5th Cir. Challenges the CFPB’s Funding Structure

You have a pretty good idea where the decision is going to go when it starts with this sentence from James Madison in the Federalist Papers:

An elective despotism was not the government we fought for; but one which should not only be founded on free principles, but in which the powers of government should be so divided and balanced . . . , as that no one could transcend their legal limits, without being effectually checked and restrained by the others.” The Federalist No. 48 (J. Madison) (quoting Thomas Jefferson’s Notes on the State of Virginia (1781)).

In Community_Fin_Servs_Assoc_of_America_v._CFPB (5th Cir. 2022), the Court of Appeals for the Fifth Circuit found that “Congress’s decision to abdicate its appropriations power under the Constitution, i.e., to cede its power of the purse to the Bureau, violates the Constitution’s structural separation of powers.”

Finally, the Plaintiffs contend that the Payday Lending Rule is invalid because the Bureau’s funding structure violates the Appropriations Clause of the Constitution and the separation of powers principles enshrined in it. Though the constitutionality of the Bureau has been heavily litigated, this issue has yet to be definitively resolved. . . Most anomalous is the Bureau’s self-actualizing, perpetual funding mechanism. While the great majority of executive agencies rely on annual appropriations for funding, the Bureau does not. See 12 U.S.C. § 5497(a). . . . So Congress did not merely cede direct control over the Bureau’s budget by insulating it from annual or other time limited appropriations. It also ceded indirect control by providing that the Bureau’s self-determined funding be drawn from a source that is itself outside the appropriations process—a double insulation from Congress’s purse strings that is “unprecedented” across the government. All Am. Check Cashing, 33 F.4th at 225 (Jones, J., concurring). And where the Federal Reserve at least remains tethered to the Treasury by the requirement that it remit funds above a statutory limit, Congress cut that tether for the Bureau, such that the Treasury will never regain one red cent of the funds unilaterally drawn by the Bureau. This novel cession by Congress of its appropriations power—its very obligation “to maintain the boundaries between the branches,” id. at 231—is in itself enough to give grave pause. But Congress went to even greater lengths to take the Bureau completely off the separation-of-powers books. Indeed, it is literally off the books: Rather than hold funds in a Treasury account, the Bureau maintains “a separate fund, . . . the ‘Bureau of Consumer Financial Protection Fund,’” which “shall be maintained and established at a Federal [R]eserve bank.” 12 U.S.C. § 5497(b)(1). This fund is “under the control of the Director,” and the monies on deposit are permanently available to him without any further act of Congress. Id. § 5497(c)(1). Thus, contra the Federal Reserve, id. § 289(a)(3)(B), the Bureau may “roll over” the self-determined funds it draws ad infinitum. . . So the Bureau’s funding is double-insulated on the front end from Congress’s appropriations power. And Congress relinquished its jurisdiction to review agency funding on the back end. In between, Congress gave the Director its purse containing an off-books charge card that rings up “[un]appropriated monies.” Wherever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it.  The Bureau’s perpetual insulation from Congress’s appropriations power, including the express exemption from congressional review of its funding, renders the Bureau “no longer dependent and, as a result, no longer accountable” to Congress and, ultimately, to the people. All Am. Check Cashing, 33 F.4th at 232 (Jones, J., concurring); see id. at 234 (detailing examples showing that the Bureau’s “lack of accountability is not just a theoretical worry”). By abandoning its “most complete and effectual” check on “the overgrown prerogatives of the other branches of the government”—indeed, by enabling them in the Bureau’s case—Congress ran afoul of the separation of powers embodied in the Appropriations Clause. See The Federalist No. 58 (J. Madison).  The constitutional problem is more acute because of the Bureau’s capacious portfolio of authority. “It acts as a mini legislature, prosecutor, and court, responsible for creating substantive rules for a wide swath of industries, prosecuting violations, and levying knee-buckling penalties against private citizens.” Seila Law, 140 S. Ct. at 2202 n.8. And the “Director’s newfound presidential subservience exacerbates the constitutional problem[] arising from the [Bureau’s] budgetary independence.” All Am. Check Cashing, 33 F.4th at 234 (Jones, J., concurring). An expansive executive agency insulated (no, double-insulated) from Congress’s purse strings, expressly exempt from budgetary review, and headed by a single Director removable at the President’s pleasure is the epitome of the unification of the purse and the sword in the executive—an abomination the Framers warned “would destroy that division of powers on which political liberty is founded.” 2 The Works of Alexander Hamilton 61 (Henry Cabot Lodge ed., 1904). . . Such a comparison, focused only on whether other agencies possess a degree of budgetary autonomy, mixes apples with oranges. Or, more accurately, with a grapefruit. Even among self-funded agencies, the Bureau is unique. The Bureau’s perpetual self-directed, double-insulated funding structure goes a significant step further than that enjoyed by the other agencies on offer. And none of the agencies cited above “wields enforcement or regulatory authority remotely comparable to the authority the [Bureau] may exercise throughout the economy.” All Am. Check Cashing, 33 F.4th at 237 (Jones, J., concurring); see also William Simpson, Above Reproach: How the Consumer Financial Protection Bureau Escapes Constitutional Checks & Balances, 36 Rev. Banking & Fin. L. 343, 367–69 (2016).16 Taken together, the Bureau’s express insulation from congressional budgetary review, single Director answerable to the President, and plenary regulatory authority combine to render the Bureau “an innovation with no foothold in history or tradition.” Seila Law, 140 S. Ct. at 2202. It is thus no surprise that the Bureau “brought to the forefront the subject of agency self-funding, a topic previously relegated to passing scholarly references rather than front-page news.” Charles Kruly, Self-Funding and Agency Independence, 81 Geo. Wash. L. Rev. 1733, 1735 (2013). We cannot sum up better than Judge Jones did: ‘[T]he [Bureau]’s argument for upholding its funding mechanism admits no limiting principle. Indeed, if the [Bureau]’s funding mechanism is constitutional, then what would stop Congress from similarly divorcing other agencies from the hurly burly of the appropriations process? . . . [T]he general threat to the Constitution’s separation of powers and the particular threat to Congress’s supremacy over fiscal matters are obvious. Congress may no more lawfully chip away at its own obligation to regularly appropriate money than it may abdicate that obligation entirely. If the [Bureau]’s funding mechanism survives this litigation, the camel’s nose is in the tent. When conditions are right, the rest will follow.’ All Am. Check Cashing, 33 F.4th at 241 (Jones, J., concurring). The Bureau’s funding apparatus cannot be reconciled with the Appropriations Clause and the clause’s underpinning, the constitutional separation of powers.

As to remedy, the Court of Appeals reversed, granted summary judgment to the Plaintiffs, and vacated the CFPB’s Payday Lending Rule.

In like manner, we conclude that the district court erred in granting summary judgment to the Bureau and in denying the Plaintiffs a summary judgment “holding unlawful, enjoining and setting aside” the challenged rule. Accordingly, we render judgment in favor of the Plaintiffs on this claim and vacate the Payday Lending Rule as the product of the Bureau’s unconstitutional funding scheme. . .But Congress’s cession of its power of the purse to the Bureau violates the Appropriations Clause and the Constitution’s underlying structural separation of powers. The district court accordingly erred in granting summary judgment in favor of the Bureau and denying judgment in favor of the Plaintiffs. We therefore REVERSE the judgment of the district court on that issue, RENDER judgment in favor of the Plaintiffs, and VACATE the Bureau’s Payday Lending Rule.