By Will Merrix 
Photo Credit: Alex Wong/Getty Images
Case History
The Consumer Financial Protection Bureau (CFPB) was created as an executive agency under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Congress granted the CFPB the ability to request its funding from the Federal Reserve Bank, allowing the CFPB to request up to 12% of the Federal Reserve’s budget. The following case is a dispute over how the CFPB’s money was appropriated for their yearly budget.
The Community Financial Services Association of America challenged this funding scheme in the wake of a CFPB rule that reportedly sought to curb predatory lending practices by “prevent[ing] lenders from attempting to collect payments from people’s bank accounts in ways that may rack up excessive fees or deviate from what they expect.” They argued that the rule was invalid, as it was issued under an unconstitutional funding scheme that gives the CFPB authority to establish its own income rather than having to request money from Congress.
Since the Constitution gives congress the power to originate budget bills, most executive agencies receive yearly funding that is directly allocated in the congressional budget whereas the CFPB can request up to 12% of the Federal Reserve’s budget pursuant to the Dodd Frank Act. This means that the CFPB requests from a pool of money that is not taxpayer dollars but rather private money as the Federal Reserve derives its own money from fees “received for priced services provided to depository institutions” as well as “the interest earned on the securities it owns.” These “institutions” are private banks who are members to and do business with the Federal Reserve.
The Fifth Circuit Court of Appeals issued a ruling that agreed with the Consumer Financial Services Association’s argument and invalidated the CFPB’s funding structure under Article 1 Section 9 of the Constitution. The Fifth Circuit stated, “Congress’s decision to abdicate its appropriations power under the Constitution… violates the Constitution’s structural separation of powers.” The CFPB appealed this decision and the Supreme Court granted review.
The Consumer Financial Services Association asserted five main grievances with the CFPB’s funding structure in their brief. Their primary objection is that the law provides for a standing appropriation, which is an appropriation that is created as part of a law congresses passed and is therefore not subject to review with the annual budget. This kind of set up, authorizes program spending for a specific period of time or indefinitely depending on what the law that was passed stipulates. Second, they argue that the appropriation is not a specific number but rather a monetary cap– no more than 12% of the Federal Reserve budget. Third, they explain that it gives the CFPB director some discretion when requesting the amount of funding because he selects the exact amount within the aforementioned 12% cap, effectively ceding congressional power to administer the budget to a bureaucratic agency of the executive branch. Fourth, they say that the CFPB has enforcement and regulatory functions that allow it to “levy knee-buckling penalties against private citizens”, like promulgating and enforcing the predatory lending rule that sparked the initial challenge to their funding structure. And finally, they argue that the CFPB’s funding comes from a source unconstrained by market forces because the money funding the Federal Reserve does not come directly from the people.
Earlier this month, the Court heard oral arguments from both sides. Because the CFPB is an agency whose leader is selected by the President, it falls within the control of the executive branch. This means that the federal government’s personal lawyer, Solicitor General Elizabeth Prelogar, argued on behalf of the CFPB. The Consumer Financial Services Association was represented by Elizabeth Prelogar’s predecessor, former Solicitor General Noel Francisco, who is now a private attorney for the Jones Day firm. Together these experienced advocates have argued a combined 44 cases in front of the Supreme Court.
The Petitioner
In her opening statement, Solicitor General Prelogar focused on the degree to which the CFPB’s funding statute is “firmly grounded in constitutional text and in historical practice.” She cited a myriad of agencies that have funding structures analogous to the CFPB. These organizations include the Customs Service, Post Office, National Mint, Patent Office, Internal Revenue Service, National Bank, Federal Deposit Insurance Corporation, National Credit Union Administration, Federal Housing Finance Agency, Office of the Comptroller of the Currency, and the Farm Credit Association. After concluding her opening statement, Solicitor General Prelogar faced questions from the justices that fit into two broad categories: historical comparisons and statutory and constitutional text, as well as limits on monetary spending caps (like the 12%), and the separation of powers.
Summary of Arguments: Historical Precedent and Textual Interpretation
In response to her first question from Justice Thomas, Solicitor General Prelogar went out of her way to “emphasize that [her] argument here also relies heavily on history.” She pointed to an extensive record of capped lump sum standing appropriations given to various agencies. From the federal government’s perspective, this makes the funding structure of the CFPB “nothing new or unprecedented.” Chief Justice Roberts prodded at this argument by saying he did not see anything “particularly compelling” about the presented examples because none of them showed that a public agency could draw its funds from an entity that is funded by the private sector. In this context, Chief Justice Roberts was referring to the fact that the CFPB obtains its funding from the Federal Reserve.
