The Supreme Court considers the CFPB's future
Highlights from oral arguments in CFPB v. Community Financial Services Association of America
For the last several years, a case that has become about the existence of the CFPB has been brewing in courts across the country - initially filed by the Community Financial Services Association of America (CFSA) in 2018. To give some background, the CFSA is a trade group formed in 1999 that represents the payday lending industry. It claims that it “promotes laws and regulations that protect consumers,” although ironically in states where there are fewer regulations, payday loans cost 4 times more in those states according to recent research conducted by Pew. For a further deep dive on payday loans, check out one of our earliest pieces looking at a specific payday lender where we also manage to squeeze in a look at the industry as well. Needless to say, it’s a jungle out there.
How did the case wind up before the Supreme Court? It started off with the CFSA challenging the CFPB’s “payday lending rule” and failing in a Texas District Court in 2018. However, in its appeal to the Fifth Circuit Court, the CFSA had better luck as the Court ruled in its favor. Several things to note - first - from the time of the initial ruling until the appeal verdict, four years passed and the appeal was not taken up until 2022. In those four years, President Trump appointed six judges to this court (and Biden appointed one), and incidentally, the three judges that heard the case and filed the opinion in favor of the CFSA were from this group of appointees. The second thing to note, which was more consequential, was that this court ruled on the constitutionality of how the CFPB was getting funded. While they did not directly challenge the existence of the CFPB and actually stated that they felt the Bureau had the authority to perform its duties, the crux of their argument was that the way the CFPB received funding was unconstitutional. Specifically, they went after the fact that the funding for the Bureau came in perpetuity from the Federal Reserve (which itself has been established for ages as a firmly independent body) rather than through annual appropriations from Congress. This is in line with some of the other regulators we talk about in this space, including the OCC, FDIC, and the Fed itself.
Of course, by taking this line of argument, the implication is that if a particular session of Congress chooses not to fund the CFPB for their two-year period (or longer), it puts the agency’s operations at risk. And furthermore, this opens a slippery slope that could also lead to re-examination of how these other agencies are funded. There is a good report by the Congressional Research Service that digs through the implications of what this could mean for the CFPB if it loses its funding at any point. On the other hand, a differing argument (made by friend of the blog Alan Kaplinsky, Senior Partner at Ballard Spahr) notes that the other agencies are in fact self-funded - and thus get around the appropriations clause (which is at issue here). The CFPB, because it receives funding from the Fed, is running up against said clause and thus should be subject to regular re-authorization of funding by Congress.
With this view in mind, this case was taken up by the US Supreme Court and oral arguments were heard yesterday from both sides. The government (CFPB) side led by US Solicitor General Elizabeth Prelogar noted the following, through their presentation and through questioning from some of the Justices:
One of the key arguments made was citing examples of other agencies with authorizations in perpetuity, including the Customs Service as a past example.
Another point was that the initial setup of funding with renewals for the CFPB was significantly less than other comparable agencies’ budgets.
The topic of separation of powers came up several times. A lot of this centered around the CFPB being able to request “as much as it wanted.” The cap was noted as being $600 million, and in discussion it was noted that this perpetual authorization for this specific agency at this specific amount could be revoked by Congress at any time - I personally think this argument is their most powerful one and puts a serious dent in the “tyrannical” argument raised by the CFSA (as we’ll see later).
Some memorable exchanges between Samuel Alito and Prelogar came up where conversations around the definition of “appropriations” were raised, as well as how unprecedented this situation appeared to be (the combination of the three factors of 1) a seemingly delegated authority, 2) in perpetuity, 3) to another agency that is not publicly funded).
The CFSA side led by former US Solicitor General Noel Francisco noted the following, through their presentation and through questioning from some of the Justices:
The CFSA aligns this as a case of Congress ceding its power to the executive in violation of the Appropriations clause, and that Congress cannot cede this authority.
They note that the cap is so high that it’s “never relevant” with the 600 million figure, because the CFPB has never spent this much and so giving the executive branch/Fed/CFPB director the authority to decide how much within that 600 million can be spent is excessive. At one point, Francisco does mention that he thinks 400 million could be an appropriate amount, but gets into his thinking that a specific amount should be designated (not a cap) and that having this in place for perpetuity is also a violation of the Appropriations Clasue.
They point to the argument that the Fed funding of the CFPB comes from private sources and the funding for the other agencies cited by the government comes from public sources; so to compare these two scenarios isn’t valid.
An interesting exchange occurs between Justice Thomas and Francisco where they discuss that it is not necessarily unconstitutional for a course of action or a series of factors to be “unprecedented”. This then leads to a parallel back and forth between Justice Jackson and Francisco (that mirrors that of Prelogar and Justice Alito) on the definition of “appropriations.”
The arguments closed with the opportunity for the government (as the defendant) to make a rebuttal, and then the Court adjourned. In reviewing the discussion (and something the media picked on as well), it seems Francisco didn’t do a great job of getting buy in from the Court on the CFSA’s argument. One hint is that the majority of the time was spent grilling Francisco, with slightly less being used on questioning Prelogar.
The case hasn’t been decided yet, and so this may be premature, but in terms of how I’d say each Justice seems be coming down based on their questioning and commentary, it looks like the split is as follows (citing each Justice and which side he/she favors) - PLEASE NOTE THIS IS JUST MY INTERPRETATION BASED ON THE ORAL ARGUMENTS AND QUESTIONS/DISCUSSION:
Roberts - CFSA
Thomas - CFPB
Alito - CFSA
Sotomayor - CFPB
Kagan - CFPB
Gorsuch - CFSA
Kavanaugh - This is a tough one, but it sounds like with the emphasis on Congress being able to revoke its “Appropriation in perpetuity”, he leans towards the CFPB side since he doesn’t seem convinced by the “tyranny” argument.
Barrett - CFPB
Jackson - CFPB
Ultimately, whether or not Kavanaugh agrees with the CFSA or not, there are five other justices who appear to be in favor of the CFPB’s argument. Actually, from the line of discussion it seems how each Justice appears to lean was more about Francisco dropping the ball in arguments more than favoring the CFPB. We will see whether this carries through if and when the actual vote happens and the decision is made. For now…the Court is adjourned (and so are we!)