Second Circuit upholds CFPB’s funding structure in the wake of Supreme Court certiorari

Next term, the Supreme Court will consider whether the funding structure of the Consumer Financial Protection Bureau (CFPB) is unconstitutional.  The Second Circuit has now weighed in: In Consumer Financial Protection Bureau v. Moroney, No. 20-3471 (2d Cir. Mar. 23, 2023), the court of appeals held that the CFPB’s funding – as set forth in the Consumer Financial Protection Act, 12 U.S.C. § 5497 – does not violate the Constitution’s Appropriations Clause. The decision, issued by a unanimous panel, creates a clear circuit split.

Last year, the Fifth Circuit held that the Consumer Financial Protection Act offends separation of powers principles by ceding too much of Congress’s appropriations power to the CFPB, eliminating an important check by Congress.  Cmty. Fin. Servs. Ass’n of Am., Ltd. v. CFPB (CFSA), 51 F.4th 616, 642 (5th Cir. 2022). At the request of the CFPB, and at the urging of dozens of state attorneys general on both sides, the Supreme Court recently agreed to review the Fifth Circuit’s decision and will hear the case after the start of the new term in October 2023.  CFPB v. Com. Fin. Servs. Ass’n, -- S. Ct. --, No. 22-448, 2023 WL 2227658 (Feb. 27, 2023).

Against this backdrop, the Moroney decision intentionally offers a counterpoint to the Fifth Circuit’s reasoning. Moroney arises from a longstanding effort by the CFPB to enforce a Civil Investigative Demand (CID) on the Moroney law firm. Several years into the CFPB’s investigation and enforcement attempts, the Supreme Court held that the statutory provision protecting the CFPB Director from removal without cause was an unconstitutional limitation on the President’s removal power. Seila Law LLC v. CFPB, 140 S. Ct. 2183 (2020). See Supreme Court finds the restriction on removal of the CFPB’s single directors unconstitutional, but leaves the bureau operational. 

Moroney then challenged the validity of the CFPB’s CID on several grounds, including that it was void ab initio as issued by the CFPB Director given the Seila Law determination. Importantly, Moroney also challenged the CFPB’s funding structure as violative of the Appropriations Clause. See U.S. Const. art. I § 9, cl. 7 (“No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.”).

The CFPB’s unique funding structure has been the subject of debate since its enactment in the wake of the 2008 financial crisis. See, eg, Seila Law, 140 S. Ct. at 2194. The CFPB does not rely on annual appropriations from Congress, but rather requests and receives funding directly from the Federal Reserve – capped at 12 percent of the Federal Reserve’s total operating expenses. 12 U.S.C. § 5497(a)(1)-(2). Further, the CFPB holds its reserves in a fund at a Federal Reserve bank, rather than an ordinary Treasury account; that fund is under the CFPB Director’s control and the monies on deposit remain permanently available to the Director. 12 U.S.C. § 5497(b)(1), (c)(1). 

In CFSA, the Fifth Circuit held that such a “funding apparatus cannot be reconciled with the Appropriations Clause and the clause’s underpinning, the constitutional separation of powers,” 51 F.4th at 642. Based on its conclusion that the CFPB was unlawfully funded, the court held that, although the CFPB did not violate the Administrative Procedure Act or the Consumer Financial Protection Act, the agency nonetheless lacked the power to promulgate the payday lending regulation that was the subject of that case. The court vacated the regulation on the ground that it was the product of an unconstitutional funding scheme.

Moroney sought a similar result in his appeal of the CFPB’s investigative demand, but the Second Circuit rejected the Fifth Circuit’s reasoning. Moroney concluded that all that is required to comply with the Appropriations Clause is a straightforward and explicit funding authorization by Congress, and that Congress provided this when it enacted the Consumer Financial Protection Act. The panel grounded that conclusion in the text, history, and prior Supreme Court precedent interpreting the Appropriations Clause.

Further, the Second Circuit rejected Moroney’s contention that the Consumer Financial Protection Act does not provide meaningful guidance to the Executive Branch’s funding decisions, reciting the statutory provisions under § 5497. Because the court of appeals upheld CFPB’s funding structure and rejected Moroney’s other challenges, it affirmed enforcement of the CID against Moroney. 

The CFPB continues to argue against CFSA’s reasoning in other pending court battles challenging its investigative authority, and the agency will no doubt rely heavily upon the Moroney decision in support. However, the ultimate constitutionality of the CFPB’s funding structure – and with it the potential validity of twelve years of CFPB actions – will be decided by the Supreme Court in the October 2023 term, which should be watched closely by CFPB-regulated entities.

For further information about this decision or the upcoming Supreme Court argument, please get in touch with the authors or your DLA Piper contact.

For further information about our consumer finance regulatory work, please contact Margo H.K. Tank; Isabelle Ord; Jeffrey L. Hare; Austin Brown; Braden Dotson; or Noah Schottenstein, Editor-in-Chief, Consumer Finance Regulatory News and Trends.