Supreme Court rejects challenge to CFPB funding structure

The heavily watched challenge had the potential to undermine the work of the bureau since its establishment in the aftermath of the financial crisis

The U.S. Supreme Court on Thursday rejected a broad challenge to the funding mechanism of the Consumer Financial Protection Bureau (CFPB), which was brought by payday lending groups led by the Community Financial Services Association of America (CFSA).

The CFSA and other groups challenged the constitutionality of the CFPB’s funding structure in a case that threatened to undermine actions the bureau had taken since its founding in 2011. The CFPB maintains regulatory enforcement authority over a wide swath of U.S. financial services, including the mortgage and real estate industries.

But in a 7-2 decision in which Justice Clarence Thomas delivered the majority opinion, the justices found that the structure is constitutionally valid.

“Under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes,” the majority opinion said. “The statute that provides the Bureau’s funding meets these requirements. We therefore conclude that the Bureau’s funding mechanism does not violate the Appropriations Clause.”

Last fall, the court appeared skeptical of the arguments against the structure’s constitutionality in oral arguments presented by representatives for the payday lending groups.

Justices on both the liberal and conservative wings of the court expressed doubts at that time about the premise of the plaintiffs’ argument in light of existing constitutional precedent going back to the earliest days of the nation, when the relationship between the executive branch and the congressional appropriations process was first established.

“I get your point that this is different, that it’s unique, that it’s odd, that they’ve never gone this far,” Thomas told Noel Francisco, one of the plaintiffs’ attorney, according to reporting from Bloomberg at the time. “But not having gone this far is not a constitutional problem.”

In the majority opinion, Thomas said that “[p]re-founding history supports the conclusion that an identified source and purpose are all that is required for a valid appropriation,” citing other institutions with similar structures including the U.S. Postal Service.

“Instead of appropriating funds on an annual basis, Congress authorized the Postmaster General to ‘defray the expense’ of carrying the mail of the United States with the revenues generated through postage assessments,” Thomas wrote.

The opinion was also blunt in its assessment of the challenging arguments.

“The associations make three principal arguments for why the Bureau’s funding mechanism violates the Appropriations Clause, each of which attempts to build additional requirements into the meaning of an ‘Appropriatio[n] made by Law,’” the opinion stated. “None is persuasive.”

The CFPB released a statement following the decision.

“Today’s decision is a resounding victory for American families and honest businesses alike, ensuring that consumers are protected from predatory corporations and that markets are fair, transparent, and competitive.”

“This ruling upholds the fact that the CFPB’s funding structure is not novel or unusual, but in fact an essential part of the nation’s financial regulatory system, providing stability and continuity for the agencies and the system as a whole,” the statement reads in part. “As we have done since our inception, the CFPB will continue carrying out the vital consumer protection work Congress charged us to perform for the American people.”

The Mortgage Bankers Association (MBA) also released a statement expressing relief about the decision.

“MBA is relieved that the Supreme Court avoided a ruling that would have disrupted the housing and mortgage markets and harmed the economy and consumers,” said Bob Broeksmit, MBA president and CEO. “While we frequently disagree with the Bureau on how they interpret or enforce particular rules, a decision that would have invalidated the Bureau’s previous rules could have had severe consequences for single-family and multifamily mortgage markets.”

In February 2023, the high court agreed to hear the case roughly four months after a Fifth Circuit Court of Appeals panel ruled that the funding structure of the CFPB was unconstitutional. The Biden administration had hoped to fast-track the proceeding, but that request was denied.

A month later, the Second Circuit Court of Appeals conflicted with the prior Fifth Circuit ruling, holding that it could find no basis in Supreme Court precedent for its decision and that the Constitution itself does not support the Fifth Circuit ruling declaring the bureau’s funding source unconstitutional.

The plaintiffs in the original case, the CFSA and the Consumer Service Alliance of Texas, challenged the CFPB’s structure, its powers granted by Congress and the director’s protections from removal, claiming all were unconstitutional.

A lower court agreed, causing the CFPB to appeal the ruling to the Supreme Court. The bureau argued in its certiorari petition that the previous decision relied on an erroneous understanding of the Appropriations Clause. The majority opinion released Thursday seemed to agree with that argument.

“The statute that authorizes the Bureau to draw money from the combined earnings of the Federal Reserve System to carry out its duties satisfies the Appropriations Clause,” the majority opinion concluded. “Accordingly, we reverse the judgment of the Court of Appeals and remand the case for further proceedings consistent with this opinion.”

Justices Samuel Alito and Neil Gorsuch were the dissenting justices.

The office of Sen. Elizabeth Warren, an architect of the CFPB, provided the following statement to HousingWire.

“The CFPB is here to stay. In a 7-2 decision, the Supreme Court followed the law and confirmed that the CFPB’s funding structure is constitutional,” Warren said. “The CFPB will keep on doing its work to slash junk fees, fight giant banks when they cheat people, and level the playing field for everyone in this country. I commend Director Chopra for his leadership, the entire CFPB team for their determination, and President Biden for his commitment to protecting consumers.”

This is a developing story. Since its publication, it has been updated with statements from the CFPB and MBA.

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