Conservatives have never liked the Consumer Financial Protection Bureau, the brainchild of Massachusetts Sen. Elizabeth Warren. Now a conservative panel of the conservative U.S. Court of Appeals for the Fifth Circuit has struck down the CFPB’s rulemaking authority using a novel theory.
The court held that the mechanism Congress established to fund the bureau through the Federal Reserve is unconstitutional — even though it’s effectively the same as the mechanism used to fund the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration and the Federal Housing Finance agency, not to mention the Fed itself. The decision is logically almost indefensible, and the Supreme Court will now have to weigh in in order to overrule it, unless it wants to call into question the constitutionality of the rest of the financial regulatory state.
The first attack conservatives made on the CFPB involved a Supreme Court challenge to the way the director was insulated from political pressure by a for-cause removal provision. The justices held that provision unconstitutional in 2020. But they didn’t take the extreme step of invalidating the bureau’s regulations. Instead, they said the director had to be removable by the president.
The current assault on the CFPB took a different tack. Challengers to the bureau’s payday lending regulations claimed that Congress lacked the authority to fund the CFPB in the manner it chose. The way Congress set things up was that, every year, the bureau sends a request to the Fed for the amount its director thinks is necessary for its budget, capped at 12% of the Fed’s total operating expenses. The Fed itself is funded primarily through interest on the securities it owns, not through congressional appropriation.
There is nothing unusual about Congress choosing to have financial regulatory agencies fund themselves instead of paying for them out of the federal budget. I vividly remember showing up for an internship at the OCC in the summer of 1994, and being stunned by how nice the building was relative to the other federal agencies I’d visited. The reason for the relative elegance was, I recall being told, that the OCC was self-funded by assessments and fees paid by regulated banks, plus other investments. The comptroller wasn’t reduced to begging Congress for funds to paint the hallways.
Constitutionally, there is nothing to prohibit financial regulatory agencies being funded by means other than congressional appropriation. The Constitution says that “no money shall be drawn from the Treasury, but in consequence of appropriations made by law.” And no money is drawn from the Treasury to fund the financial regulatory agencies. The Supreme Court has repeatedly (and reasonably) said that this clause “means simply that no money can be paid out of the treasury unless it has been appropriated by an act of Congress.” For this reason, the U.S. Court of Appeals for the DC Circuit and a slew of federal district courts have all upheld the CFPB’s funding structure.
Undaunted by the unanimity of the other courts, the Fifth Circuit panel cooked up a new theory of why it is unconstitutional for Congress to fund the bureau in this way. First, the court said that the appropriations clause is violated by the bureau’s funding because Congress isn’t appropriating the money and isn’t reviewing the Fed’s allocation of it. Recognizing that this argument doesn’t distinguish the CFPB from the other agencies, the court went on to say that the bureau is unique because of its “vast” rule-making authority.
It’s easy to see what’s faulty about this logic. The separation of powers cannot be violated by the funding of the CFPB because Congress itself adopted the plan, and Congress can change it whenever it wants.
As for the bureau’s powers, they are hardly more expansive in their effects than those of the Fed itself, which is also self-funding. The Fed’s decisions obviously affect the whole national economy, not to mention the global economy. The Fifth Circuit panel may secretly believe the Fed is unconstitutional, but it is (for now at least) unthinkable that the Supreme Court would reach that conclusion.
What’s more, the text of the Constitution does not say that the only way government activity can be funded is through congressional appropriation. In the framers’ world all sorts of self-funding mechanisms for government actors were common. The commanders of naval vessels, to mention just one small example, got to keep proceeds from enemy vessels they captured, splitting the money with their crews. No originalist who spends more than 30 seconds on the history could possibly conclude in good faith that the Constitution was meant to prohibit self-funded government activity.
The Fifth Circuit wasn’t satisfied with just striking down the CFPB’s funding mechanism. It went on to say that whatever the bureau does by way of rulemaking is therefore unlawful. This conclusion is in contrast with the Supreme Court’s refusal to strike down the bureau’s regulations after finding unconstitutional the insulation of the director from firing.
All this leads to a serious practical problem: The CFPB is constitutional in the DC Circuit but not in the Fifth Circuit. The Supreme Court will now have to resolve the circuit split. Here’s hoping it does so expeditiously and sensibly. If it doesn’t, the whole structure of financial regulation could be in jeopardy.
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ABOUT THE WRITER
Noah Feldman is a Bloomberg Opinion columnist. A professor of law at Harvard University, he is author, most recently, of “The Broken Constitution: Lincoln, Slavery and the Refounding of America.”
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
