Graeme Sloan/Sipa USA via AP Images
The Supreme Court in Washington is seen on October 2, 2023.
The Supreme Court heard arguments today in a case that could threaten all financial activity in the country. The plaintiffs, an association of payday lenders, have asserted the Consumer Financial Protection Bureau’s funding mechanism, which involves a capped appropriation from the Federal Reserve (which formerly conducted consumer financial protection activities), is unconstitutional. And while oral arguments are an imperfect indicator of the final result, the justices appeared fairly unconvinced.
“How do you decide how much is too much?” asked Justice Amy Coney Barrett, who repeatedly questioned the premises of Noel Francisco, the former solicitor general under Trump who argued the case for the Community Financial Services Association of America (the payday lenders). As several justices pointed out, the courts have no ability to decide whether a capped appropriation is, as Francisco repeatedly claimed, too high, and whether therefore Congress was giving over to the executive the power to combine “sword and purse” in appropriating government funding.
Justice Brett Kavanaugh, on multiple occasions, pointed out that there was nothing permanent about the CFPB’s funding mechanism. “Congress could change it tomorrow,” he said. “There’s nothing perpetual here.”
The case, which advanced through the ultraconservative Fifth Circuit, specifically challenges a payday lending rule that the CFPB finalized, but the lower court ruled that every single rule that passed through the CFPB, all of which was conducted through funding deemed unconstitutional, would have to fall, including a lot of rules banks would want to see upheld, like safe harbors that allow for the smooth functioning of mortgage markets. In an amicus brief, the Mortgage Bankers Association warned that calling into question all CFPB rules could “destabilize the mortgage market.” Solicitor General Elizabeth Prelogar, who argued the case for the CFPB, referred to that amicus during oral arguments.
The Dodd-Frank Act established the CFPB and placed it inside the Federal Reserve, which had previously undertaken its functions. The CFPB director asks the Fed for transfers that are “reasonably necessary” to carry out its operations. This stands outside of congressional appropriations, though Congress capped the annual amount that the CFPB can receive at $600 million in 2009, then adjusted upward for inflation. The CFPB spent $622 million in fiscal year 2022, where its cap was $734 million.
Francisco argued that this violates the appropriations clause of the Constitution, and transfers Congress’s determination of what the government can spend to the executive, as long as it doesn’t reach a number that, Francisco said, was higher than the CFPB would ever spend.
Justice Elena Kagan pointed out that $600 million, the initial cap, is a “rounding error” in the federal budget. Justice Ketanji Brown Jackson further pointed out that nothing in the Constitution says that the amount appropriated has to be a fixed amount. Indeed, about 60 percent of the federal budget is delivered through non-fixed appropriations. And numerous federal agencies, particularly the financial regulators, are outside of congressional appropriations, surviving on user fees from the entities they regulate, including the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, and the Federal Reserve.
It’s hard to see five votes for doing away with the CFPB’s funding structure given those oral arguments. But anything is possible.
“If you’re saying that Congress must supply a specific number, with a little wiggle room,” Kagan noted, “that’s a more fundamental argument that’s been decisively rejected by history … You’re just flying in the face of 250 years of history.”
Prelogar said that text and history showed that the CFPB’s funding structure was in line with constitutional sanction and past practice. She said that its capped amount was far lower than that of other agencies in the financial regulatory space. And she noted that there have been standing appropriations relying on sources of revenue other than Congress since the country’s founding. “This court should reject respondents’ attempt to gerrymander a rule to fit the CFPB alone,” she said.
While the most conservative justices, Clarence Thomas and Samuel Alito, asked Prelogar what her limiting principle was—in other words, what kinds of things Congress could do that would be unconstitutional—the concerns with her arguments were relatively mild. Chief Justice John Roberts did say that it was “unusual” for the CFPB to draw money from the Fed, which draws money from member banks. “It enhances the power of the executive,” he says. But others were really only focused on the upper bound limit of the government’s theory of the case. “I understand the practical realities,” Justice Neil Gorsuch conceded. (Alito later said he was concerned about the limiting principle “on both sides.”)
The justices were more questioning of Francisco’s argument. Even Thomas questioned the premise of the case. “I get that it’s unique, odd … But not having gone this far before is not a constitutional problem. It doesn’t prove your case.”
Francisco was at pains to define appropriations as telling the government what to spend, and that this differs from that because the CFPB could spend whatever it wants up to a cap. But the justices struggled to find any textual basis for that. “Standing appropriations aren’t unconstitutional,” Barrett said, referring to an appropriation that continues for an indefinite period. “How long before a standing appropriation becomes a problem?”
Justice Sotomayor was more direct. “I’m trying to understand your argument and I’m at a total loss.”
Francisco claimed it was the combination of the lack of a set number that “allows Congress to transfer appropriations power to the executive branch for a period of time.” He responded to the idea that the Fed, the FDIC, the OCC, and others would fail his test by saying they are “limited to what they can collect from those they serve and regulate.” (Ultimately, the CFPB’s appropriations come from the Fed, whose funding comes from member banks, which are those they serve and regulate.)
But as Jackson came back to, Congress still holds the power of the purse. “Congress could, as Justice Kavanaugh keeps saying, take it back,” she said. And she added that the separation-of-powers issue at play would be coming from the Court. “How do we avoid the judiciary becoming a super-legislator, telling the Congress, agency by agency, whether thumbs up or thumbs down?”
It’s hard to see five votes for doing away with the CFPB’s funding structure given those oral arguments. But anything is possible. And an adverse ruling would call into question the functioning of consumer financial markets that are worth trillions of dollars. Even the future of Medicare and Social Security, which aren’t funded with specific appropriations, would be murky. The destruction of the administrative state would continue apace. But that just doesn’t seem very likely from what went on at the Court today.
