After Oral Argument, Justices Seem Likely to Preserve CFPB Funding

The CFPB appears well poised to rebuff a challenge to its funding structure after the Supreme Court held oral argument on the issue on October 3.  I attended the oral argument and summarized some of my observations, thoughts, and predictions here.  

At issue in the case is the manner in which the CFPB is funded.  The agency is organized under the Federal Reserve System and is not subject to Congress’s annual appropriations process.  Instead, the director requests operating funds from the Federal Reserve each year up to a statutory cap of 12% of the Fed’s overall budget.  The Federal Reserve System, in turn, is funded mainly through assessments on financial firms and certain interest income on investments; it too is not subject to regular Congressional appropriations.  

Trade associations led by the Consumer Financial Services Association (CFSA) challenged the Bureau’s payday lending rule by arguing, among other things, that the CFPB’s unique funding structure violates the constitutional provision requiring Congress to appropriate funds for executive agencies.  As the litigation moved through the federal courts, the Fifth Circuit accepted CFSA’s argument and castigated Congress for “abandoning” its responsibility under the appropriations clause by creating a funding framework that is “double-insulated” from Congress.  CFSA v. CFPB, 51 F.4th 616, 639 (5th Cir. 2022).  The Fifth Circuit went further, concluding that the constitutional defect demanded vacatur of the payday rule.  The Supreme Court granted the CFPB’s request for review.

After oral argument, the high court seems likely to reverse the Fifth Circuit’s decision on the appropriations clause issue, and I doubt it will be close.  Justices Barrett, Thomas, and Kavanaugh all seemed skeptical of CFSA’s position.  Chief Justice Roberts asked probing questions of the solicitor general, but I would not be surprised if he ultimately sided with the CFPB.  Justice Gorsuch, sitting next to Barrett, seemed to align with her.  He has a history of cynicism toward the administrative state generally, but he seemed to appreciate the novelty of the appropriations clause challenge and I would not pigeon-hole him here.  Justice Alito was the most critical of CFPB’s position but even he appeared nonplussed at times with CFSA’s arguments. 

Bottom line: I see the CFPB winning this case easily.  In the immediate aftermath of the argument, I suggested the vote could be 9-0 but more likely 8-1 or 7-2.  After a few days of reflection, I stand by that prediction.  I add, however, another prediction—that we’ll see some number of concurring opinions among the majority.  This is a novel area; no court has ever struck down an act of Congress on the theory that it violates the appropriations clause, and there are few cases even to consider it.  The justices were plainly intrigued by the concept and at argument explored through hypotheticals how such a challenge could succeed in the future.  I expect several justices will attempt to articulate some standard for analyzing appropriations clauses challenges, even though most if not all of them will view the CFSA funding structure as safely within constitutional limits.  

My vote tally prediction flows from my assessment of the justices’ questions, comments, and demeanor at argument.  Beyond that, it was telling that the issue of remedy was barely touched upon.  I suspect that was because the entire room understood that the CFPB will be winning on the appropriations clause issue and any talk of remedy is moot.  It was Justice Sotomayor who raised the remedy issue, once to each advocate.  She will certainly side with the CFPB here.  Her raising the remedy issue was less an attempt to earnestly determine what the Court should do after striking the down the funding scheme, and obviously more an effort to demonstrate that ruling for the CFPB on the merits carries an important fringe benefit for the Court—the ability to side-step the weighty task of determining whether to strike down as unconstitutionally tainted not just the payday rule but everything the CFPB has done since it opened its doors in 2011.  

The solicitor general argued that the retroactive remedy employed by the Fifth Circuit “would be profoundly disruptive” and pointed to the Mortgage Bankers Association amicus brief for support (it warned that nationalizing the Fifth Circuit’s rationale would trigger chaos in the mortgage markets).  She also noted that a prospective remedy alone would halt enforcement of the payday rule, amounting to a “meaningful form of relief” for CFSA.  Counsel for CFSA distanced the trade association from the Fifth Circuit’s decision on remedy.  He said the circuit court’s rationale did not “stand[] on its own terms” because a win for CFSA on the appropriations clause will require going back to Congress for “a valid appropriation,” which in turn, he argued, will provide Congress an opportunity to “ratify” prior Bureau actions.  The discussion on remedy never went far and, again, I view that as a harbinger for a CFPB victory on the appropriations clause issue. 

Throughout the argument, the solicitor general was very persuasive and knowledgeable on Congress’s historical practice going back to the founding of the country (something this Court emphasizes at every opportunity when it comes to constitutional interpretation).  On rebuttal in particular she was very effective.  She made numerous references to the funding arrangement for early executive agencies, especially the Customs Service, which received a standing appropriation without a cap.  She also liberally invoked the constitutional provision limiting Congress’s ability to fund the Army beyond two years.  That provision demonstrates that the founders had no durational concerns with other (non-Army) appropriations, she argued.  

Counsel for CFSA landed a few rhetorical points but struggled to articulate a governing principle that results in vitiating the CFPB’s funding framework without affecting other agencies like the FDIC and the Federal Reserve.  The SG called this CFSA’s attempt to “gerrymander a rule” in their favor.  CFSA’s counsel held to the position that to be a constitutionally valid appropriation, Congress must specify the amount of the appropriation.  On rebuttal, the SG noted that the government counted 400 instances this year alone where Congress declined to specify a spending amount but instead set a cap (as it did with the CFPB).  CFSA also argued that by arranging to fund the CFPB “in perpetuity” Congress wrongly gave up its authority to serve as “a continuing check on executive power.”  Justice Kavanaugh’s questioning on this issue made clear that Congress could change the CFPB funding mechanism any time, and CFSA conceded as much.  At that point, none of the justices seemed concerned with the “perpetual” nature of the funding.  Counsel for CFSA was left to lean solely on the notion that Congress must specify an appropriation amount—a limp argument in light of the historical record. 

The discussion at times centered on a hypothetical situation (discussed initially in the briefs) in which Congress grants the president power to spend one quadrillion dollars however he sees fit—the implication being that at some point Congress could be seen as unconstitutionally transferring the power of the purse to another branch.  There was a sense among all justices that we are a long, long way from that.  The CFPB is among the smallest executive agencies, its funding (about $700M per year) is still subject to a cap, and Congress can change it at any time.  Justice Kagan may have previewed the prevailing opinion when she noted that history reveals “enormous variation” in how Congress makes appropriations, implying that the uniqueness of any one approach does not render it unconstitutional.  Whether and how Congress could ever run afoul of any constitutional restraints on its appropriations power will remain the quadrillion dollar question.  But in this case at least, it seems the CFPB has avoided another existential threat.