Second Circuit Court Finds CFPB's Funding Mechanism Constitutional
Commentary by Sebastian Souchet
The U.S. Second Circuit Court of Appeals determined that the CFPB’s funding structure is constitutional.
In CFPB v. Law Offices of Crystal Moroney, P.C., the CFPB petitioned the Court to enforce a civil investigative demand ("CID") that it had served to a law firm whose clients were primarily involved in the practice of collecting debt. While the CFPB petition was pending, the U.S. Supreme Court issued its ruling in Seila Law LLC v. CFPB that the statutory provision protecting the position of the CFPB Director from removal was an unconstitutional limitation on the U.S. President’s removal power. Following the Supreme Court’s ruling, and subsequent concerns over the validity of the CFPB's enforcement action, the CFPB filed a notice to ratify the CID against the law firm. The U.S. District Court for the Southern District of New York granted the CFPB’s petition to enforce the CID.
In response, the law firm appealed the decision by the U.S. District Court for the Southern District of New York and argued that the CID is not valid because (i) the Supreme Court’s Opinion in Seila Law v. CFPB made the CID void, (ii) the CFPB’s funding structure violated the Appropriations Clause of Article I of the Constitution, (iii) by creating the CFPB’s funding structure, Congress violated the nondelegation doctrine which would have directed the agency on how it should spend its budget, and (iv) the CID creates an “unduly burdensome administrative subpoena.”
In a unanimous decision, the Second Circuit Court rejected the law firm’s claims, asserting that the CID was not void because the CFPB Director was validly appointed, the CFPB’s funding is constitutional, and the CID served to the law firm was not unduly burdensome.
Commentary
Previously, the U.S. Court of Appeals for the Fifth Circuit ruled in October 2022 in Community Financial Services Association of America v. CFPB that the CFPB’s funding mechanism violated the Constitution’s Appropriations Clause. With the latest ruling from the Second Circuit, there now formally exists a circuit split on the issue. This constitutional question will eventually be resolved (at least in part) by the Supreme Court, as the Supreme Court is set to hear the CFPB’s appeal of the Fifth Circuit ruling in its October term.
The Fifth Circuit had determined that Congress ceded both direct and indirect control over the CFPB’s budget by (i) insulating the CFPB from annual or other time limited appropriations, and (ii) providing that the CFPB’s funding be drawn from the Federal Reserve System, which is itself outside of Congress’s appropriations process. The Fifth Circuit concluded that, among other things, Congress had “run afoul of the separation of powers embodied in the Appropriations Clause” because it effected a “double insulation from Congress’s purse strings” (CFSA v. CFPB, p. 30).
In CFPB v. Law Offices of Crystal Moroney, the Second Circuit determined that it could not find “any support for the Fifth Circuit’s conclusion in Supreme Court precedent” (at p.15). Relying heavily on the 1937 Supreme Court decision Cincinnati Soap Co. v. United States, the Second Circuit asserted that the Supreme Court consistently interpreted the Appropriations Clause to mean simply that the Appropriations Clause requires no more than a statute authorizing the payment of money from Treasury (at pp. 15-16). Thus, for the Second Circuit, Congress’s appropriation of the CFPB’s funding through enactment of the Consumer Financial Protection Act is sufficient for the CFPB’s funding mechanism to be held constitutional.
As part of its legal analysis, the Second Circuit determined that nothing in the text of the Appropriations Clause requires agency appropriations to be either time limited or drawn from a particular source (at p. 16). Instead, the absence of specific limits or restrictions on the Appropriations Clause, other than the requirement of a congressional authorizing statute, illustrated to the Second Circuit that the Constitution’s Framers did not intend for there to be any such limits. Furthermore, addressing the Fifth Circuit’s historical review of the Appropriations Clause, the Second Circuit concluded that “[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, Congress specified ‘the purpose, the limit, and the fund’ of its appropriation for the CFPB” (at p. 19).
Ultimately, the circuit split on this issue raises a number of interesting and important constitutional questions to consider, including:
- whether there is a distinction under the Constitution between “mere enabling legislation” and “appropriation” (as delineated by the Fifth Circuit);
- whether the Appropriations Clause is properly viewed through the lens of separation of powers doctrine;
- whether Congress can violate the Appropriations Clause by passing a statute on spending and delegating spending authority, given the seemingly broad holding of Cincinnati Soap Co. v. United States; and
- whether the constitutionality of the CFPB’s funding mechanism calls into question the constitutionality of every regulatory action the CFPB has taken since its creation.
Related Articles
-
The Supreme Court will review a Fifth Circuit ruling that the CFPB "funding mechanism" violates the Constitution's separation of powers clause.
-
The U.S. Court of Appeals for the Fifth Circuit ruled that the CFPB's independent funding process which runs through the Federal Reserve rather than through congressional appropriations violates the Constitution's separation of powers clause.
