A recently-issued decision by the U.S. Supreme Court in Consumer Financial Protection Bureau vs. Community Financial Services Association of America may be the final nail in the coffin for community banks (and other CFPB-regulated entities) seeking to halt the CFPB by challenging the bureau’s constitutionality. In Community Financial Services, the Supreme Court threw ice cold water on the latest challenge to the bureau’s constitutionality, a challenge to the CFPB’s funding leveled by dissatisfied payday lenders. Immediately following the Supreme Court’s decision to save the bureau from extinction and overturn a contrary Fifth Circuit decision, CFPB Director Rohit Chopra said the Supreme Court’s decision “made it clear the ‘CFPB is here to stay’ …[a]nd as we have done since our inception, the CFPB will continue carrying out the vital consumer protection work Congress charged us to perform for the American people.”
Constitutional challenge
In Community Financial Services, the Supreme Court rejected multiple arguments made by the trade associations representing payday lenders and credit-access businesses asserting the bureau’s funding mechanism violated the Appropriations Clause of the U.S. Constitution. The lenders and businesses contended, among other things, that the way the CFPB is funded — directly from earnings of the Federal Reserve, rather than through an annual Congressional appropriation — violated the Appropriations Clause and, as such, the bureau should no longer exist.
The U.S. Court of Appeals for the Fifth Circuit agreed with the challengers, which initiated a nationwide halt on CFPB litigation. The Fifth Circuit’s primary rationale was appropriations must not only place a limitation on an agency’s funding but must also “meet the Framers’ salutary aims of separating and checking powers” to ensure accountability.
Supreme Court decides funding mechanism is constitutional
In a Supreme Court opinion delivered by Justice Clarence Thomas and joined by justices from both the liberal and conservative wings of the Court, the Court deemed the CFPB’s funding mechanism constitutional. The Supreme Court held the CFPB’s funding mechanism is constitutional because it is permitted by three sources of law: (1) the text of the Appropriations Clause; (2) the history against which the Appropriations Clause was enacted; and (3) congressional practice immediately following ratification.
First, the Court opined the Constitution’s use of the term “appropriation” provides insight as to its meaning. The Court explained the Appropriations Clause makes clear that an appropriation must authorize withdrawals from a particular source — the public treasury. And, funds can only be drawn from that source “in consequence of appropriations made by law.” The Court took note that, at the time of the Constitution’s ratification, “appropriation” meant “[t]he act of sequestering, or assigning to a particular use or person, in exclusion of all others.” In turn, the Court reasoned that the appropriation of public money to fund the CFPB from the Federal Reserve by Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act met the description of the type of appropriation authorized by the Appropriations Clause.
Second, the Court indicated that pre-founding history suggests an identified source and purpose are all that is required for Congress to make a valid appropriation. Justice Thomas spent several pages going through the appropriations practice by Parliament, the colonies, and early state legislatures. For Justice Thomas, the origins of the Appropriations Clause confirmed that appropriations needed to designate particular revenue for an identified purpose but also that early legislative bodies exercised a wide range of discretion. The Supreme Court reasoned that the CFPB’s funding mechanism mirrored historical practices, and rejected the trade associations’ argument that the mechanism violated that Appropriations Clause because the bureau decides the amount of annual funding it draws from the Federal Reserve System.
Third, the Court explained that practices from the First Congress support the constitutionality of the CFPB’s funding mechanism. Many early appropriations laws passed by Congress made annual lump-sum grants for the government’s expenses. The Supreme Court explained that the CFPB’s funding mechanism emulated other agencies, rejecting the trade associations’ argument that both Chambers of Congress must periodically agree on an agency’s funding. The Court noted Congress has also allowed for indefinite funding from revenue collected, evidenced by the Customs Service and Post Office open-ended fee- and commission-based funding schemes.
In sum, looking primarily at historical analogs and practice around the time the Constitution was drafted, the Supreme Court reversed the Fifth Circuit’s judgment and held the CFPB’s funding mechanism meets the requirements imposed by the Appropriations Clause.
Takeaways for community bankers
The CFPB has existed for over 10 years and has rebuffed multiple challenges to its constitutionality. Given this latest Supreme Court opinion, it is unlikely that bringing future, novel constitutionality arguments will serve as an effective scare tactic when trying to negotiate with CFPB attorneys or examiners, nor gain traction in judicial proceedings.
Additionally, following this decision, CFPB litigation across the country will resume. Investigations, examinations and ongoing rulemakings will also proceed without the threat of the Supreme Court imminently stepping in. It is reasonable to expect there will be an influx of new enforcement actions leveled by the CFPB, perhaps those that were in a holding pattern until this decision was issued.
Moreover, with the possibility President Joe Biden may be replaced by former President Donald Trump, the Biden appointees at the bureau will be incentivized to move quickly to insulate any rulemaking or other actions from reversal pursuant to the Congressional Review Act, which permits the president to rescind rules promulgated by executive agencies within the 60 days prior to taking office.
The result is also bespoke of a Supreme Court potentially worried of political or reputational blowback should it dismantle a large financial regulatory agency. Over the past decade, the CFPB has asserted itself as a primary regulator of financial services in the U.S., including by issuing rules and other binding regulations. Should the Court have decided the bureau’s funding mechanism was unconstitutional, it is unclear what the effect would have been on the validity of the CFPB’s past rulemakings and enforcement actions. Moreover, a ruling against the CFPB could have been viewed as a boon to the payday lending industry, one of the industries the bureau has vigorously policed and regulated.
Ultimately, if your bank is currently under investigation, in the midst of an examination or is regulated by the CFPB, the bureau is not going away any time soon. And, it is imperative banks stay up to speed with the latest CFPB rulemaking and enforcement actions. In a virtual press conference held May 17, the CFPB noted it is “firing on all cylinders” to get new enforcement staff hired, trained and in the field.
Goodrich is a partner with Miami-based law firm Holland & Knight LLP, and Cornelius is an associate with the firm.