Introduction and summary
Since opening its doors 12 years ago, the Consumer Financial Protection Bureau (CFPB) has been a formidable advocate for everyday Americans, holding financial institutions accountable for predatory practices and returning $17.5 billion to wronged customers.1 Its success at protecting consumers is tied to its independence. Following the 2007–2008 financial crisis, Congress carefully designed the CFPB as a new, independent regulator to carry out its important mission free from political interference.2
CFPB critics have long sought to limit the agency’s autonomy3 and, by extension, its capacity to promote a fairer financial marketplace. The U.S. Supreme Court is currently considering CFPB v. Community Financial Services Association of America, Limited (CFSA), a case challenging the constitutionality of the agency’s independent funding structure. A ruling against the CFPB would not only be unsupported by legal precedents, but it would also be an example of judicial overreach that would reinsert political influence into efforts to protect consumers.
This report discusses Congress’ intent to establish the CFPB as an independent financial regulator and explores how the 5th Circuit’s faulty logic will have wide-ranging legal and consumer implications if upheld by the Supreme Court. Such a decision could have spillover effects to other similarly situated financial agencies, creating regulatory and economic uncertainty.
Congress intended for the CFPB to be independent
For years preceding the 2007–2008 financial crisis, financial institutions engaged in excessive risk taking, exploiting the vulnerabilities of the regulatory framework as it existed at that time. A confluence of expanded subprime lending and mortgage securitization based on those risky loans contributed to the housing market collapse and culminated in economic disarray as households struggled to make payments on their homes, even as their value rapidly declined.4 In the Great Recession that followed, the United States experienced the most significant sustained job losses since the Great Depression,5 worsening wealth gaps between the middle class and the richest Americans.6
The subprime loans that fueled the financial crisis commonly featured predatory conditions. For instance, many loans offered a misleadingly low introductory “teaser rate.” Over time, these interest rates would reset and be recalculated, often drastically increasing monthly payments. These loans were typically made to low-income individuals or those with poor credit histories, who would struggle to keep up with continuously increasing monthly payments.7
Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank) Act in 2010, establishing tougher rules for financial institutions and promoting resilience across the financial system.8 Recognizing the role predatory financial products played in the crisis, the Dodd-Frank Act created the CFPB as an independent agency within the Federal Reserve System with a mission to protect consumers from financial schemes and predators.9 Significantly, the CFPB was given authority to oversee a host of consumer statutes previously implemented by different agencies—an arrangement that had caused confusion for consumers and often relegated oversight and implementation of those laws to the back burner when those agencies focused on other priorities under their purview. The CFPB is the only federal agency whose sole mission is to protect consumers from unfair and abusive practices by banks and nonbank financial actors, such as mortgage companies and payday lenders.10
Upholding the U.S. Court of Appeals for the 5th Circuit’s decision would upend enforcement of key consumer finance laws
The CFPB is responsible for enforcing statutes that prevent discrimination in lending, provide enhanced protections for servicemembers, set strong standards for debt collectors, and provide many other consumer protections. Those statutes include:11
Alternative Mortgage Transaction Parity Act of 1982
Consumer Financial Protection Act
Consumer Leasing Act of 1976
Electronic Fund Transfer Act
Equal Credit Opportunity Act
Expedited Funds Availability Act
Fair Credit Billing Act
Fair Credit Reporting Act
Fair Debt Collection Practices Act
Specified Rules under the Federal Trade Commission Act
Federal Deposit Insurance Act
Gramm-Leach-Bliley Act of 2009
Home Mortgage Disclosure Act of 1975
Homeowners Protection Act of 1998
Home Ownership and Equity Protection Act of 1994
Interstate Land Sales Full Disclosure Act
Military Lending Act
Omnibus Appropriations Act of 2009
Real Estate Settlement Procedures Act of 1974
S.A.F.E. Mortgage Licensing Act of 2008
Truth in Lending Act
Truth in Savings Act
In designing the agency, Congress intentionally set up guardrails to ensure the CFPB could carry out its mission free of political influence. For instance, Dodd-Frank states that the agency must be led by a single director who can only be removed by the president for cause.12 Unfortunately, in a narrowly decided opinion, the Supreme Court found this provision unconstitutional in 2020; the director can now be removed by the president at will.13
