As noted earlier, the Supreme Court heard oral arguments about how the CFPB is funded – with an underlying issue of whether ALL of the CFPB’s actions since its inception should be called into question. So that’s the biggest impact this case could have – invalidating all of the CFPB’s actions over the past decade.
Based on an initial assessment of how the Justices acted, it does not seem likely that they are going to approve of such a broad-sweeping remedy even if the funding mechanism can be questioned.
All in all, Justice Sotomayor was the only Justice who really brought up the remedy issue. The CFPB noted that there is an express severability clause in Dodd-Frank. Additionally, CFSA did not focus on that reasoning of the Fifth Circuit related to remedies, and even clarified that they are not seeking to strike down every rule passed by the CFPB – rather they were just challenging the specific rule.
Solicitor General Elizabeth Prelogar represented the CFPB and attorney Noel Francisco represented the Community Financial Services Association. I summarized the oral arguments below — and you can read the argument transcript here.
CFPB
As expected, Prelogar argued against the Fifth Circuit’s decision, which marked the first instance in U.S. history where a court ruled that Congress breached the Appropriations Clause by enacting a funding statute. She emphasized that the CFPB’s funding mechanism is rooted in both the Constitution’s text and historical practices that trace back to the country’s inception. Prelogar highlighted that Congress has a longstanding tradition of funding agencies through non-time-limited appropriations, citing examples from the first Congress and various financial regulators.
She noted that the Respondents argue that the CFPB’s funding mechanism violates an unrecognized constitutional boundary. However, the Bureau’s funding is consistent with other historical funding statutes, which the Respondents admit are constitutional.
Justice Thomas inquired about the limits on Congress’s power beyond passing appropriations laws. Prelogar explains that the term “appropriation” has specific requirements, including specifying the source and purpose of funding. She emphasized that while the Constitution places some limits on appropriations, such as for the Army, it doesn’t generally restrict Congress’s authority in structuring funding.
Chief Justice Roberts raised concerns about the CFPB’s unique funding mechanism, which allows it to request funds up to a certain limit from an external entity. Prelogar provided historical examples of similar funding mechanisms.
Justice Gorsuch questioned the role of the upper limit in the CFPB’s funding and whether the President could potentially request an exorbitant amount. Prelogar clarified that while there’s no strict upper limit, the amount requested must be “reasonably necessary” for the Bureau’s functions.
Justice Barrett and Justice Alito raised questions about the nature of the funds and the Dodd-Frank Act’s provisions. Prelogar defended the constitutionality of the CFPB’s funding, referencing historical practices and the intent of Congress. Justice Sotomayor and Justice Kagan noted the separation of powers and potential limits to appropriations.
Justice Alito asked about a test for determining the constitutionality for funding, and Prelogar stated that the test involves both text and history. She highlighted again that while the Constitution expresses concerns about funding the Army with a standing appropriation, it does not impose similar restrictions on other functions.
Justice Alito further inquired about historical examples of agencies with similar features to the CFPB. Prelogar cited the Customs Service, established in 1789, as a prime example. The Customs Service had a standing, uncapped source of funding derived from revenues it collected, making it a powerful agency.
Justice Sotomayor shifted the discussion to remedies, expressing concern over the Fifth Circuit’s broad remedy that invalidated not just the Payday Lending Rule but all actions of the agency since its inception.Prelogar argued against this retrospective remedy, emphasizing the express severability clause in Dodd-Frank and the potential disruption such a remedy could cause, especially in the housing finance space.
Justice Kagan then revisited the historical precedent of appropriations. She asked if it’s more significant that all parts of a scheme have been used historically or if the entire scheme itself has an exact precedent. Prelogar highlighted the vast variation in Congress’s appropriations over history and defended the CFPB’s funding mechanism, noting it isn’t novel.
CFSA
Respondents argued that the CFPB’s funding scheme is unprecedented and poses a threat to the separation of powers. They emphasized that Congress has never before authorized an agency to determine its own perpetual appropriation. The respondents drew a distinction between the CFPB and other fee-for-service agencies like the Post Office, noting that such agencies are limited by what they can collect from the people they serve.
