On Monday, the U.S. Supreme Court announced that it has agreed to review the Fifth Circuit’s decision in Consumer Financial Protection Bureau (CFPB) v. Community Financial Services Association of America (CFSA). The decision comes after the Fifth Circuit ruled unanimously in November 2022 that the CFPB’s funding structure violates the Appropriations Clause of the Constitution. The Biden administration appealed, suggesting the Fifth Circuit’s ruling “threatens to inflict immense legal and practical harms on the CFPB, consumers and the nation’s financial sector.” The court will now determine the constitutionality of the CFPB’s funding mechanism. Under the Dodd-Frank Act, the CFPB receives its funding through the Federal Reserve System, placing its funding requests outside of the purview of the House and Senate Appropriations committees.
Notably, the request for an expediated review was denied. Thus, the court will not hear the case until next term, which is fall 2023, meaning a final decision will likely not be released until December 2023 at the earliest, or more likely June 2024. Also, the court denied CFSA’s counter petition, which had argued that the court should not determine the constitutionality of the CFPB’s funding structure and instead issue its decision on narrow statutory grounds. Specifically, CFSA argued that the Payday Lending Rule at issue in its original case was invalid when enacted and that the CFPB had no authority to issue the rule. The Fifth Circuit rejected CFSA’s arguments, and the Supreme Court declined to rehear that portion of the case.
How Will the Supreme Court Decide?
While it is still very early in the process and oral arguments will be a factor, we believe there are a few possible outcomes the court can land on when it finally issues its decision:
- The Supreme Court could strike just the offending language from the Dodd-Frank Act and send the funding question back to Congress to decide how the CFPB should be funded by passing new legislation. It is possible the court could set a time frame for Congress to act, but given the likely timing for a decision to be in the spring of 2024, the heated politics of a presidential election in the final stretches, and a divided government, will almost certainly mean Congress would face challenges meeting any prescribed deadline.
- The court could strike the language concerning funding with no directive to Congress. This would effectively freeze the ability of the CFPB to function until Congress acts on its own. In this scenario it is possible that everything the CFPB has done would be found null and void. If Congress does successfully restructure the CFPB to meet constitutional requirements, a new director might attempt to go back and ratify all past actions, which arguably could then prompt even more litigation.
- The court could take the pen and rewrite Dodd-Frank to place the CFPB under the authority of the House and Senate Appropriations committees. We view this as a less likely scenario since the Supreme Court does not usually like to take the pen out of Congress’ hand.
Will Congress Get Involved?
Congressional Republicans have indicated that they are waiting on the Supreme Court to issue a decision. Senate Banking Committee Ranking Member Tim Scott (R-SC) released a statement saying, “The CFPB has long been an agency that lacks transparency and seeks to operate beyond its jurisdiction. I look forward to reviewing the Supreme Court’s decision, when the time comes, and continuing my efforts to hold the CFPB accountable to the American people and Congress.”
House Financial Services Committee Chair Patrick McHenry (R-NC), issued the following statement:
“As Republicans have said for years, the CFPB’s unconstitutional funding structure improperly insulates it from Americans’ representatives in Congress,” said Chairman McHenry. “This problem is compounded when the Bureau is led by a rogue regulator, as it is now. Director Chopra is returning the CFPB to its Obama-era regulation by enforcement approach that harms both consumers and our economy. Republicans promised the American people we would restore accountability to the federal bureaucracy. The House Financial Services Committee is committed to delivering transparency with legislation like Congressman Barr’s TABS Act to bring the unaccountable CFPB under the annual appropriations process.”
It is expected that Republicans will reintroduce legislation putting the CFPB under the appropriations process as referenced in Chairman McHenry’s statement as soon as next week, and will also reintroduce other legislation that changes the leadership structure to a five-person commission rather than a single director. However, currently it appears unlikely anything gets done on this front in Congress, unless and until it is mandated to get done. Members of Congress have indicated they are waiting to see if the litigation changes any hearts on the Democratic side, which has historically opposed any structural changes to the CFPB.
If the court does find the CFPB is an unconstitutional agency, or significantly hampers its ability to function, a legislative fix still may be challenging unless motivation to act increases. As indicated in recent history, the Supreme Court has decided to issue its opinions for high-profile cases at the end of its term. That timing would mean the court could issue its ruling at a critical time in the next presidential election. It is unlikely that a divided Congress would be able to agree on compromise legislation in the lead-up to the election, and it is also unlikely that President Biden would sign any legislation that might be viewed as defanging a consumer protection agency unless the court’s decision essentially compels him to.
The Brownstein team will continue to monitor this space closely and is prepared to help clients weigh in both with the Supreme Court and Congress to help shape any forthcoming changes. Read more of our prior analysis on this case here.
THIS DOCUMENT IS INTENDED TO PROVIDE YOU WITH GENERAL INFORMATION REGARDING THE SUPREME COURT TAKING UP THE CONSITUTIONALITY OF THE CFPB FUNDING STRUCTURE. THE CONTENTS OF THIS DOCUMENT ARE NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT OR IF YOU NEED LEGAL ADVICE AS TO AN ISSUE, PLEASE CONTACT THE ATTORNEYS LISTED OR YOUR REGULAR BROWNSTEIN HYATT FARBER SCHRECK, LLP ATTORNEY. THIS COMMUNICATION MAY BE CONSIDERED ADVERTISING IN SOME JURISDICTIONS.