Showdown at the CFPB as constitutional challenge hits high court

A years-long and simmering dispute over the Obama-era Consumer Financial Protection Bureau has finally boiled over as the constitutionality of the agency’s funding has landed in the U.S. Supreme Court.

In general, Democrats and progressives hail the bureau — the brainchild of Massachusetts Sen. Elizabeth Warren — as a champion of average consumers, a bulwark against predatory businesses, but Republicans and conservatives say the agency pursues an aggressively progressive agenda, and that the statute unconstitutionally cedes Congress’s oversight and funding of the agency.

Two weeks ago, 132 GOP lawmakers filed an amicus brief in the case, which is an appeal to the U.S. Supreme Court of a decision by the Fifth Circuit Court of Appeals declaring the CFPB’s funding structure unconstitutional. 

The lawmakers are asking the court to uphold the Fifth Circuit’s decision in Consumer Financial Protection Bureau, et al., v. Community Financial Services Association of America, Limited, et al.

Leading the brief on the Senate side is U.S. Sen. and presidential candidate Tim Scott (R-South Carolina), who has been an aggressive watchdog as ranking member of the Senate banking committee.

In their brief, the lawmakers argue that the agency’s funding should be but is not subject to congressional appropriations. Right now, CFPB funds its operations by directly requisitioning the Federal Reserve for appropriations, up to 12 percent of the Federal Reserve’s total operating expenses. The funding mechanism was created through the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

Critics argue that Congress did not have the right to divest itself of power over CFPB’s budget under the Appropriations Clause in Article I of the Constitution.

The lawmakers’ brief

At the heart of the argument, the lawmakers contend in their briefs, quoting case law, the constitution’s appropriations clause “assure[s] that public funds will be spent according to the letter of the difficult judgments reached by Congress as to the common good and not according to the individual favor of Government agents” in the executive branch. 

And yet, when it came to funding the CFPB, the lawmakers argue, the Dodd-Frank Act delegated those “difficult judgments” wholesale to the CFPB itself, whose director can unilaterally decide, in perpetuity, how much money he wants for the agency to carry out its “broad” and “potent” regulatory and enforcement powers.

The problem is, Scott and the others argue, the agency levies “knee-buckling penalties against private citizens,” not just entities in highly regulated industries. 

“Dodd-Frank included a panoply of provisions designed to insulate the agency as much as possible from Congress’s ordinary appropriations processes, the sum of which, when taken together, amount to a clear transfer of Congress’s Appropriations Clause powers over the CFPB, as Congress itself would never determine the CFPB’s funding, even indirectly,” the brief states. “Constitutional separation of powers prevents Congress from handing its Article I powers to executive agencies.”

For example, the lawmakers argue, the CFPB’s funding comes not from an appropriation or even from fees collected, but rather from the Federal Reserve System (Fed), which itself does not obtain funding directly from Congress. 

“These payments also continue in perpetuity without the CFPB ever needing to return to Congress, hat in hand,” the brief states. “There is even an automatic inflation adjustment to ensure the CFPB would never face a de facto funding reduction due to rising costs. The CFPB can carry over extra money from year to year to ensure continued operations regardless of whether the Fed can keep sending money to the CFPB, which coincidentally has been aggressively hoarding cash —  over $600 million in the first two quarters of 2023 alone.”

Dodd-Frank also neutered the House and Senate Committees on Appropriations’ oversight of the CFPB by purporting to deprive them of the ability to review the CFPB’s funding, the lawmakers contend.

“Because of these provisions, the only way for Congress to reduce the CFPB’s funding level is to amend Dodd-Frank itself and then override an inevitable veto, necessitating supermajorities in both chambers,” the brief asserts. “Supporters justify this scheme by saying the CFPB needed to be ‘independent of the Congressional appropriations process.’ But periodically requiring elected representatives to make difficult policy choices about funding is a feature, not a bug, of Article I and the Appropriations Clause.”

The CFPB insists that its funding mechanisms are analogous to those used by agencies like the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the U.S. Postal Service, the lawmakers observed.

