On May 16, 2024, the U.S. Supreme Court held that the Consumer Financial Protection Bureau’s (CFPB) funding structure does not violate the Appropriations Clause of the U.S. Constitution. Justice Clarence Thomas authored the Court’s majority opinion and, in an unusual division of conservative voices, Justices Samuel Alito and Neil Gorsuch dissented. Since this decision, the reinvigorated CFPB has set its sights on the rise in mortgage closing costs, including credit reporting costs, and buy now, pay later lenders.
By way of background, the Community Financial Services Association of America and the Consumer Service Alliance of Texas – trade associations that represent payday lenders and credit-access businesses – filed suit against the CFPB in 2018 to challenge its regulations against high interest consumer loans. The lawsuit required a court in the Western District of Texas to review whether the CFPB’s funding structure complied with the Appropriations Clause of article I, section 9, clause 7 of the U.S. Constitution. The trial court found in the CFPB’s favor, and the Fifth Circuit Court of Appeals reversed, leading to the appeal to the U.S. Supreme Court.
Drawing largely from pre-founding history – the times of the Crown and Parliament – and from systems used during the post-colonial and Constitutional Convention era, the U.S. Supreme Court determined that what historically constituted lawful appropriations1 has varied. Legal appropriations sometimes specified the exact amount to be spent but sometimes did not, instead imposing spending limits. The only common thread was that each practice required an “identifiable source of public funds” and a “designated purpose.” Relying on this less stringent standard, the Court determined that because the CFPB’s funding statute specifies that the CFPB must take its funds from the earnings of the Federal Reserve subject to a cap2 as is “reasonably necessary to carry out the authorities of the Bureau,” the Appropriations Clause was satisfied.
The CFPB, known for its aggressive implementation of rules and sanctions since its launch in 2011, sees the ruling as commentary on the CFPB’s importance to this country’s financial regulatory system and swiftly issued a press release citing the decision as a “resounding victory for American families and honest businesses.”
The financial services industry can expect the CFPB to continue to vigorously enforce existing regulations and implement new laws, fines and assessments to ensure compliance. Since the U.S. Supreme Court’s decision, the CFPB issued press releases signaling upcoming targets of its enforcement efforts. On May 20, the CFPB published the prepared remarks of its Director Rohit Chopra at the Mortgage Bankers Association, in which the Director signaled the CFPB’s focus on the rise in mortgage closing costs, including credit reporting costs, calling out excessive charges imposed on both lenders and borrowers. On May 22, the CFPB issued a press release highlighting its new interpretive rule confirming that buy now, pay later lenders are credit card providers, requiring them to provide consumers with “key legal protections and rights that apply to conventional credit cards.” These rights “include a right to dispute charges and demand a refund from the lender after returning a product purchased with a Buy Now, Pay Later loan.” These recent CFPB press releases signal that the CFPB’s Director, bolstered by the U.S. Supreme Court decision and the agency’s recent “hiring spree,” hopes to dig in for the long haul with respect to the agency’s enforcement efforts.
- “‘[T]he payment of money from the Treasury must be authorized by statute.’” See Consumer Fin. Prot. Bureau. v. Comty. Fin. Servs. Ass’n. of Am., Ltd., No. 22-448, 2024 U.S. LEXIS 2169, at *13 (U.S. Sup. Ct. May 16, 2024) (internal citations omitted). Appropriations are government funds paid out through an appropriation made by law. See id.
- Currently, the Bureau cannot request more than 12 percent of the Federal Reserve System’s total operating expenses as reported in the 2009 Annual Report. 12 U.S.C. § 5497(a)(2)(A)(iii).
Client Alert 2024-114