The concern is that if Congress can authorize the CFPB to determine its own funding, it could do the same for other agencies, leading to a potential unification of powers that the Constitution seeks to prevent. Throughout the discussion, Justices sought clarity on how the CFPB’s funding scheme might violate the Constitution, with some Justices emphasizing the need for a clear Constitutional basis for any objections to the scheme.
Francisco argued that the Appropriations Clause is meant to separate the power of the sword from the purse. He contended that Congress cannot delegate the power to decide the amount of appropriation to the executive branch.
Justice Kagan challenged Francisco’s argument by pointing out that from the very beginning, Congress has not strictly adhered to annual line-item appropriations. Instead, they sometimes provided lump sums without specific line-by-line breakdowns. Justice Sotomayor then highlighted that a significant portion of appropriations are “standing appropriations” which are not given every year. She questioned Francisco on his stance regarding these appropriations and how they differ from caps.
Francisco used the Customs Service as an example, stating that it was funded through fees set by Congress and was supervised by the Department of the Treasury, which was subject to annual appropriations. Francisco emphasized that Congress should determine the appropriation amount, and when combined with other factors, any limitations on this power are nullified.
Throughout the discussion, various Justices interjected with questions and clarifications, challenging Francisco’s interpretations and seeking a clearer understanding of his position.
Justice Sotomayor expressed concerns about the open-ended nature of Francisco’s arguments regarding the funding of the CFPB. She questioned the implications of the argument, asking if every agency that returns money or underspends would be affected.
When discussing remedies, Francisco clarified that they are not seeking to strike down every rule passed by the CFPB, but rather challenging one specific rule. Justice Sotomayor further probed how the logic wouldn’t apply to everything the agency has done and expressed concerns about potential market disruptions. Francisco argued that if they are correct, the matter should return to Congress for a valid appropriation.
Justice Jackson’s line of questioning focused on the fundamental issue of Congress giving away the “power of the purse” in the way the CFPB is set up. She presented two scenarios to illustrate her point and sought clarification on why the current setup of the CFPB doesn’t align with the broader constitutional mandate for Congress to decide how government departments are funded.
Francisco argued that combining the powers of the sword and purse would be inconsistent with the purpose of separating them, as highlighted by historical figures like Hamilton and Madison.
Justice Jackson questioned the implications of allowing Congress to determine the funding for an agency without specifying a fixed amount. Francisco argued that such an approach would risk tyranny by allowing the President unchecked discretion over spending. He contended that the Appropriations Clause of the Constitution requires Congress to specify the amount of funding, and that transferring this power to the executive branch would undermine the separation of powers.
Justice Jackson further inquired about the potential separation of powers issue if the judiciary were to dictate how Congress exercises its funding prerogatives. Francisco emphasized that the judiciary’s role is to protect the liberty of the people by ensuring a balance of power between the legislative and executive branches.
Prelogar, in her rebuttal, argued that appropriations without specifying a fixed sum have historical precedent, dating back to the founding era. She highlighted that over 60% of the federal budget today comes from standing appropriations, which have been a consistent practice. She also noted that the CFPB funding requests have been approaching the set cap, indicating that it is a meaningful constraint.
Prelogar discussed the challenges courts would face in determining the limits of the Appropriations Clause. She highlighted the difficulty in distinguishing the functions of different financial regulators, such as the Federal Reserve Board, from others, noting that many of these entities have similar regulatory and enforcement roles. She referenced 12 U.S.C. Section 1818 to emphasize that these functions are consistent across agencies.
Prelogar argued against the idea of an inherent, implicit limit on Congress’s appropriations power that isn’t grounded in historical precedent. She urged the Court to avoid interpreting the Appropriations Clause in a way that introduces new, previously unrecognized constraints.
Chief Justice Roberts concluded the session, and the case was officially submitted for review.