Consumer Finance Insights
April 3, 2023

Second Circuit Rules CFPB Constitutionally Funded, Creates Circuit Split

On Thursday March 23, 2023, a three-judge panel of the Second Circuit unanimously ruled that the Consumer Financial Protection Bureau’s (CFPB) funding structure is constitutional, creating a circuit split between the Second Circuit and the Fifth Circuit on the issue.  CFPB v. Law Offices of Crystal Moroney, P.C., No. 20-3471 (decided March 23, 2023) (Opinion).  The panel’s opinion is timely, as the U.S. Supreme Court last month agreed to hear the agency’s appeal of the Fifth Circuit decision on the same issue.

In the Second Circuit’s decision, the panel held that there was no support for the Fifth Circuit’s earlier conclusion that the CFPB’s funding through the Federal Reserve – rather than annual spending bills – violates the Constitution’s Appropriations Clause.  In Community Financial Services Association of America Ltd et al. v. CFPB, the Fifth Circuit held that the CFPB’s funding structure “cannot be reconciled with the Appropriations Clause and the clause’s underpinning, the constitutional separation of powers.”  No. 21-50826, at p. 36 (decided on October 19, 2022).  According to the Fifth Circuit, the Appropriations Clause was designed to separate the power to dispense public funds from the power to exercise executive authority.  Id. at 25-26.  However the CFPB funds itself by drawing down funds equal to up to 12% of the Federal Reserve’s total operating expenses each year.  Id. at 4, 29.  And the Federal Reserve itself is not funded by congressional appropriations at all—rather, it is funded by interest earned on the securities it owns and the assessments it levies on banks within the Federal Reserve System.  Id. at 30.  Given this double insulation from congressional appropriations — where the CFPB is funded by another agency that itself is funded outside the appropriations process — the Fifth Circuit held the CFPB’s funding structure unconstitutional.  Id. at 31-32.

In contrast, the Second Circuit panel last week noted that the Appropriations Clause requires only that “payment of money from the Treasury must be authorized by a statute,” and the Consumer Financial Protection Act authorizes the CFPB’s funding.  Opinion at 15-16.  Therefore, in finding the CFPB constitutionally funded, the panel held that “the absence of any restrictions in the Appropriations Clause other than that Congress must authorize government funding in a prior statute precludes the sort of implicit . . . limits that the Fifth Circuit chose to impose.”  Id. at 17 (internal quotations and citations omitted).

While the CFPB’s ability to exercise enforcement powers in Fifth Circuit states has been questionable at best since the Community Financial Services decision, this recent outcome in the Second Circuit could be viewed as reinstating legitimacy to the agency in the interim before the Supreme Court ruling.

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