U.S. Supreme Court Holds CFPB Funding Structure Constitutional

On May 16, 2024, the U.S. Supreme Court held in a 7-2 decision that the funding structure of the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) complies with the Appropriations Clause of the United States Constitution. Justice Thomas wrote the majority opinion with separate concurrences written by Justices Kagan and Jackson. Justice Alito, joined by Justice Gorsuch, dissented.

The decision puts to rest longstanding litigation over the Bureau’s funding structure, which had cast doubt over the Bureau’s ability to exercise its rulemaking, enforcement, and other powers. The litigation began in 2018 when the Community Financial Services Association of America and the Consumer Service Alliance of Texas (“Plaintiffs”), two trade associations, challenged the CFPB’s Payday Lending Rule in a U.S. District Court in Texas. The lawsuit challenged, among other things, the CFPB’s “self-funding” mechanism, which permits the CFPB to receive all of its funding from the Federal Reserve System rather than through the typical Congressional appropriations process. The Plaintiffs argued the CFPB’s funding structure was too open-ended in duration and amount to satisfy the constitutional requirement for “Appropriations made by Law.” 

The District Court rejected the Plaintiffs’ arguments. On appeal, a three-judge panel from the Fifth Circuit reversed and ruled that Congress unconstitutionally ceded direct and indirect control over the CFPB’s budget by making the CFPB “double-insulated” from Congressional oversight, violating the Appropriations Clause.

The Supreme Court rejected the Fifth Circuit’s view. The majority opinion explained that “an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes.” The Court concluded that the mechanism for funding the Bureau satisfies those requirements. Given the skepticism a number of Justices expressed toward Plaintiffs’ position at oral argument, the Court’s reversal of the Fifth Circuit’s holding was unsurprising. 

Key Takeaways

The Supreme Court’s decision means the lawsuit challenging the Payday Lending Rule will proceed to consider the Plaintiffs’ specific challenges to the rule. Several other lawsuits involving the CFPB had also been stayed pending resolution of this case. Those will now proceed, including litigation over the 1071 rule and the CFPB’s appeal of the UDAAP exam manual ruling. 

This decision will also affect the ongoing litigation involving the CFPB’s credit card late fee rule. The district court judge in that case relied on the CFPB’s unconstitutional funding structure in granting a preliminary injunction to stay the effective date of the rule. But the plaintiffs there also raised alternative arguments to enjoin the rule. The district court has not yet ruled on those requests.

We also expect certain other federal agencies to welcome this decision and the degree of certainty it provides about their own exposure to similar challenges based on their funding structures.