Congress also established a funding mechanism for the agency that shields it from political gamesmanship. The CFPB’s budget is derived from the Federal Reserve (Fed), an independent financial agency that receives its funding from fees levied on financial institutions and from interest earned on its investments, instead of annual congressional appropriations. After holding more than 50 congressional hearings following the 2007–2008 financial crisis, Congress determined that independent funding was an essential element to the function of “any financial regulator.”14 During consideration of the Dodd-Frank Act, Rep. Carolyn Maloney (D-NY)—a former senior member of the House Financial Services Committee—discussed the importance of the agency’s autonomy:
For far too long in our financial system and its products, any concerns about consumer protection came in a distant second or a third or none at all. Now, anyone who opens a checking or savings account, anyone who takes out a student loan or a mortgage, anyone who opens a credit card or takes out a payday loan will have a Federal agency on their side to protect them…It will be completely independent, with an independently appointed director, an independent budget, and an autonomous rulemaking authority.15
Efforts to curb the CFPB’s independence not only lack legal precedents, as discussed in greater detail in the following sections, but they also undermine Congress’ explicit intentions when passing the Dodd-Frank Act.
CFPB v. CFSA is a challenge to the CFPB’s independence
CFPB detractors have mounted numerous legal challenges aimed at chipping away at the agency’s congressionally authorized independence. As mentioned above, in 2020, the Supreme Court ruled on a challenge to the constitutionality of the CFPB’s structure, which allowed the president to remove the director of the CFPB only for cause. The court ruled on separation of powers grounds that the “for cause” limitation was unconstitutional and that the director may be removed at the president’s discretion, without requiring a showing of cause.16 The latest attack, CFPB v. CFSA, targets the agency’s funding mechanism.
Since its inception, the CFPB has used its authority under the Dodd-Frank Act and the statutes the agency oversees to establish regulations protecting consumers from unseen or misunderstood financial penalties and schemes. Payday lenders, which often prey on low-income individuals—particularly women and military service members—by luring them into debt traps, were an early and frequent target of CFPB regulations and enforcement actions to protect consumers from rapacious financial entities.17 Since 2011, the CFPB has received more than 5,000 consumer complaints against payday lenders.18 At the same time, the CFPB has been the target of significant financial industry pushback, often led by shady lenders seeking to undermine the agency’s authority and declare it unconstitutional.19
The current challenge to the CFPB’s authority, which will be heard by the Supreme Court on October 3, 2023, was brought by CFSA, a corporate trade association composed of payday lenders, many of which have been subject to enforcement actions, fines, and refunds mandated by the CFPB for predatory practices.20 The CFSA is challenging a CFPB rule that prohibits the predatory practice whereby payday lenders make multiple attempts to withdraw loan repayments directly from consumers’ bank accounts—a practice that can result in significant overdraft fees being applied against those consumers.
The Supreme Court will review the 5th Circuit’s decision in the case declaring the funding of the agency, and effectively any rulemaking promulgated by the agency through such funding, unconstitutional and specifically voiding the payday lending regulation.21 The 5th Circuit panel found that because Congress mandated that the CFPB receive its funding directly from the Federal Reserve, which in turn receives its funding through its investments and bank assessments, there was an unconstitutional abdication of congressional authority as funding fell outside the annual appropriations process.22 Specifically, it said that Congress “cede[d] direct control of [the CFPB’s] budget by insulating it from annual or other time limited appropriations,” and it “ceded indirect control by providing that the [CFPB’s] self-determined funding be drawn from a source that is outside the appropriations process.”23 In doing so, the 5th Circuit asserted, funding for the CFPB is different from the uncapped permanent funding derived through fees, investments, and assessments that power other financial regulators including the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, and the Federal Housing Finance Agency.24
But the CFPB, which is formally part of the Federal Reserve, does not determine its own funding. Congress expressed its will by statute that the CFPB should receive a portion of the income collected by the Federal Reserve, also established by Congress, with a strict cap limiting that amount and statutory enumeration of how it could be spent. Moreover, Congress ensured that the CFPB is still subject to a series of checks. For instance, the Dodd-Frank Act requires the CFPB director to appear before Congress on a twice-annual basis. Concurrent with these appearances, the CFPB must submit a report to the president and Congress detailing, among other information, justification of its budget request for the previous year,25 presumably providing a timely opportunity for Congress to oversee the agency and, if it so chooses, to make changes it deems necessary through legislation.
