Tomorrow, the Supreme Court will hear oral arguments in Consumer Financial Protection Bureau v. Community Financial Services Association, a case which poses an existential threat to the CFPB. I have been asked time and again by clients, other industry folks and media what I think the Supreme Court will do. While it is always hazardous to predict the outcome of cases pending before the Supreme Court, particularly one in which oral argument has not yet been held, here is my opinion on how I think the Supreme Court should rule.
When the CFPB was created as part of the Dodd-Frank Act in 2010, the intent of Congress was to create an agency that would be totally insulated from political pressure from the president and Congress. The president could remove the agency's director only for good cause, a feature which the Supreme Court invalidated a few years ago as being contrary to the separation of powers and thus unconstitutional. Congress conferred on this agency sweeping and extraordinary regulatory, supervisory and enforcement powers that dwarfed the powers held by the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and Federal Trade Commission.
In order to enable the CFPB to act swiftly, Congress decided to repose all the power in a single director who would answer to nobody. (When has it ever been a good idea to have a single leader who answers to nobody?) The centerpiece of this legislation was the unique provision that gave the director the right to demand funds each year from the Federal Reserve System, rather than from Congress as part of the annual appropriations process. To put it succinctly, Congress created the poster child for the administrative state on steroids.
The Supreme Court should hold that the funding of the CFPB is unconstitutional because it violates the appropriations clause of the Constitution, which states that "[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law." The CFPB can directly requisition from the Federal Reserve Board "the amount determined by the Director to be reasonably necessary to carry out" the CFPB's functions each year, subject to a very high statutory cap which has never come close to being reached. (It is the equivalent of giving the CFPB a blank check.)
As the CFPB itself, rather than Congress, decides the amount of its annual funding, the funds are not "drawn … in Consequence of Appropriations made by Law." At our founding, an appropriation was considered a specific sum. The only "appropriation" that determines the "sum" that the CFPB takes each year is made by the CFPB unilaterally, not Congress. The CFPB argues that Dodd-Frank not only created the agency but also authorized its perpetual funding through the Fed. However, that assertion is in conflict with the appropriations clause which requires an agency to go to Congress for its periodic funding. In short, Congress cannot delegate its power of the purse to an agency which it has created.
I would also distinguish the CFPB's funding mechanism from that used by the Fed, OCC, FDIC, etc. The latter agencies are all self-funded in various ways, and their funding isn't covered by the appropriations clause. The CFPB is not self-funded. It is funded by the Fed. This is the equivalent of being funded by the Treasury since any funds not demanded by the CFPB ultimately revert to the Treasury.
I am not urging the Supreme Court to dismantle the CFPB or to invalidate all of its regulations. As pointed out by the
I would urge Congress to create a new governance structure for the CFPB by substituting a five-member bipartisan commission for a sole director and to nullify certain actions of the CFPB. Among other things, Congress should curb the CFPB's unfair, deceptive and abusive acts and practices (UDAAP) authority which the CFPB has greatly abused (no pun intended). The most extreme examples of this are the revisions last year to the UDAAP Exam Manual to encompass all types of discrimination which are not covered by the Equal Credit Opportunity Act.
Congress should also take a close look at any final rule which reduces the credit card late-fee safe harbor below its current level. I also urge Congress to preclude the CFPB from engaging in any further rulemaking regarding arbitration. There are, of course, many other actions taken by the CFPB which push the envelope and should be nullified by Congress. Space constraints don't allow me to enumerate all of the items on my wish list.
