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Update: High Court Finds CFPB Funding Structure Constitutional Once and For All

ABSTRACT: Yesterday the U.S. Supreme Court overturned the 2022 Fifth Circuit Opinion holding the CFPB’s self-funding structure unconstitutional, providing clarity to courts and enforcement agencies across the nation about the CFPB’s authority for rulemaking and enforcement.

The U.S. Supreme Court issued a 7-2 Opinion yesterday finding the funding structure of the Consumer Financial Protection Bureau (“CFPB”) constitutional. In so doing, the Supreme Court overturned the Fifth Circuit’s holding finding the opposite. The case was initiated and made its way through the appellate courts on behalf of Community Financial Services of America (“CSFA”), a group representing the interests of payday lenders.

The CFPB Payday Lending Rule that started this years-long legal battle is found at 12 S.F.R. § 1041.8 and prohibits what the CFPB described as the “unfair and abusive” practice by lenders of initiating subsequent payment transfers from consumer bank accounts after two consecutive failed attempts, in an effort to prevent excessive overdraft fees. Baker Sterchi previously discussed the Fifth Circuit’s holding and subsequent legal complications in prior posts.

The challenge to the CFPB’s funding structure centered on the powers granted to the CFPB under Dodd-Frank, which allows it to operate with funds from the Federal Reserve as opposed to funding approved by Congress.

The Supreme Court rejected CSFA’s argument that the funding structure violates the Appropriations Clause under the U.S. Constitution. Justice Thomas penned, "Under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes. 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."

Justices Alito and Gorsuch dissented, with Alito warning that the majority opinion “upholds a novel statutory scheme under which the powerful Consumer Financial Protection Bureau may bankroll its own agenda without any congressional control or oversight."

The Supreme Court’s Opinion will impact numerous cases and enforcement actions that have been in limbo across the country as the Court’s decision was awaited. Much industry discussion has been centered around an assumption that the Fifth Circuit would be upheld and the question of how far the Supreme Court would reach in undermining previous CFPB enforcement actions. With the Supreme Court’s decision reversing the Fifth Circuit, those discussions are put to rest, at least until another constitutional challenge to the CFPB is raised.