the court focused on the fact that the funding comes “directly from the Federal Reserve, which is itself outside the appropriations process through bank assessments.” Thus, it reasoned that “Congress did not merely cede direct control over the Bureau’s budget by insulating it from annual or other time limited appropriations. It also ceded indirect control by providing . . . a double insulation from Congress’s purse strings.” This “novel cession by Congress of its appropriations power” was “unprecedented” according to the court because the Bureau Fund is held completely “off the books” to the point where “the Bureau may ‘roll over’ the self-determined funds it draws ad infinitum.” The court also “underscore[d]” its point by noting that “Congress expressly renounced its check” on Executive power through the Appropriations Clause because it expressly renounced Congressional oversight of the CFPB’s basic funding mechanism.

The Community Financial Services court also found that this “constitutional problem is more acute because of the Bureau’s capacious portfolio of authority.” Where the CFPB is “[a]n expansive agency insulated (no, double-insulated) from Congress’s purse strings, expressly exempt from budgetary review, and headed by a single Director removable at the President’s pleasure is the epitome of the unification of the purse and sword in the executive—an abomination the Framers warned ‘would destroy that division of powers on which political liberty is founded.’”

The Fifth Circuit also rejected the CFPB’s arguments in defense of the funding mechanism. First, the court stated that Congress’s enacting the scheme did not satisfy the Appropriations Clause because a mere law was not enough under its interpretation of the Clause, and instead, “an appropriation is required.” This position, the court noted, was untenable because it would “mean[] that no federal statute could ever violate the Appropriations Clause because Congress, by definition, enacts them.” The court similarly rejected what it called the “converse argument, that Congress can alter the Bureau’s perpetual self-funding scheme anytime it wants, curing any infirmity” because Congress’s ability to correct the unconstitutional structure did not “excuse the underlying constitutional problem” that existed in the first place.

The Fifth Circuit thus concluded that “[t]he Bureau’s funding apparatus cannot be reconciled with the Appropriations Clause and the clause’s underpinning, the constitutional separation of powers.” Turning to the remedy, the court held that the Payday Lending Rule was “the product of the Bureau’s unconstitutional funding scheme” and it therefore held that the plaintiffs should have been granted summary judgment on this question and vacated the 2017 Payday Lending Rule “as the product of the Bureau’s unconstitutional funding scheme.”

The Supreme Court granted certiorari on the following question: “Whether the court of appeals erred in holding that the statute providing funding to the Consumer Financial Protection Bureau (CFPB) . . . violates the Appropriations Clause . . . and in vacating a regulation promulgated at a time when the CFPB was receiving such funding.” The Court heard argument in October 2023.

CFPB v. Law Offices of Crystal Maroney, P.C.

When presented with the opportunity to rule on the constitutionality of the CFPB’s funding mechanism, the Second Circuit reached the opposite result and expressly distinguished Community Financial Services. In facts similar to those underlying Seila Law, which arose from a law firm’s challenge to a CFPB civil investigative demand (“CID”), the Law Offices of Crystal Maroney objected to a CID issue to it and the CFPB filed an action to enforce the CID. After the decision in Seila Law, the CFPB Director ratified the issuance of the CID and the filing of the enforcement action to cure the constitutional deficiency identified by the Supreme Court. Nevertheless, the respondent law firm attacked the constitutionality of the CID for largely the same reasons that CFSA did in the Fifth Circuit case, including the argument that “the funding structure of the CFPB violates the Appropriations Clause of Article I of the Constitution.”

The Second Circuit rejected all of the respondent’s arguments, holding that the CFPB properly issued the CID and that its funding structure “is not constitutionally infirm under . . . the Appropriations Clause.” The court rejected the respondent’s argument that “the CFPB’s funding structure violates the Appropriations Clause because the Executive Branch ‘decides how much funding is reasonably necessary’ to carry out the agency’s mission, without any meaningful guidance, limitation, or control by the Legislative Branch.” Instead, the court accepted the CFPB’s argument that its funding structure is consistent with the Appropriations Clause because “the CFPB’s funding structure was authorized by the CFPA—a statute passed by Congress and signed into law by the President.” The Second Circuit held that the statutory ceiling set by the CFPA on the CFPB’s funding, and that exceeding such a ceiling requires the CFPB to seek any additional monies “through the annual appropriations process,” was an adequate legislative check such that the CFPB’s funding was “authorized by Congress and bound by specific statutory provisions.”

With respect to the CFSA decision, the Second Circuit could not “find any support for the Fifth Circuit’s conclusion in Supreme Court precedent.” To the contrary, “the [Supreme] Court has consistently interpreted the Appropriations Clause to mean simply that ‘the payment of money from the Treasury must be authorized by a statute.’” The Second Circuit also rejected its sister circuit’s “reasoning in the Constitution’s text” because the text did not “require[] that agency appropriations be ‘time limited’ or that appropriated funds be drawn from a particular ‘source.’” Rather, “the absence of any restrictions in the Appropriations Clause other than that Congress must authorize government funding in a prior statute” precluded the limitations “that the Fifth Circuit chose to impose.”

The Second Circuit also rejected the Fifth Circuit’s historical and structural interpretation. It held that the funding structure provided for the CFPB was “[c]onsistent with the historical practices of English, colonial, and state governments that formed the basis of the Founders’ understanding of the appropriations process at the time of the Constitution’s enactment” such that Congress’s specification of the CFPB’s “purpose,” “limit,” and “the fund” was sufficient to satisfy constitutional prerogatives. The respondent law firm filed a writ of certiorari on the question of whether the funding mechanism violates the Appropriations Clause and renders the CID unenforceable, which is still pending as of this writing.