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WASHINGTON (CN) — Rejecting an attempt to cripple the agency, the Supreme Court ruled last week that Congress did not violate the Constitution when funding the Consumer Financial Protection Bureau.
The Consumer Financial Protection Bureau has stood as a consumer watchdog over the financial markets since the 2008 financial crisis. Congress created the agency to root out predatory financial tactics.
Payday lenders — often under scrutiny from the bureau — challenged the agency’s funding mechanism, claiming it violated the appropriations clause of the Constitution. Unlike agencies that need yearly allocations in Congress’ budget, the bureau is funded by earnings of the Federal Reserve System.
In a 7-2 ruling, the court ruled that the payday lenders were wrong. Writing for the majority, Justice Clarence Thomas, a George H.W. Bush appointee, said the agency’s funding structure was authorized by Congress for a specific purpose so it did not violate the Constitution.
“Under the appropriations clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes,” Thomas wrote. “The statute that provides the bureau’s funding meets these requirements. We therefore conclude that the bureau’s funding mechanism does not violate the appropriations clause.”
In the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, lawmakers instructed the bureau’s director to set a budget for the agency based on its needs. However, the budget can never exceed 12% of the total operating expenses of the Federal Reserve System. In 2022, the bureau received $641.5 million; the cap was around $734 million.
Aimed at maintaining independence, the funding mechanism allows the bureau to be shielded from the whims of partisan lawmakers who can be lobbied by those the watchdog regulates.
A trade organization representing payday lenders like Enova International, USA Cash Services, and Purpose Financial, argued this violated the appropriations clause, which requires all treasury funds to be allocated by the legislative branch.
In October, former Trump administration solicitor general Noel Francisco told the court that the funding mechanism violated checks and balances by removing power from lawmakers and transferring it to the executive branch.
The payday lenders began their challenge to the Consumer Financial Protection Bureau by targeting a rule stopping such lenders from offering loans to people who would not be able to repay them. The Payday Lending Rule also stopped these lenders from attempting to withdraw payment from consumers’ accounts after two failed attempts, which the government reasoned led to harm to the customer.
Lenders opposing the Payday Lending Rule offer loans between $100 and $1,000, with terms lasting around two weeks. The loans carry extremely high interest rates, with the average falling around 400%. The nonpartisan watchdog Accountable.us said USA Cash Services offered some loans with annual percentage rates as high as 1,400%, while Advance American provides loans with APRs of 664%.
The government argued that the watchdog bureau was funded through Congress when lawmakers passed the Dodd-Frank Act in 2010. U.S. Solicitor General Elizabeth Prelogar said limiting agency funding to yearly appropriations was what violated the Constitution.
The trade association — the Community Financial Services Association of America — filed a lawsuit against the Payday Lending Rule in April 2018. A federal court in the Western District of Texas threw out the suit but the Fifth Circuit revived the issue in a sweeping ruling.
The Supreme Court’s ruling reverses the appeals court. Thomas said the court’s conclusion was supported by the Constitution’s text, history when the text was enacted, and congressional practice following ratification. He said appropriations were understood as a legislative authorization to use public funds for a designated purpose.
“In short, the origins of the appropriations clause confirm that appropriations needed to designate particular revenues for identified purposes,” Thomas wrote. “Beyond that, however, early legislative bodies exercised a wide range of discretion.”
The court’s opinion provides a detailed history lesson dating back to 17th-century England. Thomas said it was Parliament’s practice to appropriate government funds for a range of purposes, noting the legislative body’s effort to not micromanage every aspect of the king’s finances.
Justice Samuel Alito, a George W. Bush appointee, dissented from the ruling, claiming it turned the appropriations clause on its head.
“There are times when it is our duty to say simply that a law that blatantly attempts to circumvent the Constitution goes too far,” Alito wrote in a dissent joined by Justice Neil Gorsuch, a Donald Trump appointee. “This is such a case. Today’s decision is not faithful to the original understanding of the appropriations clause and the centuries of history that gave birth to the appropriations requirement, and I therefore respectfully dissent.”
Alito said the court’s ruling upholds a novel statutory scheme that lets a powerful agency bankroll its own agenda without congressional oversight.
The Consumer Financial Protection Bureau’s funding structure gives the agency the kind of financial independence the appropriations clause was meant to prevent, he added.
“It is not an exaggeration to say that the CFPB enjoys a degree of financial autonomy that a Stuart king would envy,” Alito wrote.
Alito disagreed with the majority’s version of history. He claimed that English, colonial and early American history demonstrate a demand for legislative control over the use of government funds.
In Thomas’ telling, however, while Alito “spends pages recounting how Parliament secured fiscal supremacy and wielded that power to superintend the king,” he does not grapple with the many laws that preserved broad fiscal discretion for the king.
Justice Elena Kagan, a Barack Obama appointee, joined the court’s opinion and provided her own take on the history behind the funding structure. She said that although the agency’s funding scheme would have worked during the 18th century, the same could be said about any other time in the nation’s history.
Kagan said just as history supports the court’s ruling, so does tradition.
“The way our government has actually worked, over our entire experience, thus provides another reason to uphold Congress’s decision about how to fund the CFPB,” Kagan wrote.
Justice Ketanji Brown Jackson, a Joe Biden appointee, said the court didn’t need to wade into historical analogs to reach its conclusion. She said the justices could have stopped their inquiry after reading the text of the appropriations clause.
“In my view, nothing more is needed to decide this case,” Jackson wrote.
