This article is the first in a three-part series addressing a seminal Fifth Circuit case that is now pending before the U.S. Supreme Court. Each week, we will debunk each myth and address the implications for consumer finance regulation going forward.

Myth No. 1: CFSA’s matter presents a novel attack on the Bureau’s constitutionality


As many readers are aware, the plaintiffs in Consumer Financial Services Association of America, Ltd, et al. v. Consumer Financial Protection Bureau et al. challenged the Consumer Financial Protection Bureau’s (“CFPB or Bureau”) new regulation concerning the payday loan industry. In federal court in Texas, the plaintiff also had asserted that the Bureau’s funding mechanism was unconstitutional, but it lost this argument. On appeal last fall however, the U.S. Court of Appeals for the Fifth Circuit reversed, concluding that legislative appropriations are required before the agency’s expenditure. The Fifth Circuit held that because the Bureau’s budgets are not subject to appropriations, its funding mechanism violated the Appropriations Clause of the Constitution. The case is pending before the U.S. Supreme Court and oral argument is now set for October 3, 2023.

Constitutionality in general. The Bureau is not new to constitutional attacks. The Bureau has been the subject of extensive public discourse concerning its legitimacy. Politicians and others have – since its inception – argued the various ways that the Bureau’s architecture or leadership structure could violate the constitution. See below bullets for a brief overview:

  • In 2012, a few months after the Bureau first gained its independence, President Barack Obama used the presidential recess-appointment power[1] to confirm his nominee, Richard Cordray, to serve as the first director of the Bureau. At the time, Senate Republicans had preferred to oppose the appointment of a director absent structural reforms at the Bureau. According to Senator Mitch McConnell, the recess appointment “threaten[ed] the confirmation process and fundamentally endanger[ed] the Congress’s role in providing a check on the excesses of the executive branch.”
  • In 2016, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit held in a mortgage case that the Bureau’s structure, which per statute entailed allowing the President to remove the director only “for cause,” was unconstitutional. In 2018, the D.C. Circuit sitting en banc reversed, holding that the “for cause” basis for dismissing a Bureau director was, indeed, constitutional.
  • In 2020, the U.S. Supreme Court took the opposite view while adopting an expedient remedy. It ruled on the agency’s constitutionality in a case concerning the nature of the Bureau’s civil investigative powers. In that case, Seila Law LLC v. CFPB, the Supreme Court held that the protocol for dismissing a Bureau director was unconstitutional, but that the provision establishing the “for cause” removal was severable. The Supreme Court ruled that the remedy for the constitutional defect was as follows: redline out the offending provision in the agency’s enabling statute, not shutter the agency as a whole, and allow the Bureau to continue its enforcement investigation activities under its authority elsewhere set forth in the statute.   

Constitutionality of CFPB funding structure.  Presidential removal powers aside, you might wonder if the Bureau’s funding mechanism had previously been scrutinized? Yes it had been, and the plaintiffs in CFSA v. CFPB are not the first to raise constitutional defects of the agency’s funding mechanism. Many years before the Fifth Circuit ruled on the issue in October 2022, the Bureau’s funding mechanism was the subject of vibrant debate. In fact, it was a point of discussion around the Bureau’s design before the agency was even created. See below bullets for a brief overview:

  • In 2010, in response to the financial crisis, the Senate Committee on Banking, Housing, and Urban Affairs submitted a report stating that: “the assurance of adequate funding, independent of the Congressional appropriations process, is absolutely essential to the independent operations of any financial regulator.”[2]
  • In October 2016, the D.C. Circuit stated in a footnote that: “As those who have labored in Washington well understand, the appropriations process brings at least some measure of oversight by Congress. … The CFPB’s exemption from the ordinary appropriations process is at most just ‘extra icing’ on an unconstitutional ‘cake already frosted.’”[3]
  • In November 2016, a federal district court judge in California considered, in a case involving lead generation for short-term loans, a motion for summary judgment that, among other things, argued that the Bureau lacked constitutional authority to enforce the Dodd-Frank Act. The Defendants in that case argued that because the Bureau is funded by the Federal Reserve System, as opposed to appropriations, the Bureau could not be monitored adequately by Congress and was unconstitutional. The court disagreed. It held that Congress’ decision to fund the Bureau through the Fed did not violate the Appropriations Clause because it was still Congress that had made the decision how to fund the Bureau to begin with.[4]
  • In March 2017, in a hearing before the U.S. House of Representatives Committee on Financial Services (HFSC) entitled The Bureau of Consumer Financial Protection’s Unconstitutional Design, lawmakers discussed how the Bureau could be restructured to make the agency more accountable to Congress and the executive branch. During this hearing, a former solicitor general testified: “[the funding not being under control by Congress] is an additional problem [on top of the President’s removal power]. The power of appropriations is the core of Congress’s responsibility in addition to creating laws. And when you lose that power, you lose control over the agency.”
  • In April 2017, in a hearing before the HFSC entitled A Legislative Proposal to Create Hope and Opportunity for Investors, Consumers, and Entrepreneurs, Fed Vice Chair Michael Barr[5] testified: “I think it would be a mistake to put the CFPB under appropriations. I think the system we have for the OCC and the Fed and the FDIC insulating it from the appropriations process is appropriate, and I think the CFPB should be treated the same.”
  • In January 2018, an en banc panel of the D.C. Circuit concluded: “The CFPB’s independent funding source has no constitutionally salient effect on the President’s power. The Supreme Court has recently dismissed issues including ‘who controls the agency’s budget requests and funding’ as ‘bureaucratic minutiae’-questions of institutional design outside the ambit of the separation-of-powers inquiry.”[6]
  • In May 2022, Judge Edith Jones of the Fifth Circuit wrote in a concurring opinion in a different case, Consumer Fin. Protection Bureau v. All Am. Check Cashing, Inc. et al., that other agencies funded by the Fed have features that preserve political accountability, whereas the Bureau does not. She also wrote, “None of the agencies identified by the CFPB (as precedent) wield enforcement or regulatory authority remotely comparable to the authority the CFPB may exercise throughout the economy.” The concurring opinion stated that because the funding mechanism contravenes the Constitution’s separation of powers, the Bureau’s enforcement action in the underlying case – made possible through the use of such funds – ought to be dismissed.

The Bureau’s current constitutionality problem is not novel. What is unprecedented is that this discrete basis for unconstitutionality – the funding mechanism – is now before the Supreme Court. While significant, it is important to view this legal development in the larger context. Throughout the last 12 years, the Bureau has developed muscle memory concerning how to operate while under existential attacks. The Bureau has continued its work while grappling with arguments questioning constitutionality since before, and chronically after, it began.

Next week’s article regarding Myth No. 2 will address whether the case itself was a total blow to the CFPB’s regulatory function or enforcement capability.    

[1] The Constitution’s Recess Appointments Clause permits presidents to make appointments without the traditional advice and consent of the Senate during a recess.

[2] See Report submitted by Senator Chris Dodd regarding legislative proposal, The Restoring American Financial Stability Act of 2010 dated April 30, 2010, S. Rep. No. 111-176, at 163.

[3] PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1, n. 16 (D.C. Cir. 2016).

[4] Consumer Fin. Prot. Bureau v. D&D Mktg., No. CV 15-9692 PSG, 2016 U.S. Dist. LEXIS 194709, at *13 (C.D. Cal. Nov. 17, 2016).

[5] In 2022, Michael Barr took office as the Vice Chair for Supervision of the Board of Governors of the Federal Reserve System.

[6] PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75, 96 (D.C. Cir. Jan. 31, 2018).