“But that is wrong,” they argued. “Those agencies, and many others like them, generate most of their revenue from direct fees or assessments on regulated parties, a mechanism used since the nation’s earliest days, and the ability to charge such fees is inherently limited because otherwise the agencies risk invoking ‘forbidden delegation of legislative power’ by ‘carr[ying] [the] agency far from its customary orbit and put[ting] it in search of revenue in the manner of an Appropriations Committee of the House.’” 

The CFPB’s attempt to analogize to other agencies, including the Fed itself, likewise fails because they are funded in ways that differ materially from an Appropriations Clause perspective, the lawmakers asserted.

“In fact, the operations of some agencies the CFPB invokes, like the Social Security Administration, are funded via the normal appropriations process,” the brief states. “The Court need not determine which particular aspect of the CFPB’s funding scheme is the most problematic. This is the easy case. The CFPB ‘is in an entirely different league’ from other entities when it comes to its insulation from Congress, to the point that the CFPB currently operates as ‘a sort of junior-varsity Congress’ setting its own funding levels in perpetuity. Such insulation means that Congress itself is not determining the CFPB’s funding.”

The CFPB reply

In its defense, the CFPB said the plaintiffs in the case offered no persuasive defense of the court of appeals’ holding that the CFPB’s funding violates the Appropriations Clause.

“Text, history, and precedent refute respondents’ assertion that Congress violated the Appropriations Clause by authorizing the CFPB to spend a specified amount from a specified source for a specified purpose,” the reply stated. “Respondents do not and could not contend that the text of the Appropriations Clause restricts Congress’s authority to choose the specificity and duration of the ‘Appropriations’ it makes ‘by Law.’” 

What’s more, the agency argued, the absence of any such limit was confirmed by the separate clause restricting appropriations for the army — and only the army — to “two years.” 

“Respondents get it backwards in asserting that the ‘concern’ behind that restriction requires reading an analogous restriction into the Appropriations Clause,” the agency states. “As in other contexts, an express limit in one constitutional provision confirms the absence of such a limit elsewhere.”

Likewise, the agency argued, there is no evidence that the Founders intended the Appropriations Clause as a limit on Congress’s power to pass laws authorizing spending.

In addition, the agency argues, agencies dating back to the Founding, including the Post Office and National Mint, were funded from sources other than annual appropriations. 

“Respondents also concede that the same is true of other financial regulators, including the Federal Reserve Board, Office of Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC),” the agency argued. “Like the CFPB’s appropriation, those agencies’ funding statutes contain ‘no temporal limitation.’ But respondents do not question the constitutionality of those longstanding funding laws. And they offer no principled distinction between those laws and the CFPB’s funding statute.”

Neither did Congress give the agency “nearly unfettered discretion” over its funding, the CFPB asserts. 

“But Congress did no such thing,” the reply states. “It imposed an annual cap of $597.6 million, adjusted for inflation. The only discretion the CFPB has is to request less than that congressionally determined amount. By contrast, Congress imposed no absolute cap on the funding of agencies like the Federal Reserve Board and OCC.”

Nor is the statutory cap on the CFPB’s funding “illusory” or “astronomical,” CFPB argued.

“Congress set the cap to ensure that ‘the CFPB budget is modest’ in comparison with the budgets of ‘other financial regulatory bodies,’” the reply states.

In addition, CFPB argues, while critics say that Congress provided that the Bureau’s funds “remain available until expended,” such provisions are commonplace. 

“The OCC, for example, may likewise retain unspent funds for use on its ongoing activities,” the reply states. “Again, therefore, this feature of the CFPB’s funding does not distinguish it from concededly valid funding mechanisms.”

Ultimately, CFPB argues, the insistence that the CFPB’s funding is “unprecedented” comes down to a single distinction: Agencies like the Postal Service, Mint, Federal Reserve Board, OCC, and FDIC are funded through fees or assessments imposed by those agencies themselves, whereas the CFPB receives its funding from the earnings of the Federal Reserve System. 

“But that distinction has nothing to do with the Appropriations Clause,” the reply states. “If, as respondents concede, Congress made a valid ‘[a]ppropriation’ ‘by [l]aw’ when it authorized the Federal Reserve Board to use a portion of the Federal Reserve System’s revenues to fund the Board’s operations, Congress likewise made a valid appropriation when it authorized the CFPB — ‘an independent bureau’ established ‘in the Federal Reserve System’ — to spend a portion of the same revenues on its operations.”

