In early October, the U.S. Supreme Court will hear arguments in a case that could determine the fate of the decade-old Consumer Financial Protection Bureau, and possibly other federal agencies — including possibly the Federal Reserve System — not funded through annual appropriations by Congress. Created in the wake of the Global Financial Crisis as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the bureau, or CFPB, was the brainchild of U.S. Senator Elizabeth Warren, then a professor at Harvard Law School. Despite its work to protect individuals and families from unfair practices from banks and other financial institutions — including more than $14 billion in consumer relief over the years — the CFPB has been subject since its inception to intense scrutiny and legal challenges, including a 2020 ruling by the Supreme Court that its leadership structure was unconstitutional.

The latest constitutional question comes in a case — Consumer Financial Protection Bureau v. Community Financial Services Association of America, Limited — challenging an effort by the bureau to regulate the payday lending industry. At issue is whether the CFPB’s funding structure violates the Appropriations Clause of the U.S. Constitution, which states that “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” Since the CFPB is not funded through the annual appropriations process, but through permanent statutory authority to obtain funding from the Federal Reserve, or the Fed, the U.S. Court of Appeals for the Fifth Circuit ruled that Congress had run afoul the Appropriations Clause when it established the CFPB. The Fifth Circuit also invalidated the new payday lender rule on the grounds that its funding was the product of an unconstitutional funding arrangement. In asking the Supreme Court to reverse the Fifth Circuit’s decision, the Biden administration has stressed that many other federal agencies and programs, including the Fed itself and many other banking regulation agencies as well as entitlement programs, such as Social Security, are also funded on a permanent basis or benefit from mandatory spending arrangements that need not be renewed with annual appropriation each year.

Harvard Law School Professor Howell Jackson J.D./M.B.A ’82, a federal budget expert who is currently teaching a joint Harvard Law and Harvard Kennedy School course on Federal Budget Policy this semester, says that the case poses a risk not only to the CFPB itself but potentially to other agencies and programs not currently dependent upon Congress’ ability to annually approve federal spending by the beginning of the new fiscal year — a goal it does not always achieve on time. Harvard Law Today spoke to Jackson, who served as a visiting scholar at the CFBP from 2013 to 2015, about the constitutional law questions, the stakes for the bureau and other vital federal agencies, and about the case’s unexpected benefits for his Federal Budget Policy class.

Harvard Law Today: Could you briefly describe the Fifth Circuit ruling? What is the Supreme Court being asked to weigh in on?

Howell Jackson: The Consumer Financial Protection Bureau has been the subject of considerable litigation over the years. From the beginning, there were legal challenges, including constitutional claims, attacking its combination of powers and about its unique managerial structure. The bureau has already been up to the Supreme Court once a few years ago in a case involving the capacity of the president to remove the bureau’s director. The case before the Court this term coming out of the Fifth Circuit focuses on the funding structure of the CFPB. The specific agency action at issue is the bureau’s adoption of something known as a payday lending rule, which deals with companies that make short-term loans to borrowers. The litigation originally included a number of administrative law issues, and the Fifth Circuit upheld the rule on those grounds. But somewhat surprisingly and in a controversial decision, the Court of Appeals concluded that the funding structure for the CFPB violated the Appropriations Clause of the U.S. Constitution, and therefore both invalidated the funding structure and concluded that the payday lending rule was itself unlawful. The part of the case that is before the Supreme Court is this ruling on the Appropriations Clause and the proposition that Congress violated this provision of the Constitution in its passage of the Dodd-Frank Act.

HLT: Why did the Fifth Circuit court believe the CFPB’s funding structure violated the Appropriations Clause? How is it funded?

Jackson: Congress appropriates in a lot of different ways. One familiar form is an annual appropriation bill of the sort that is supposed to be passed before the beginning of each fiscal year. Nowadays, however, a good deal less than half of federal spending is funded annually, with the majority of spending being funded as permanent or mandatory spending. Permanent funding and alternative funding arrangements have existed since the early years of the republic. In its decision the Fifth Circuit focused on the specific terms of CFPB’s unique funding structure. Rather than requiring that the bureau go to Congress for annual appropriations, the Dodd-Frank Act set up an arrangement whereby a fraction of the Federal Reserve’s revenues could be allocated to the CFPB, and each year the director would request a budget up to a certain amount that Congress had authorized. Then, the Fed would transfer those funds to the CFPB to cover its expenses over the coming year.

