Supreme Court Rules CFPB Funding Structure is Lawful
In a 7-2 decision, the Supreme Court ruled that the CFPB's statutory funding mechanism satisfied the requirements of the Appropriations Clause of the Constitution.
The Court considered whether the CFPB's funding mechanism, which draws directly from the Federal Reserve System an amount that its Director deems "reasonably necessary to carry out" the CFPB's duties, rather than through annual appropriations, was constitutional. The Court ruled that the funding mechanism was constitutional, as it satisfies the requirement that an appropriation must designate a source of funds and their intended purpose. The Court stated that its decision was supported by "the Constitution's text, the history against which that text was enacted, and congressional practice immediately following ratification."
The matter originated from "payday lenders and credit-access businesses" that challenged CFPB regulations on high-interest consumer loans. In a 2022 decision, the Fifth Circuit held that the CFPB’s funding mechanism violated the Appropriations Clause. In a separate case, the Second Circuit reached the opposite result in 2023, holding that the CFPB's funding structure does not violate either the Appropriations Clause or the nondelegation doctrine. The Supreme Court's decision reaffirms the constitutionality of the CFPB's funding structure, thereby maintaining the agency's independence in financial regulation.
Commentary
As a result of the injunction, the CFPB's final rule is stayed pending resolution on the merits. This district court decision marks yet another procedural turn in this litigation challenging the CFPB's credit card penalty fees final rule. Judge Pittman initially had entered orders denying the plaintiffs’ motion for expedited consideration of their preliminary injunction motion and transferring the case to the U.S. District Court for the District of Columbia. However, the Fifth Circuit then vacated the transfer order and issued a writ of mandamus directing the district court "to reopen the case and give notice to D.D.C. that its transfer was without jurisdiction and should be disregarded." The Fifth Circuit also entered an order denying the CFPB's petition for a panel rehearing to reconsider the panel’s order vacating the district court's order that transferred the case to the U.S. District Court for the District of Columbia and issuing a writ of mandamus directing the district court to reopen the case. Additionally, the Fifth Circuit vacated Judge Pittman's order denying the plaintiffs' motion for expedited consideration of their preliminary injunction motion and ordered him to rule on the preliminary injunction motion by May 10. In that vein, while some may view the substance of Judge Pittman's latest decision to be surprising, the timing of this ruling – issued right ahead of the May 14 effective date of the CFPB's final rule – was expected.
It's too early to tell whether this ruling poses any long-terms risks to the fate of the CFPB's final rule. In granting the preliminary injunction, Judge Pittman found that that plaintiffs had established a likelihood of success on the merits based on the Fifth Circuit's decision in CFSA v. CFPB which held that the CFPB's funding mechanism violates the Appropriations Clause of the U.S. Constitution. Furthermore, the court further found that the balance of interest test weighed in the plaintiffs' favor because if the court denied the injunction, "[p]laintiffs face an enormous undertaking based upon a potentially unconstitutional rule," whereas if the court granted the injunction "the CFPB is relatively unaffected because the Final Rule has not yet gone into effect." We note that the U.S. Supreme Court granted the CFPB's cert petition to review the Fifth Circuit's CFSA v. CFPB decision, with oral argument in the case taking place on October 3, 2023, and a ruling expected by the end of next month. Although Judge Pittman did not address the plaintiffs' other arguments that the CFPB's rule violates the Truth in Lending Act, the CARD Act and the Administrative Procedure Act, he did comment that these other arguments are "compelling," which may signal his willingness to continue the preliminary injunction and eventually grant summary judgment in favor of the plaintiffs and against the CFPB on one or more of the alternative grounds should the Supreme Court decide that the CFPB is constitutionally funded (or the Supreme Court affirms the Fifth Circuit decision but does not make its decision retroactive). For its part, the CFPB said in a statement that it will continue to "defend this rule," without specifying what the agency's next move will be. In any case, it is worth noting that the plaintiffs originally asked for a decision by March 26 so credit card issuers could appropriately prepare for sending notices of the rule change to millions of card users. Since this decision was issued right before the effective date of the rule, this is not a total win for industry as card issuers have instead likely incurred some compliance costs.
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