Solicitor General Prelogar pushed back on this notion by citing that the Customs Service, at its founding, had also drawn money from the private sector along with modern day agencies like the “Federal Reserve Board, Federal Deposit Insurance Corporation, National Credit Union Administration, Farm Credit Association, and Federal Housing Finance Agency.” Later on, she also pointed to the Customs Service when Justice Alito asked for the government’s “single best [historical] example of an agency that has all of the features that the CFPB has.”
Justice Alito also made inquiries about the text of the Dodd-Frank Act. He pressed Solicitor General Perlogar on a specific line of the law that explains how the CFPB’s funding “shall not be construed to be government funds or appropriated monies.” Solicitor General Prelogar explained that Congress’s intent with this language was to “control for the interaction between the [CFPB] mechanism and other background rules.” She further argued that rules such as the Miscellaneous Receipts Statute would “interfere with the funding [structure] congress intended.” Justice Alito interjected, stating that the language of the Dodd Frank Act would then be “wrong.” However, the Solicitor General responded by arguing that the law’s language was “not taking a stance” on whether or not the scheme fit the definition of an appropriation within the scope of the Constitution, rather that it was commenting on how the Act should interact with regulatory rules already in place. Solicitor General Prelogar also requested that the Court’s focus should be on the “enormous variation” in historical appropriations, not that the CFPB structure needs an exact analog.
Summary of Arguments: Limits and Separation of Powers
Several justices wanted to know the government’s position on possible limits and interference with the separation of powers. Justice Thomas began this line of questioning by asking Solicitor General Prelogar if there was “no other condition” that appropriations have to satisfy outside of the “almost skeletal requirements”currently in place. If not, she wondered whether the CFPB’s funding scheme “eviscerated the kind of exacting control” Congress should have when it appropriates money for new agencies or re-examines appropriations of existing agencies.
Concerning the first part of the question, Solicitor General Prelogar said that the appropriations clause of the Constitution did not place any limits on Congress, outside of defining appropriations as needing a “duration and purpose.” She went on to say that Congress had exercised its powers and control when it passed the standing appropriation that set up the funding structure of the CFPB, and therefore offered its consent to the CFPB’s funding structure. She advocated that the text of the Army Appropriations Clause put to bed the notion that Congress must impose time limits on all of their appropriations, stating that the founders must have been aware of certain appropriations they did not want to be standing because the Army Appropriations Clause explicitly says that appropriations for the military cannot exceed two years. She contends that because no other agency or group is given this kind of explicit limit that the founders purposely left them out and thus no other agencies are required to have appropriations subject to a duration.
Justice Kagan asked Solicitor General Prelogar about the government’s answer to a hypothetical raised by the Consumer Financial Services Association. The hypothetical supposes that under the current structure, Congress could draft an appropriation delegating “up to a quadrillion dollars for the President to fund, as he deems fit, the entire federal government besides the army.” Solicitor General Prelogar said this would be a constitutional violation because it would be “completely unprecedented,” unlike the CFPB’s funding scheme under consideration. She went on to concede that the Court could recognize limits on capped appropriations if faced with that particular hypothetical, but she did not specify a particular number.
Justice Sotomayor asked a multi-pronged question about the separation of powers. First, Justice Sotomayor asked for an explanation of the difference between separation of powers and the nondelegation doctrine, which is a legal theory that says Congress cannot delegate its legislative powers or law making ability to other entities, such as an agency like the CFPB. The Fifth Circuit ruled that the Consumer Financial Services Association’s nondelegation argument was forfeited upon appeal because they did not present it in district court and that Congress provided “an intelligible principle to guide the [bureau’s] discretion” as required by Hampton Co. v. United States. Justice Sotomayor wondered if this also meant the Consumer Financial Services Association had to forfeit the separation of powers argument if the two were similar. She further inquired if the government thought that these two principles had a place of discussion within the case. Solicitor General Prelogar responded by saying the government believed the two did have some “overlapping functions,” but that when the Court had considered broad separation of powers arguments in the past, they looked at “text and history,” and should do the same in this case.
The Respondent
In his opening statement, Noel Francisco said that the current structure of the CFPB “reflects the feared unification” of sword and purse, a term used by Alexander Hamilton in Federalist 78. Francisco argued that the CFPB’s sword is its ability to promulgate and enforce rules while its purse is its ability to select its own amount of funding. He refuted the government’s positions by saying the CFPB’s funding is unprecedented because it gets to pick “its own perpetual appropriation” and that the historical similiarities cited by Solicitor General Prelogar are markedly different because they are “limited to what they can collect from the people they serve and regulate.” He asked the Court to “hold the line where it stands” so it does not endorse the “unification of sword and purse that the Constitution was designed to prevent.” Francisco welcomed the Court’s questions which took on two overarching themes: clarification of the argument and textual interpretations of the appropriations clause.
