Isabella Carter
The constitutionality of the Consumer Financial Protection Bureau (CFPB) has been the subject of several court hearings and decisions in recent years. In 2017, the CFPB faced hostile questions from judges during a federal appeals court hearing, challenging its single-director structure and funding mechanism. The CFPB has also faced legal challenges from non-bank mortgage lenders, such as PHH, and trade associations representing payday lenders. These cases have centred around the CFPB's authority, funding structure, and compliance with constitutional provisions. The outcomes of these cases have significant implications for the CFPB's operations, enforcement powers, and future governance, as well as the balance of power between the president and Congress in overseeing the agency.
| Characteristics | Values |
|---|---|
| Date of the court hearing | May 16, 2024 |
| Court | US Supreme Court |
| Case name | Consumer Financial Protection Bureau v. Community Financial Services Association of America |
| Issue | Constitutionality of the CFPB's funding structure |
| Decision | The Supreme Court upheld the constitutionality of the CFPB's funding structure |
| Impact | The decision will have significant ramifications on the CFPB's rulemaking and enforcement agenda, and the future governance of the agency |
| Previous decision | In 2022, the US Court of Appeals for the Fifth Circuit held that the CFPB's funding structure violated the Appropriations Clause of the US Constitution |
| Arguments against CFPB | The CFPB's funding mechanism did not include a specific amount of appropriation; Congress's delegation of its duties to the executive branch was constitutionally suspect |
| Arguments for CFPB | The appropriations clause does not require a specific amount of appropriation; numerous other agencies are funded similarly to the CFPB |
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What You'll Learn
The US Supreme Court upholds the CFPB's funding structure
On May 16, 2024, the US Supreme Court upheld the constitutionality of the Consumer Financial Protection Bureau's (CFPB) funding structure. This decision arose from a challenge to the CFPB's payday lending rule, which was first issued by Director Richard Cordray in 2017. The Fifth Circuit initially rejected the plaintiffs' challenges to the rule but held that the CFPB's funding structure violated the Appropriations Clause of the US Constitution. The clause states that "No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law," typically resulting in agencies being funded through annual appropriations by Congress.
The Supreme Court's decision reversed the Fifth Circuit's ruling, concluding that the CFPB's funding structure did not violate the Appropriations Clause. Justice Ketanji Brown Jackson argued that there was no requirement for a specific amount of appropriation, as claimed by trade associations. The Supreme Court's decision will likely lead to increased enforcement and rulemaking activities by the CFPB, with Director Rohit Chopra stating that the agency will be "firing on all cylinders."
The ruling also has significant implications for the balance of power between the president and Congress regarding the CFPB. While the Court upheld the president's power to remove the CFPB director at will, the absence of statutory change means Congress lacks its primary means of oversight of the agency. As a result, the president will now play a predominant role in determining the CFPB's future direction, including its funding requests through the appointment and removal of directors.
The Supreme Court's decision highlights the ongoing debate over the CFPB's structure and funding mechanisms, with some arguing that its independence from Congress and the president makes it unaccountable. The Court's ruling affirms the CFPB's unique funding arrangement, which grants it a level of independence from traditional congressional oversight.
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The CFPB's payday lending rule
The rule was challenged in court, with plaintiffs raising various legal challenges. While the district court rejected these challenges, it stayed the compliance date of the rule pending the resolution of an appeal. In 2022, the Fifth Circuit rejected the plaintiffs' challenges once more but ruled that the CFPB's funding structure violated the Appropriations Clause of the US Constitution. This decision was, however, reversed by the US Supreme Court in 2024, which upheld the constitutionality of the CFPB's funding structure.
The Supreme Court's decision means that the CFPB will likely intensify its enforcement and rulemaking activities. This includes the payday lending rule, which was affirmed by the court of appeals, and is set to take effect on March 30, 2025. The rule will provide important protections for borrowers of payday and instalment loans.
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The CFPB's single-director structure
The Consumer Financial Protection Bureau (CFPB) has faced scrutiny in court over its single-director structure and its funding mechanism, which some argue violate the US Constitution. The CFPB is an agency created by the Dodd-Frank Act to protect consumers in the financial sector.
The controversy surrounding the CFPB's single-director structure centres on the argument that vesting executive authority within a single director, rather than a multi-member commission, violates the constitutional separation of powers. This structure, it is argued, makes the CFPB “effectively unaccountable" to Congress or the president. The CFPB's defenders, however, claim that many other agencies are funded similarly and that the director serves at the pleasure of the president, who has the power to remove the director "for cause".
In January 2017, the CFPB faced hostile questions from judges during oral arguments before a federal appeals court. The nonbank mortgage lender PHH Corp. had brought a lawsuit challenging the CFPB's single-director structure and its funding mechanism. PHH argued that the bureau's vesting of executive authority within a single director was unconstitutional. Theodore Olson, the former solicitor general who appeared on behalf of PHH, claimed that the structure gave the CFPB too much power and independence from the administration and Congress. Justice Brett Kavanaugh appeared sceptical of the CFPB's arguments, questioning whether the president could easily remove the director if they disagreed with their actions.
