On October 3, 2023, the United States Supreme Court heard oral argument in Community Financial Services Association of America Ltd., et al. v. Consumer Financial Protection Bureau, et al., in which the Court was asked to determine the constitutionality of the Consumer Financial Protection Bureau’s (“CFPB”) independent funding structure.

In Community Financial Services Association of America Ltd., et al. v. Consumer Financial Protection Bureau, et al., the U. S. Court of Appeals for the Fifth Circuit held in a unanimous decision that the CFPB’s “unique” funding structure was unconstitutional and vacated the CFPB’s 2017 Payday Lending Rule “as a product of the [CFPB’s] unconstitutional funding scheme.”

In Community Financial Services Association of America Ltd, the Fifth Circuit stated that, unlike other independent executive federal agencies, the CFPB’s funding scheme, which was established in the Dodd-Frank Act, is unique in that it does not receive funding from periodic congressional appropriations. Instead, the CFPB receives its funding directly from the Federal Reserve, which the Fifth Circuit stated is “funded outside the appropriations process through bank assessments.” The Fifth Circuit explained that under the CFPB’s funding structure, the CFPB’s director determines the amount of funding to be provided by the Federal Reserve. The Federal Reserve must grant the Director’s funding requests so long as the amount sought does not exceed twelve percent of the Federal Reserve’s total operating expenses. The Fifth Circuit determined that in establishing this funding structure, Congress double insulated the CFPB from its control over governmental purse strings and directly and indirectly ceded its appropriations power in violation of the Constitution.

Additionally, the Fifth Circuit stated that Congress went to “even greater lengths to take the Bureau completely off the separation-of-powers books” by allowing the CFPB to hold its funds in an account at the Federal Reserve bank that remains under the control of the CFPB’s Director without any further act of Congress. The Fifth Circuit concluded that the CFPB’s “funding apparatus cannot be reconciled with the Appropriations Clause and the clause’s underpinning, the constitutional separation of powers.”

Since the Fifth’s Circuit’s decision, a circuit split has developed. In March of 2023, the U. S. Court of Appeals for the Second Circuit declined to follow the Fifth Circuit’s decision and held in Consumer Financial Protection Bureau v. Law Offices of Crystal Moroney, P.C. that the CFPB’s funding structure was constitutional. In June, the Second Circuit agreed in Law Offices of Crystal Moroney, P.C. to stay a mandate regarding the enforcement of an investigative demand from the CFPB directed to the Law Offices of Crystal Moroney, P.C. until after the Supreme Court issues a decision on the Fifth Circuit’s determination.

Should the Supreme Court uphold the Fifth Circuit’s decision that the CFPB’s funding structure is unconstitutional, the validity of over a decade of federal rule making by the CFPB would be thrown into doubt and similar challenges could be brought against other agencies that similarly do not receive direct Congressional appropriations, such as the Federal Deposit Insurance Corporation.