The Federal Reserve promulgates binding regulations, just as the CFPB does. However, the CFPB arguably has even less discretion over its funding than the Federal Reserve. The Fed is funded mostly through interest paid on securities it buys on the open market and fees assessed on institutions it regulates, among other income streams.26 Assets can be bought (using Fed income) or sold (adding to Fed income) as the Fed chooses to carry out its statutory duties.27 The CFPB is funded from the same income stream that funds the Fed and can hold funds that it has requested from the Fed, but not yet used, in a Fed account.28 The CFPB can use these funds only for purposes determined by Congress in statutes. However, unlike the Fed, the CFPB cannot buy or sell income-earning assets, and its annual requests to the Fed are limited to a fraction of the Fed’s operating expenses. Importantly, both the Fed and the CFPB are statutorily subject to congressional reporting and oversight. By extension, the scale and use of their assets are subject to scrutiny.29
Notably, in CFPB v. Law Offices of Crystal Moroney—a case that was decided after the 5th Circuit case—the 2nd Circuit Court of Appeals found that the CFPB’s funding was constitutional, directly and completely rejecting the 5th Circuit’s reasoning. Using both analysis based on precedent and analyzing the plain language of the Constitution’s text, which the 5th Circuit purported to do, the 2nd Circuit conducted a thorough review of the constitutionality of the CFPB’s funding under the appropriations clause, which provides, “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.”30 It found that the “[Supreme] Court has consistently interpreted the appropriations clause to mean simply that ‘payment of money from the Treasury must be authorized by a statute.’”31
The 2nd Circuit further noted that contemporaneous writings by Alexander Hamilton confirmed that the “[appropriations clause] was … to secure … that the purpose, the limit, and the fund of every expenditure should be ascertained by a previous law.”32 The court found that Congress “had prescribed the ‘purpose’ (or ‘object’), ‘limit,’ and ‘fund’ of its appropriations for the CFPB” under its enacting statute, and that, although it does not fall under the annual appropriations process commensurate with most spending, Congress did not abdicate its authority.33 Later in its analysis, the 2nd Circuit noted that the Dodd-Frank Act directly subjects the CFPB to congressional oversight, requiring biannual reports and appearances by the director before its authorizing committees to justify its budget requests.34
Furthermore, it is important to note that the permanence of the CFPB’s funding does not run afoul of the Constitution; nothing in the Constitution or the appropriations clause prohibits such action by Congress if it so chooses. Rather, the only constitutional limitation on appropriations is that funds may not be appropriated for the Army for a period longer than two years, in accordance with the Founders’ opposition to maintaining a standing army.35 The 5th Circuit is effectively imposing its political preference in favor of constitutional text in contravention of its supposed “originalist” interpretations in this case.
The 5th Circuit’s use of a strained interpretation of the appropriations clause to hold the operation of nearly the entire agency unconstitutional is wholly novel and entirely contravenes Supreme Court precedents. The Congressional Research Service noted that the 5th Circuit “appears to have broken new jurisprudential ground,” and its “decision is significant as the first appellate—and perhaps the first court decision ever—to conclude that congressional action, as opposed to executive or judicial action, can violate the appropriations clause.”36 The 5th Circuit, in its statutory interpretation deeming the CFPB’s funding stream inapposite to that of other financial regulatory agencies, also appears to have ignored or dismissed the Government Accountability Office and the U.S. Department of Justice’s understanding of statutory rules of construction for funding streams outside the annual appropriations process that have applied to other financial regulators since at least the 1930s.37
The 2nd Circuit was succinct in its reasoning that the CFPB’s funding sources are permitted under the Constitution—specifically, there is no precedential or originalist basis supporting the 5th Circuit’s decision to declare the CFPB unconstitutional. However, in one sense only, the 5th Circuit’s decision came as no surprise as the court is substantially composed of ultraconservative jurists38 who have taken to utilizing flawed and politically motivated analysis under the guise of originalism—a theory that purports to use objective history to guide constitutional interpretation, though often results in politically charged judicial decision-making39—to obtain the right-wing policy outcomes they seemingly prefer. And in doing so, the 5th Circuit elevated conservative efforts to undermine a wide range of federal government functions designed to protect consumers and U.S. democracy.