There were two reasons that the CFPB was set up that way. One reason is that the bureau took over the oversight of a number of consumer protection laws that the Fed had previously administered, such as the Truth in Lending Act. With the creation of the CFPB, the Fed no longer had to do that work and it made some sense to allocate some of the Fed’s resources to enable the CFPB to continue those operations. Under the Dodd-Frank Act, the bureau is technically a subdivision of the Federal Reserve, although in practice it operates as an independent entity. The other reason for this funding arrangement was quite self-consciously related to the framers of the Dodd- Frank Act not wanting to have Congress interfering with the work of the CFPB on an annual basis in the appropriations process, on the view that it would allow too much politics to get into regulation. And if you look at the other banking agencies, the Fed itself, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, they all have these permanent funding structures and they’re insulated from annual appropriations process. Some financial regulators are not insulated in this way. The Securities and Exchange Commission and the Commodity Futures Trading Commission both depend on annual appropriations and many policy analysts believe that constraint has inhibited their work.

HLT: What are the federal government’s arguments? I don’t imagine the Constitution’s framers could have envisioned the CFPB. And President Jackson was famously opposed to anything like a Federal Reserve Bank.

Jackson: It’s true that there are a lot of aspects of the administrative state that the framers couldn’t have contemplated. I think one thing is clear, though: the framers certainly contemplated that appropriations might be made over a longer period of time than one year. And we know that because the Constitution itself says the Army can’t get appropriations for more than two years. That limitation wouldn’t have been put in the Constitution if there were a one-year limitation on all appropriations. Over time, Congress has adopted many, many examples of permanent appropriations, including permanent indefinite appropriations. For example, interest on the federal debt is permanently appropriated. Congress does not sit around each year and try to decide how much to pay of interest. Interest payments have permanent funding. And to a considerable degree, the other banking agencies have a permanent appropriation up to the limit of the fees that they can charge. The CFPB has a similar permanent appropriation up to the statutory amount that was set by Congress. That’s a quite common practice. 

HLT: If the Supreme Court upholds the Fifth Circuit’s decision, would federal agencies and programs with permanent appropriations also be scrutinized? I believe Social Security, for instance, has a mandatory appropriation.

Jackson: Social Security is a good example. Social Security benefits are permanently appropriated up to the amount that comes in from the payroll taxes and certain other resources that are paid into the trust fund, and these funding sources have been adequate to pay Social Security benefits since the foundation of the program. There is a concern that those resources won’t be enough to fund the program when you get out to 2032 or so, but the program clearly relies on a permanent appropriation. So, this case is important for the CFPB, but its broader implications are also important. As we’ve been discussing, there are many different parts of the government that are funded in a permanent way. The bank regulating agencies, as I’ve already mentioned. The Smithsonian Museum has a permanent gift authority that allows it to spend all private gifts that it receives. And every federal government concession stand, when they sell hot dogs, they can buy more hot dogs with the proceeds. So, there’s lots and lots of permanent appropriations. And the question is, if the Court were to follow the reasoning of the Fifth Circuit, what other funding arrangements would be in jeopardy. It’s difficult to predict what the Court might do if it went in that direction.

Reading over the briefs of the main parties, I would say that the parties challenging the CFPB funding structure are largely arguing that its funding arrangement is different than all of our other forms of permanent funding. So, they’re not themselves taking on Social Security or the other banking agencies. They want to say that the CFPB is different, the funding arrangement is different. And the government defending the CFPB is largely saying no, the CFPB’s funding arrangement is quite analogous to lots of things that we’ve done in the past. If the Court were to adopt the challengers’ position, it would distinguish the CFPB, and so maybe not threaten these other existing things and say that there’s a distinction here. Conceivably, one could imagine the Court could go so far as to say — and this would be breathtaking to those who follow federal spending law — that Congress must annually appropriate or periodically appropriate everything. That would really be a dramatic change in our financial structure. I personally very much doubt the Court would go that far.