Respondents assert that agencies that rely on their own fees and assessments are constrained “because they must consider the risk of losing funding if regulated entities exit their regulatory sphere,” CFPB observed.

“But even if that were true, respondents fail to explain why that sort of ‘accountability’ would have any relevance under the Appropriations Clause,” the reply states. “Under respondents’ own theory the Clause is concerned with Congress’s control over federal spending — not with agencies’ accountability to the private entities they regulate.”

Bird-dog Scott

As the ranking member of the Senate banking committee, Scott has been bird-dogging the CFPB — essentially following in the footsteps of former Wisconsin U.S. Rep. Sean Duffy — and he has not been pleased with what he has turned up.

At a hearing earlier this year, Scott excoriated CFPB director Rohit Chopra for what the senator called the agency’s progressive regulatory agenda, saying the agency’s reckless actions reduced access to credit, limited consumer choice, discouraged financial responsibility, and increased costs for everyday Americans. 

With most agencies, Scott said, Congress is able to analyze and scrutinize the executive branch’s actions on behalf of the American taxpayer, so that the voices of the country’s citizens are heard and their viewpoints reflected.

“Unfortunately, the Consumer Financial Protection Bureau — or the CFPB — is a notable exception,” Scott said. “It is not accountable to Congress or the American taxpayer through the appropriations process, and it routinely and brazenly acts outside of the scope of its authority.”

Chopra has taken full advantage of that loophole, Scott told him. 

“Under your leadership, the CFPB has implemented policies and practices that will ultimately reduce consumer options and curtail reasonable practices that promote financial responsibility — further eroding access to credit,” he said. “Director Chopra has created uncertainty in the marketplace by attempting to regulate through speeches and issuing blog posts under the guise of ‘clarifying guidance.’” 

The result of rulemaking and enforcement by blog post? Scott asked rhetorically.

“Fewer consumers are actually protected and fewer options of financial products will be made available,” he said. “Instead of serving people, companies are forced to maintain the status quo or withdraw service offerings out of fear for retribution by nastygram. Whether it is reputational harm through a CFPB press release based on a unique and flawed interpretation of the law or an assessment of risk exposure, the result is the same: less credit access for those who need it most.”

While the CFPB’s website boasts of how the agency’s enforcement actions through 2022 have yielded $16 billion in consumer relief for 192 million consumers, the reality is that translates into a check of about $83 for the average consumer, Scott said.

“Of course, $83 is still $83, but we have to ask ourselves, what is the real cost of those enforcement activities?” Scott said. “How many billions of dollars have your actions actually cost consumers in the form of higher prices, reduced access to credit, or in lost opportunities for new products?”

To cite one example, Scott continued, the CFPB has campaigned against “junk fees,” but in so doing lumped legitimate, standard credit card late fees in with them.

“Let’s be honest: no one likes paying late fees, but they do encourage financial discipline,” Scott said. “When you pay your credit card on time, your credit score goes up. When you don’t, it goes down. And when your credit score goes down, it makes it harder to get a car loan, a small business loan, or even a mortgage at a better rate. So, I am concerned that the CFPB’s crusade on ‘junk fees’ will do more harm than good, and actually end up restricting access to credit for low and middle-income Americans with limited credit histories.”

To make matters worse, Scott said, under Chopra’s leadership, the CFPB learned of a major data breach in its own backyard, impacting more than a quarter-million consumers. 

“At the same time, the CFPB was finalizing the rule that requires lenders to collect and report a vast swath of small business lending data on credit products, including personally identifiable information like race, sex, ethnicity to the CFPB,” he said. “The irony here is just astounding. Why should we trust the CFPB to collect more data on millions of community banks, small businesses, and individuals when it has failed to maintain safekeeping of the data it already collects?”

Scott said he was a firm believer that the best way to provide economic opportunity and protect American consumers was to encourage competitive markets, innovative products, and set clear rules of the road. 

“But what I find so disappointing is that the American public cannot trust this agency, this administration, or this director, and that is truly a shame,” he said.

Richard Moore is the author of “Dark State” and may be reached at richardd3d.substack.com.