A decision to uphold the 5th Circuit’s unmoored rationale would have wide-ranging consequences
A Supreme Court decision upholding the 5th Circuit’s finding that the CFPB’s funding is unconstitutional would lead to cascading effects, inviting lawsuits, irrevocably harming Americans’ chief consumer advocate and possibly other federal regulators, and throwing an array of financial markets into uncertainty.
Should the Supreme Court adopt the reasoning set forth by the 5th Circuit, it could enable future litigants to claim that most if not all of the more than 100 rules promulgated by the CFPB to date are unconstitutional. Even before such claimants file their lawsuits, the decision could throw into chaos all of the CFPB’s regulatory and enforcement activities for the past 12 years and call into question the billions of dollars in benefits it has accrued to consumers.40 In fact, financial institutions subject to CFPB enforcement actions have already sought to have these actions dismissed based on the 5th Circuit’s ruling, including an action that would have resulted in a $7.9 million civil penalty, but which was vacated and remanded earlier this year.41
If the 5th Circuit’s decision is upheld, it would effectively defund the CFPB, resulting in the cessation of day-to-day administrative activities necessary to fulfill its statutory mission and could result in hundreds of layoffs of federal employees. This would likely prevent enforcement of the many preexisting statutes mandating consumer financial protections, (see text box) which were placed under the CFPB’s purview at its creation. As such, the government would be unable to enforce many of the consumer protections provided under existing laws that long predated the creation of the CFPB.
In addition, the CFPB’s capacity to protect consumers, along with its funding, could be subjected to the political whims of whichever party controls Congress. Cuts to the CFPB’s budget would severely limit the agency’s capacity to carry out its statutory mandate and continue to protect everyday Americans from harmful financial practices. In its relatively short history, the CFPB has obtained $17.5 billion in benefits for Americans through monetary compensations, principal reductions, canceled debts, and other relief, and it has imposed more than $4 billion in civil penalties on financial actors for violations of the law.42
Since 2011, the CFPB has responded to more than 4 million consumer complaints, with more than 200 million consumer accounts eligible to receive financial relief.43 Moreover, the presence of a robust CFPB encourages market discipline. Academic studies have shown that the threat of consumer complaints to the CFPB influences banks to lower fees.44 Through the agency’s consumer complaint process, an individual can submit a claim regarding various financial services products and issues, and the CFPB works on their behalf to contact financial institutions and help them address consumers’ concerns and get answers. Additionally, nearly all complaints referred to companies by the agency receive a timely response.45
Measuring the CFPB’s impact
Returned directly to wronged consumers
Accounts eligible for financial relief
Consumer complaints addressed by the CFPB on behalf of customers
Consumer complaints handled by the CFPB daily
It is also worth noting that payday lenders, the plaintiffs in CFPB v. CFSA, have been heavily scrutinized by the CFPB and other regulators for their predatory practices. Payday loans are generally short-term, small-dollar financial products. They are also extraordinarily costly and tend to target vulnerable communities, which already face barriers accessing traditional banking services.46 On average, a two-week payday loan can come with an annual percentage rate of 400 percent, compared with 12 percent to 30 percent for a credit card.47 Research by The Pew Charitable Trusts found that those without a four-year college degree, Black Americans, and those earning less than $40,000 annually are more likely to use payday loans.48
There is no question that the CFPB has fulfilled the role that Congress intended, implementing and enforcing federal consumer financial laws, including the Truth in Lending Act,49 the Real Estate Settlement Procedures Act,50 the Equal Credit Opportunity Act,51 and the Fair Credit Reporting Act,52 which govern a wide array of financial products and services. Through its rulemaking, supervision, and enforcement authorities, the CFPB has fought discriminatory practices in lending and fees that contribute to the racial wealth gap,53 including 323 enforcement actions,54 with $3.7 billion in penalties55 collected for violations of fair-lending laws. Additionally, as part of President Joe Biden’s commitment to rein in junk fees,56 the CFPB has examined fees imposed by banks and credit card issuers,57 supporting a recent proposal to limit credit card late fees that could save Americans $9 billion per year.58 A decision against the CFPB would place these achievements in flux.
