In the aftermath of the 2008 financial crisis, Congress consolidated the task of enforcing federal consumer finance laws into one agency. It created the Consumer Financial Protection Bureau to protect consumers in the marketplace and, in part, regulate predatory financial products, like the high-risk mortgages that had contributed to the crash. As part of its efforts to foster the agency’s independence, funding for the CFPB would come not from the annual appropriations process in Congress, but instead from the Federal Reserve, which itself is funded through the fees that it charges depositors for the services that it provides. On Oct. 3, the Supreme Court will hear oral argument in a case brought by groups representing the payday-lending industry, who argue that this funding scheme is instead the CFPB’s fatal flaw.

The stakes in the case are high. The Biden administration, which represents the CFPB, warns that a ruling for the challengers could call into question not only the payday-lending rule at the center of this case but also a wide swath of other regulations that protect consumers. And more broadly, the case is the first of several on the court’s docket this term in which the justices will weigh in on the division of authority between the three branches of government, as well as the power of administrative agencies.

Created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB’s powers include the authority to issue rules barring unfair, deceptive, or abusive acts that target consumers. In 2017, the agency issued a “payday lending” rule that, as relevant here, bars lenders covered by the rule from trying to withdraw a repayment from a borrower’s bank account when their first two efforts fail because the borrower does not have enough money in the account. When it issued the rule, the CFPB explained that lenders will often try to withdraw funds several times on the same day and then, if unsuccessful, try again in the days that follow, leading to large penalties and fees for the borrower.

Two industry groups representing payday lenders went to federal court in 2018 to challenge the rule. After a federal district court in Texas upheld the rule, the challengers appealed to the U.S. Court of Appeals for the 5th Circuit. A panel made up of three judges appointed by former President Donald Trump rejected the challengers’ argument that the rule violated the federal laws governing administrative agencies, but it agreed that the funding structure of the CFPB was unconstitutional.

The court of appeals pointed to Article I, Section 9 of the Constitution, known as the appropriations clause, which instructs that “[n]o money shall be withdrawn from the Treasury, but in Consequence of Appropriations made by Law.” In this case, the court of appeals contended, the CFPB’s funding is “double-insulated” from Congress’s power under the appropriations clause: Not only does the CFPB receive its funding from the Federal Reserve, rather than through the normal appropriations process, but Congress does not determine the amount of that funding. Instead, the CFPB requests the amount that it needs from the Fed and automatically receives the money, subject to a cap imposed by Congress. “Whatever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it,” the court of appeals determined, because the CFPB is “no longer dependent and, as a result, no longer accountable to” Congress.

Turning to the question of the remedy for the violation of the appropriations clause, the court of appeals concluded that the CFPB could not have issued the payday-lending rule without its unconstitutional funding scheme. As a result, the court of appeals vacated the rule. The Biden administration came to the Supreme Court in November, and the justices agreed to weigh in.

Congress’s authorization

Defending the funding mechanism, the CFPB contends that the appropriations clause simply prohibits money from being paid out of the Treasury, and federal officials from spending public funds, unless Congress has passed a law authorizing that funding. That is precisely what Congress did for the CFPB, the agency contends: It provided that the CFPB will receive funding every year from the Fed’s earnings, up to the limit identified by Congress, “and further specified when and how the Bureau may spend those funds.”

The validity of Congress’s funding for the CFPB is confirmed, the agency argues, in a separate provision of the Constitution that specifically bars Congress from creating a standing appropriation for the military, instead requiring Congress to appropriate money at least every two years. This “special exception for army appropriations,” the CFPB contends, “thus proves the baseline rule under the Appropriations Clause: Congress has broad authority to determine the specificity, duration, and source of the appropriations it makes by law.”

The CFPB notes that there is also a long history of Congress funding federal institutions through fees or assessments, rather than the traditional appropriations process, beginning in the 18th century with the First Bank of the United States, the post office, and the U.S. Mint. And the CFPB’s funding statute is “not materially distinct from” those of other financial regulators such as the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve Board itself, the CFPB asserts. The only difference is that the funding for those regulators comes from fees or assessments that the agencies themselves collect, while the CFPB’s funding comes from the money that the Fed collects. But nothing in the appropriations clause requires that funding come from a particular place, the CFPB stresses.

The CFPB pushes back against the Fifth Circuit’s suggestion that the agency is “double-insulated” from congressional control. Congress, the agency emphasizes, can change how the CFPB is funded or how much it receives at any time, simply by passing a statute.

The CFPB cautions that if the Fifth Circuit’s ruling is allowed to stand, it would threaten “profound disruption by calling into question virtually every action the CFPB has taken in the 12 years since its creation.” But the decision could have ripple effects on the rest of the federal budget as well, the CFPB adds, if the court agrees with the challengers either that the appropriations clause requires Congress to “specify the precise dollar amount to be spent, or that multi-year appropriations are suspect,” because Congress funds a wide range of programs – including Social Security, unemployment assistance, interest payments on the national debt – without specifying a particular amount of money for those programs.