Summary of Arguments: Clarification of the Argument
Justice Thomas was the first to ask for some clarity on the respondents’ positions. He asked if Francisco could tell him precisely how the CFPB’s scheme runs afoul of the separation of powers. In response, Francisco said the appropriations clause requires “Congress to determine how much the government should be spending.” He argues that the CFPB being allowed to request its budget subject to a cap “so high it’s almost never relevant” is functionally no different than Congress saying to the President “spend whatever you want.” Later Justice Thomas also asked Francisco to finish the sentence, “funding of the CFPB violates the appropriations clause because…” to which Francisco obliged him, “Congress has not determined the amount that this agency should be spending.” He went on to argue again that “instead, [Congress] has delegated to the director the authority to pick his own appropriation, subject only to an upper limit so high it’s rarely meaningful.”
Justice Kagan also pressed Francisco on his tests for a constitutional funding scheme. She asked him to clarify if his core argument turned on the idea of a fixed sum of money. In response, Francisco clarified that a fixed number is not the core of his argument. During a later exchange where the two discussed potential applications of a ruling in the Consumer Financial Services Association’s favor, regarding agencies like the Federal Reserve and Office of the Comptroller of the Currency, Kagan interjected, “you’re now adding a new thing to your test” after Francisco insisted the Federal Reserve and Office of the Comptroller of the Currency were funded constitutionally because they were “limited to what they can collect from the people that they serve and regulate.”
Also searching for clarification was Justice Barrett. When discussing potential limits on how high a cap can be, she asked the following: “what would the standard be? Is it like an intelligible principle of money spent? I mean I think we’re all struggling to figure out what’s the standard you would use.” Francisco responded by advocating that the justices should look at the “front end” when Congress drafts the appropriation rather than after they enacted a cap. He further explained that the justices need to answer one question: “has congress made a determination as to what the amount should be or has it delegated that fundamental determination?”
Justice Sotomayor summed up her mood with Francisco’s arguments by saying, “I’m trying to understand your argument and I’m at a total loss.” She then asked Francisco when standing appropriations should be considered wrong, when they are right, how much detail they need, and why a “cap is different from a standing appropriation for a certain amount.” To this barrage, Francisco responded by stressing Congress’s need to “determine an amount,” following his consistent argument that otherwise, it is “so high it’s rarely relevant.” He explained that the current situation “allows Congress to essentially transfer its appropriations power to the executive branch for an indefinite period of time.”
Summary of Arguments: Textual Interpretations of the Appropriations Clause
Underlying all these questions of clarity, Justice Jackson in particular was very vocal about whether or not Francisco’s argument squared with the text of the appropriations clause. Engaging him regarding the topic of limits, she asked, “what in the text of the appropriations clause makes it so that the requirement is that the government has to fix the amount?” Francisco made three points in response. First, he said it is “inherent in what an appropriation is.” Second, he argued that the spending must be “in consequence of Congress’s judgment,” but that cannot be the case if the choice is delegated to an agency head. Third, he said that allowing Congress to delegate that choice is directly going against the history of separating the “sword from the purse.” Justice Jackson countered by suggesting that the definition of an appropriation is “just the decision that a particular government department can spend up to a certain amount of money.” Francisco said that that definition would mean that Congress could “let the President pick his own appropriation.” Justice Jackson doubled down on this definition in retort by saying: “but if that’s the definition in the Constitution, I’m not allowing anything.”
This exchange is emblematic of the three other times the two conversed. With fundamentally different interpretations of the Constitution, Justice Jackson questioned Francisco’s definition of Congress’s delegating power, what the “power of the purse” meant, and whether appropriations were a “prerogative or obligation” for Congress. Francisco met all of these with the idea that the inherent point of the appropriations clause was to separate the “sword from the purse,” and under the current structure that was not the case.
Takeaways and Consequences
In aggregate, the government leaned heavily on arguments of history and comparisons to other executive agencies. The respondents’ logic operated from a distinct interpretation of the Constitution that requires Congress to set specific appropriations. Throughout the oral arguments, as evidenced by the quotes above, some of the justices seemed to have a hard time grasping the respondents’ argument without a clear legal test to place on all appropriations. The outcome of this case has the potential to affect the appropriations process as a whole. Its ruling could go against precedent set in cases like Cincinnati Soap Co. V. United States, where the majority opinion stated:
“Congress has wide discretion in the matter of prescribing details of expenditures for which it appropriates… Appropriations and other acts of Congress are replete with instances of general appropriations of large amounts, to be allotted and expended as directed by designated government agencies.”
Additionally, because the CFPB has only ever acted under the challenged appropriations scheme, they claim that a ruling in favor of the Consumer Financial Services Association would call “into question virtually every action the CFPB has taken in the 12 years since its creation.” Looking back at the Court’s 2020 decision in Selia Law, LLC. v. Consumer Financial Protection Bureau, which invalidated the CFPB’s leadership scheme, the Court’s decision about the CFPB’s budget could decimate the CFPB’s ability to operate.