HLT: When the Court found in Seila Law LLC v. Consumer Financial Protection Bureau that the leadership structure unconstitutionally violated separation of powers, there was an easy fix and the bureau continued to operate. If they again rule against the CFPB, is there an easy fix for the funding question?

Jackson: One of the distinguishing features that the Court focused on in the Seila Law case was the amalgamation of powers within the director of the CFPB, sitting on top of rulemaking and enforcement. And the Fifth Circuit’s decision has a little bit of that flavor, that this funding arrangement is problematic because of the special role the CFPB plays and the way in which it’s structured. The Fifth Circuit also focuses on the fact that the Fed is the one that is sending the funds over to the CFPB. That two-track system is unusual and it was problematic in the Fifth Circuit’s decision. So, depending how the Court writes its decision, you could imagine Congress correcting it by make the permanent appropriation a little bit more direct from the Treasury, rather than indirect through the Fed. You also could imagine adjustments to the organizational structure. There have been bills pending — mostly from the Republican side — to replace a single director with the somewhat more familiar five-person commission like the SEC and some other agencies. So, to the extent that the decision turned on distinctive features of the CFPB, you could imagine fairly straight-forward legislative fixes.

Then there is a separate issue from the Fifth Circuit that is being briefed and discussed at the Supreme Court. What is the consequence if the funding mechanism is found invalid? Does that mean everything that the CFPB has done is invalid? That would be a huge change in the decade-long legacy of the bureau upon which a lot of people have designed their compliance systems and business operations. And, of course, consumers have greatly benefited from the work of the agency. Are we going to go back to the bad old days? It will just be a mess if all the work of the last 12 years were undone in a single stroke.

HLT: If the Court overturns the Fifth Circuit, and sides with the government, what happens with the payday lending rule?

Jackson: Absent some other legal challenge, I think the payday lending rule would remain in effect, because there’ll be no other basis for overturning under the Fifth Circuit’s decision.

HLT: As you’ve pointed out, the CFPB has been subject to a lot of litigation challenging its legitimacy. Is there something we should take from that?

Jackson: My take away is that there are two things that combine here. One is that financial regulation is often controversial. If you go back to the early days of the republic, you might think of McCulloch v. Maryland from 1819 as a famous constitutional law case. I think of it as a famous banking case because it’s about the power of Congress to establish a national bank. Changes in financial regulatory structure often attracts judicial challenges. The Social Security Act was challenged and went up to the Supreme Court. The constitutionality of the SEC has been challenged at various times. There’s been a lot of litigation over the years about the constitutionality of regulatory agencies. When the federal government gets into a new space, it prompts litigation.

The other thing I would say is, Congress often deals with complicated spending issues with creative solutions. The Gramm Rudman Hollings Act from the mid-1980s had a way of getting towards a balanced budget that had a novel arrangement for sequestering funds that went to the Supreme Court and aspects of it were struck down. At one point, Congress came up with a line-item veto arrangement for the president. That also went up to the Supreme Court and was struck down. So, with spending, Congress sometimes tries to be creative and do new things. And that also prompts legal challenges. I think that the CFPB is well grounded in precedent. I had a very, very modest role in kibitzing with the Obama administration when the Dodd-Frank Act and these provisions were put together. And it was not on my radar screen that we were skating close to the edge of the Appropriations Clause with this funding arrangement. It wasn’t something that seemed like a plausible challenge. So, I’m hopeful that the Supreme Court, or at least five members of the Supreme Court, will see it that way as well too.

HLT: Is there anything else you’d like to add?

Jackson: One of the good things about the case is that it is making the students in my Federal Budget Policy class think that they are at the cutting edge. It’s very good for enrollment to have a case pending before the Supreme Court. So, for that, I’m grateful.

This conversation has been edited for brevity and clarity.

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