Executive overreach

For the challengers, this is a case about checks and balances. The Founding Fathers, they say, gave Congress “the power over the purse” to ensure that the other branches of government, and in particular the executive branch, did not become too powerful. But in 2010, they argue, Congress “abdicated the power of the purse” and violated the separation of powers when it established the CFPB’s “unique funding scheme.”

The challengers push back against the CFPB’s contention that its funding scheme has its roots in both past and current practice. “Although the Bureau cobbles together a handful of purportedly analogous schemes, not one involves permanently eliminating all fiscal oversight” by both Congress and the people, the challengers write. From the beginning of the country’s history until now, the challengers emphasize, no other agency “was permanently ceded the power to choose the amount of its own governmental funding for core executive powers.” At the very least, they assert, the appropriations clause requires Congress to allocate a specific amount of funding for an agency, “rather than letting the Executive Branch choose what it deems ‘reasonably necessary.’”

If the CFPB’s funding scheme is constitutional, they caution, the implications would be breathtaking: Congress could “allocate, each year forever, up to a trillion dollars to an agency like the FBI or FTC, or even up to a quadrillion dollars for the President to fund as he deems fit the entire federal government besides the Army.”

Moreover, the challengers add, the other agencies that the CFPB cites as having similar funding schemes are also very different not only in terms of the CFPB’s “unaccountable funding” but also its “sweeping powers.” Unlike the other financial regulators, the challengers say, the CFPB “acts as a mini legislature, prosecutor, and court.”

Finally, the challengers write, the CFPB’s argument that the agency is politically accountable despite its funding scheme because Congress can at any point pass legislation to change that scheme “flips the appropriations baseline.” Under the regular appropriations process, they reason, Congress would have to approve the CFPB’s budget each year. But under the current system, they continue, the CFPB is automatically funded, and “both chambers must agree, and persuade or override the President, to take the strings back from the CFPB.”

The two sides also disagree about what the Supreme Court should do if the justices uphold the 5th Circuit’s determination that the funding mechanism is unconstitutional. The CFPB contends that even if the funding mechanism is unconstitutional, that is no reason to vacate the 2017 payday-lending rule. Three years ago, in Seila Law v. CFPB, the agency notes, the Supreme Court held that restrictions on the removal of the CFPB director were unconstitutional. But in that case, the agency stresses, the court made clear that the normal practice when it determines that a provision in a statute is unconstitutional is to separate the unconstitutional portion of the statute and leave the rest in place.

In this case, the CFPB argues, the court of appeals should have followed that practice and asked whether it could fix the violation of the appropriations clause by carving out the provisions of the funding statute that it identified as particularly problematic. At most, the CFPB contends, the court of appeals should have barred the agency from using its funds to enforce the payday-lending rule against the challengers and their members until Congress gives the CFPB funding from another source. But instead, the CFPB simply concluded that the entire funding mechanism was unconstitutional, and that the payday-lending rule was therefore invalid as well.

The CFPB adds that invalidating the payday-lending rule would also inflict “significant disruption on the Nation’s economy and the consumers, financial institutions, regulators, and others who have reasonably relied on the CFPB’s past actions.” Some of the “friend of the court” briefs filed in support of the CFPB echo this warning, with a brief filed by a group of 23 states and the District of Columbia cautioning that the challengers’ arguments could also invalidate other actions taken by the CFPB. And a brief by the Mortgage Bankers Association urges the justices “not to call into question current CFPB regulations, including those governing the real-estate financing industry, which could lead to immediate and intense disruption to the housing market, harming both consumers and the broader economy.”

Although the CFPB suggests that some provisions can simply be separated from the rest of the agency’s funding statute, the challengers say, the 5th Circuit actually based its ruling on three “key aspects of the scheme: it is (1) ‘self-actualizing’ and ‘double-insulated,’ (2) ‘perpetual,’ and (3) funding a ‘capacious portfolio’ of executive powers.” These “core defects,” the challengers maintain, can “be cured only by Congress, not by judicial blue-penciling” to sever them from the statute. The CFPB’s argument also ignores the specific instruction in the federal law governing administrative agencies that invalid rules “shall” be “set aside.”

The challengers and some of their supporters downplay the potential ramifications of the court’s ruling. The challengers note, for example, that the six-year statute of limitations will foreclose challenges to many of the CFPB’s rules, “including substantial portions of its mortgage-related disclosure rules.” And a brief by West Virginia and 26 other states posits that “if the CFPB is as critical to the financial system as its supporters suggest, then Congress can restore its funding quickly.” Until then, they assure the justices, states “and other federal financial regulators have experience protecting consumers in financial markets” and “can stand in the breach.”

Not all of the challengers’ supporters are equally sanguine, however. Three “friend of the court” briefs – filed by credit union trade groups, the trade association for the debt collection industry, and the Chamber of Commerce – agree that the CFPB’s funding structure violates the Constitution, but they urge the justices to put their ruling on hold to give Congress time to act to fix the problem.

This post is also published on SCOTUSblog.