In October 2023, the US Supreme Court heard oral arguments in another case, Consumer Financial Protection Bureau v. Community Financial Services Association of America, which also targeted the constitutionality of the CFPB. The case started as a challenge to the CFPB's payday lending rule but evolved into a broader debate about the CFPB's funding mechanism and its interpretation of Congress' authority under the Appropriations Clause. The Supreme Court's decision, announced in May 2024, upheld the constitutionality of the CFPB's funding structure, reversing a 2022 decision by the US Court of Appeals for the Fifth Circuit. The Supreme Court's decision will likely lead to an intensification of the CFPB's enforcement and rulemaking activities, with the president having enhanced authority over the agency's agenda.
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The CFPB's funding outside of congressional appropriations
The Consumer Financial Protection Bureau (CFPB) is the primary federal agency responsible for regulating the consumer finance industry. The CFPB has a unique funding structure that operates outside the traditional Congressional appropriations process.
When Congress created the CFPB in 2010, it established that the agency would not be funded through an annual appropriation law, unlike most other agencies. Instead, the CFPB receives its funding directly from the Federal Reserve, which is also funded outside the ordinary appropriations process. The Federal Reserve provides the CFPB with an annual amount that the CFPB Director deems "reasonably necessary," up to an inflation-adjusted cap.
This funding structure was challenged in court, with critics arguing that it rendered the CFPB unaccountable to Congress and usurped the President's executive functions. In 2022, the Fifth Circuit held that this funding mechanism violated the Appropriations Clause of the US Constitution. The Supreme Court, however, reversed this decision in 2024, upholding the constitutionality of the CFPB's funding structure.
The Supreme Court's ruling concluded that the CFPB's funding mechanism complies with the Appropriations Clause. Justice Thomas, writing for the majority, held that the statute authorizing the CFPB's funding qualifies as an "appropriation" as it specifies the amount (a cap), source, and purpose of the public funds. The Court noted that unspecified but capped appropriations were common after the founding of the nation. Additionally, the Court disagreed with the argument that upholding the CFPB's funding structure would allow the Executive branch to operate without fiscal checks.
The decision has significant implications for the CFPB's future operations and rulemaking activities, with the agency's director, Rohit Chopra, stating that they will now be "firing on all cylinders" and intensifying their enforcement efforts. The ruling also shifts the predominant role in determining the CFPB's direction to the President, including indirect influence over its funding requests through the appointment and removal of the CFPB director.
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The president's power to remove the CFPB director
In 2020, the US Supreme Court ruled that the President can fire the Consumer Financial Protection Bureau (CFPB) Director without cause. This decision gives the President the power to replace a CFPB Director at will, serving at the President's pleasure. This ruling was based on the argument that the limitation on the President's authority to remove the CFPB Director is incompatible with historical and legal precedent and the constitutional structure.
The Supreme Court's decision in Seila Law addressed two key issues: the constitutionality of the statutory restriction on the removal of the CFPB Director, and whether the restriction could be separated from the Consumer Financial Protection Act (CFPA). The Court held that the removal restriction was unconstitutional, citing the President's broad power to hold agency officers accountable. This decision enhanced the President's authority over the CFPB's agenda, at the expense of Congress.
The CFPB's unusual funding structure, upheld by the Supreme Court, further contributes to the President's predominant role in determining the CFPB's future direction. This funding structure allows the CFPB to operate outside the annual appropriations process, reducing Congress's oversight of the agency. The President's power to appoint and remove the CFPB Director indirectly influences the agency's funding requests.
The impact of the Seila decision on the CFPB's operations is evident. For instance, President Biden requested former CFPB Director Kathy Kraninger's resignation upon his inauguration, and President Trump appointed an acting CFPB Director, demonstrating the President's ability to exert political control over the agency. The CFPB's enforcement and regulatory policies may also experience shifts with changes in presidential administrations.
While the CFPB continues to function, the President's power to remove the CFPB Director at will has significant implications for the agency's independence and stability. The Supreme Court's ruling highlights the President's influence over the CFPB's leadership and agenda, shaping the future direction of the bureau.
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Frequently asked questions
It is an agency that was created by the Dodd-Frank Act. It is funded by the Federal Reserve and has a single-director structure.
On May 16, 2024, the US Supreme Court upheld the constitutionality of the CFPB's funding structure.
Justice Ketanji Brown Jackson argued that there is no requirement for a specific amount of appropriation. US Solicitor General Elizabeth Prelogar also gave examples of other agencies funded similarly to the CFPB.
Theodore Olson, the former solicitor general, argued that the CFPB is "a super-executive agency" that is unaccountable to Congress or the president due to its independent funding and the "for cause" limitation on the power to dismiss the director.
