ANALYSIS: Three Ways the Supreme Court Could Nix the CFPB

How the federal government enforces consumer finance laws in the near future depends on whether the US Supreme Court invalidates the Consumer Financial Protection Bureau’s funding structure in a case recently argued before the court.

If the bureau remains the flagship regulator in the consumer finance space, enforcement changes could be minimal. But if the court deems the bureau itself unconstitutional, the country could revert to a pre-Dodd-Frank regulatory landscape, where multiple agencies—none of which focuses primarily on consumer finance—enforce a disparate collection of consumer financial protection laws.

The Funding Structure

Under the Consumer Financial Protection Act, the bureau is funded through earnings from the Federal Reserve, which finances itself primarily through trading of government securities. The bureau may withdraw up to 12% of the Fed’s annual earnings to pay its bills.

The Community Financial Services Association (CFSA) is a payday lender association that’s challenging this method of agency financing. In CFPB v. CFSA, the group argues that the funding structure violates the US Constitution’s appropriations clause, which provides that only Congress can withdraw money from the US Department of the Treasury.

The CFSA argues that the clause implicitly limits agency funding to regular congressional appropriations. Because the bureau isn’t funded this way, it the CFSA contends that Congress circumvented this implicit limit. The federal government maintains that the appropriations clause imposes no limit on Congress’s ability to devise other funding mechanisms. Last year, the Fifth Circuit agreed with the CFSA, holding that the bureau is fundamentally unconstitutional. The Supreme Court granted certiorari and heard oral arguments in early October.

When it decides the case later this term, the high court could adopt one or more theories to invalidate the bureau’s funding structure. Each approach would require different industry adjustments and preparations.

Alternative 1: No Leftover Funds

The court may take issue with the bureau’s flexibility regarding unspent funds. Under the current scheme, the bureau keeps any funds it withdraws from the Fed and doesn’t spend. Agencies funded through regular appropriations don’t have this flexibility: Any leftover funds are canceled. If the court imposes this requirement, the bureau may develop a “use it or lose it” approach. In turn, the bureau may be motivated to spend down its funds at the end of each fiscal year, as do other agencies—causing annual upticks in regulatory activities.

On its face, such a requirement would apply to other self-funded regulators, like the Fed, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. Historically, the obligation to return unused funds has only applied to agencies funded through regular appropriations. Agencies funded through other means, like the prudential bank regulators, do not have this obligation.

Eliminating this flexibility would upset the broader financial regulatory landscape. Industry members would have a harder time evaluating enforcement risks, and consumers would be more exposed with weakened regulators. Because the impacts would reach beyond the bureau, the court, if it adopted this theory, would likely try to limit the case to its facts. But it is unclear how it would distinguish the bureau from other self-funding regulators.

Alternative 2: No Perpetual Funding

In a similar vein, the court could take issue with the perpetual nature of the bureau’s funding. Another implicit limit contained in the appropriations clause, the CFSA argues, is that Congress must designate an end date for all spending. The bureau’s funding structure imposes no time limits: It can continue withdrawing funds from the Fed indefinitely, provided that Congress doesn’t say otherwise.

Like an obligation to return unspent funds, imposing funding time limits would implicate several other federal agencies. Here too—if the court adopted this theory—it would likely try to limit the case to the facts, explicitly stating that precedential effect is limited to the bureau alone. But, again, it is unclear how it would prevent subsequent litigants from invoking such a decision in a future case.

Alternative 3: No Double Insulation

The court is most likely to adopt a third theory, prohibiting the “double insulation” provided by the bureau’s funding structure. The Fed is insulated from the regular appropriations process because it funds itself through securities holdings, and the bureau is then doubly insulated because it funds itself by withdrawals from the Fed.

The Supreme Court may favor this approach because it homes in on what makes the bureau unique: No other agency is doubly insulated this way. In Seila Law v. CFPB, an earlier case challenging the bureau’s constitutionality, the court concentrated on the bureau’s unique leadership structure, holding that it was unconstitutional for Congress to limit the president’s removal power over the bureau’s sole director.

By focusing on the bureau’s uniqueness again here, the holding would be limited to the bureau. Other federal programs wouldn’t be implicated—unlike the theories against unspent funds and perpetual funding—and broader disruptions could be avoided.

If Unconstitutional, Then What?

Regardless of how the court determines the funding structure to be unconstitutional, it must decide what happens to the bureau until Congress addresses the defects.

If the court fully affirms the Fifth Circuit, the bureau would be defunct until Congress acts. There would be a reversion to a pre-Dodd-Frank regulatory landscape in which the prudential regulators enforce consumer finance laws pertaining to banks, the Federal Trade Commission pursues unfair and deceptive acts and practices, and so on. The Supreme Court will likely not take this route because of the uncertainty that would result.

Instead, it’s more likely that the court will narrowly invalidate the structure and stay the effect of its opinion, giving Congress time to come up with a new scheme while keeping the bureau’s regulatory powers largely intact. This approach is consistent with the practice of statutory severability, and would lessen the broader disruptions.

Of course, we will not know much more until the court hands down its opinion next summer. Prior to the oral argument, it appeared likely that the court would deem the funding structure unconstitutional. This is still the most likely outcome even though the bureau’s odds may have improved slightly after several justices, including key members of the conservative bloc, seemed skeptical of the CFSA’s argument. Regardless, the bureau’s current form remains at existential risk.

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