Spillover effects on other agencies, financial markets, and the economy
If affirmed, the 5th Circuit’s ruling could have cascading effects on agencies funded outside of the annual congressional appropriations process, depending greatly on the specific rationale adopted by the court. These programs could even include Medicare and Social Security, which have permanent appropriations outside the annual appropriations process and generally only require congressional intervention if amended or repealed, although these agencies would likely be affected to a lesser extent given their entitlement authority.
The CFPB’s funding is structured similarly to a number of financial regulators such as the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Farm Credit Administration, the Office of Financial Research, and the Federal Housing Finance Agency, whose budgets are mostly derived from fees collected from supervised entities and other investments.59 The 5th Circuit’s ruling, if upheld, could leave these agencies vulnerable to funding and other legal challenges.
Financial crises of the past demonstrate how uncertainty can create economic distress. The Supreme Court will opine on this case as financial regulators continue to address the instability in the banking sector earlier this year and pursue new proposals to ensure a more resilient and reliable financial system.60 Amid volatility, banks may take steps such as restricting lending or increasing user fees, which could place an uneven burden on the most vulnerable individuals and communities. When these decisions are made, credit needs do not disappear, and some borrowers are forced to turn to lightly regulated or unregulated and costly alternatives.61 Consumers need both a strong CFPB and a robust financial regulatory framework.
Regulatory independence is a long-held, essential principle of well-functioning markets and a sound financial system. For example, independent regulators provide assurance to market participants that rules will be enforced consistently over time. This allows financial institutions and the businesses and households they serve to engage in long-term planning. The Mortgage Bankers Association, a trade group representing real estate finance companies that filed a brief in the 2nd Circuit case discussed above, cautioned that uncertainty “could destabilize critical segments of the national economy”62 and that “the mortgage markets would very likely all but grind to a halt as lenders would be unable to have any confidence that their transactions comply with law.”63
A reliable agency funding source is critical to maintaining regulatory independence and certainty. Among the worst-case scenarios of an adverse Supreme Court ruling in CFPB v. CFSA is that subsequent legal challenges could place one of the world’s most powerful economic institutions in flux: the Federal Reserve. The Fed is not only a regulator, but it also conducts monetary policy—managing interest rates, the money supply—and serves as a liquidity backstop in times of crisis, among other core economic functions.64 Throughout his term, former President Donald Trump made headlines for pressuring Federal Reserve Board Chair Jerome Powell to slash interest rates.65 The Fed is empowered to make judgments as consequential as setting rates or establishing strong banking standards based on its expertise and data—free from political interference and without a looming threat that such actions could affect the stability of its funding.66
For more than 12 years, the CFPB has employed its congressionally authorized independent authority to carry out its statutory purposes and protect everyday consumers from financial schemes and predators. Should the Supreme Court find the agency’s funding structure unconstitutional, it would not only undermine the CFPB’s ability to perform its critical mission, but it would also result in dangerous consequences for consumers and leave similarly structured federal financial agencies vulnerable to future legal challenges, potentially creating regulatory and economic chaos. The Supreme Court must be conscious of the wide-ranging effects of such a decision, which is clearly based on policy and political considerations—not constitutional ones. The court must resist the urge to conduct judicial policymaking, reject dubious legal arguments, and maintain the CFPB’s autonomy as intended by Congress.