CFPB’s Survival Odds Improve After Supreme Court Hears Challenge

The Consumer Financial Protection Bureau has a good shot of surviving a challenge to the way it’s funded following oral arguments before the US Supreme Court.

Court watchers said justices, including several conservative members of the court, appeared leery of finding that the CFPB’s funding through the Federal Reserve violated the Constitution’s appropriations clause.

The case before the Supreme Court was the CFPB’s appeal of a decision last October from the US Court of Appeals for the Fifth Circuit holding that the agency’s funding through the Fed gave it “double insulation” from Congress’s appropriations powers and was unconstitutional.

While attorneys said the case would be close ahead of the Tuesday arguments, the questioning by Justices Amy Coney Barrett, Brett Kavanaugh, and even Clarence Thomas indicated there was a great deal of skepticism about the judiciary’s role in reviewing Congress’s methods of funding government agencies.

“Several of the justices were very wary of the judiciary reading into the Appropriations Clause principles and standards that would squarely place the courts into the role of evaluating Congress’ exercise of its power of the purse in virtually all instances,” said Joseph Lynyak, a Dorsey & Whitney LLP partner who advises financial institutions.

The Community Financial Services Association of America, a payday lending industry group, brought the case as part of a challenge to a CFPB rule that would place some restrictions on the industry. The Fifth Circuit invalidated the rule, arguing the CFPB shouldn’t have had the funding to pay the staffers who wrote it.

Friendly Questioning

Solicitor General Elizabeth Prelogar sought to make the case that the CFPB’s funding was firmly within the bounds of the constitution’s text and Congress’s history of funding agencies.

To many lawyers, Prelogar met that bar, repeatedly referencing the standing appropriations the first Congress established to fund the Customs Service.

“Solicitor General Prelogar made clear throughout the argument that the CFPB is embracing constitutional text and history, noting in the opening minutes of her argument that the CFPB’s funding is ‘firmly grounded in constitutional text and historical practice,’” said Brianne Gorod, chief counsel at the Constitutional Accountability Center, a progressive legal advocacy group.

Noel Francisco, the former solicitor general during the Trump administration and current Jones Day partner representing the payday lending industry group, faced a different challenge.

Arguing in support of the Fifth Circuit’s reading of the appropriations clause, he was confronted with questions about how courts should assess a standing pool of funds provided outside the annual appropriations process. Justices Barrett and Sonia Sotomayor in particular pressed Francisco on those questions.

“How do you decide how much is too much or how specific is specific enough?” Barrett asked.

Congress allows the CFPB to request money for its operations directly from the Fed, up to an annual funding cap. The CFPB withdrew $641.5 million from the Fed in fiscal 2022, when the cap was set at $734 million.

Francisco, the payday lenders he represents, and the Fifth Circuit all categorized the funding scheme as “perpetual.”

Kavanaugh said during arguments that the funding wasn’t perpetual because a future Congress could change it at any time.

Kavanaugh has previously raised concerns about the CFPB’s constitutionality, and found the single-director leadership structure to be unconstitutional while serving on the US Court of Appeals for the DC Circuit and since joining the Supreme Court.

The remedy adopted in the 2020 Seila Law LLC v. CFPB decision was to get rid of for-cause removal protections for the CFPB’s director, which satisfied Kavanaugh that the CFPB was no longer too independent of political control.

Sabrina Rose-Smith, a partner at Goodwin Procter LLP, noted in a presentation for clients Wednesday that Kavanaugh had a chance to raise issues with the CFPB’s funding in an even earlier case at the DC Circuit, PHH Corp. v. CFPB.

“He had the chance to do that and did not,” she said, adding that it was hard for her to see him doing so now.

The absence of questions on how the court might address constitutional flaws with the agency’s funding without eliminating its existing rules and enforcement actions suggests the justices may not be ready to rule against the CFPB, Goodwin Procter partner Jamie Santos said on the client webinar.

Justices asked Prelogar 38 questions while Francisco fielded 61, according to a court transcript. Santos said there have been academic studies showing the side that gets more questions tends to fare worse at the court.

“Here, I don’t necessarily think the conventional wisdom is wrong,” she said.

Predictive Value

Despite the seeming skepticism from a majority of the justices to the Fifth Circuit’s opinion, oral arguments aren’t always an indication of which way the court will rule.

“Oral arguments can be misleading indicators of the final outcome,” Ian Katz, managing director at Capital Alpha Partners, wrote in a Wednesday note to clients.

The antipathy of the court’s conservatives to administrative agencies may in the end win out, said Elliott Stein, a Bloomberg Intelligence analyst.

“Our base case remains that the high court will largely affirm the Fifth Circuit’s October 2022 decision, but it looks closer than we thought given the questions by Justices Barrett and Kavanaugh,” Stein wrote.

A decision is expected in the first half of 2024.

The case is CFPB v. Community Financial Services Association of America, U.S., No. 22-448, Oral Arguments 10/3/23.