Ed. #68: Kong Lives! CFPB Swats Away the Funding Challenge
Constitutional challenges to CFPB
CFPB’s detractors[1]have unsuccessfully sought to invalidate the agency on Constitutional grounds since it was formed by the Dodd Frank Act in 2010. Fundamentally, these challenges stem from concerns about the agency and its director’s[2]vast powers that are removed from the kind of political and legal oversight and accountability demanded by Constitutional notions of separation of powers. Those vast powers, however, were by design in the Dodd Frank Act given the concerns about the “big banks” espoused by Elizabeth Warren who it was believed could only be held to act responsibly by a massively powerful consumer-focused regulator.
CFPB remains today as perhaps the most powerful and unaccountable government agency ever created. In fact, one smart guy privately told me he compared the CFPB dealing with its critics to King Kong swatting away the airplanes on the Empire State building. I appreciate a good metaphorical image like that, but Kong dies at the end of that movie.[3] As I discuss below, CFPB, on the other hand, at least for the foreseeable future, isn’t likely to find its demise. In fact, as I note later, like a Hydra growing more heads when one is chopped off, CFPB is only going to grow stronger.
As I have written previously, concern about the CFPB’s abusive exercise of power, is not merely theoretical. Mick Mulvaney, who later became interim director of CFPB called the agency “a joke, in a sick, sad kind of way”, in reference to its lack of accountability to separation of powers. In its 2020 decision in the Seila Law case, SCOTUS forced the CFPB’s Director to be removable at will by the President to provide some electoral accountability to the CFPB’s independent use of federal power, but CFPB remains the King Kong of regulatory agencies.[4]
The CFPB funding challenge
A year ago, I wrote about the 5th Circuit case that determined that the CFPB was unconstitutionally funded[5]because it violated the Appropriations Clause of the Constitution.[6] According to the 5th Circuit, CFPB’s budget was “double insulated” from Congressional appropriations because the Dodd Frank Act gave them authority to draw up to 12% of the Federal Reserve’s total budget at their own discretion. In finding that unconstitutional, the 5th Circuit jeopardized the legality of virtually everything the CFPB has done from its inception[7]in terms of rulemaking, enforcement and interpretation. On Monday, October 2, 2023, in one of the first cases heard in the new term[8], the Supreme Court heard oral arguments in the appeal of that 5thCircuit decision.
To be clear, CFPB has been on a bit of a losing streak in court[9]that may very well continue into this year.[10]But, based on my reading of the lines of questioning in the transcript of oral arguments in the CFPB funding case, the uncaged wild monkeys of regulatory chaos[11]I predicted last year[12]look like they are about to get rounded up by SCOTUS. While I wouldn’t expect a unanimous decision, I now think that the CFPB’s demise based on the 5th Circuit’s expansive reading of the Appropriations Clause isn’t going to happen.[13]That is, I don’t expect CFPB to be found to be unconstitutional based on how it is funded. I provide my analysis below, but I think it is safe to assume the housing industry's favorite regulations won’t disappear overnight when this decision is handed down.[14]
What's the limiting principle?
Clearly, the Dodd Frank Act is a law, so Congress did somethingtowards the “consequence of appropriating” money to CFPB. From my perspective however, the SCOTUS justices seemed to all be grappling with the following question: What, if any, is the limiting principle on Congress’s ability to give to the Executive branch the power to use as much money (or as little) as it determines it needs to do a job Congress authorized?
Baking non-delegation into “appropriation”
Justices who favor a textualist approach to Constitutional interpretation don’t have much to work with in the Constitution on that question. The Community Financial Services Association’s attorney, Noel Francisco, struggled with the limited text of the Appropriations Clause (see my fn #6), ultimately saying that the word “appropriation” has “a non-delegation component baked into it because you cannot simply transfer that core legislative function to the executive branch.”[15] Mr. Francisco didn’t say that the Appropriations Clause requires annual appropriations or a fixed dollar amount[16]and couldn’t even conclude that a specific dollar amount would have been sufficient for CFPB. Meanwhile, Solicitor General Elizabeth Prelogar representing the CFPB pounced on Francisco’s expansive reading by saying,
“what all of this adds up to is that my friend is proposing that the Court go down the road of for the first time ever interpreting the Appropriations Clause to contain some kind of inherent, implicit limit on Congress that has never previously before been recognized and that is completely detached from history….This Court should reject Respondents' attempt to gerrymander a rule to fit the CFPB alone without providing a coherent theory about how to interpret and apply the Appropriations Clause”
On the flip side, Ms. Prelogar struggled with providing her own coherent theory about how to interpret and apply the Appropriations Clause. Ms. Prelogar denied that Congress could pass a law that gives the executive an unlimited budget, but she struggled with what to do with a limit that was far in excess of what was needed or if the Executive chose to use none of the funds appropriated.[17]Rather, the government argued for using a “historical approach” by offering similar examples of executive functions whose budgets were not subject to annual appropriation in the past, such as the Customs Department.
Unsatisfactory arguments on both sides
So, neither side in the argument could come up with a truly satisfying unifying test/limiting principle of when the power of the purse is unconstitutionally granted to the Executive. And, I would not look for this Court to offer its own “balancing test” for sufficient separation of powers in appropriations such as how much money appropriated is too much, or how long of a duration for an appropriation is too long. SCOTUS would have to invent that test from whole cloth where the Appropriations Clause provides no textual guidance. I don't even think former Justice Stephen Breyer (who was famous for coming up with balancing tests) would take that on. That said, I am fairly certain that each Justice would draw a line somewhere, but perhaps not the same line.
While the Justices will likely differ in their answers about where the line is, the affirmative answer to the simple question posed (more than once) by Justice Kavanaugh seemed to provide the dagger for how CFPB’s case will come out in their favor. That is, Kavanaugh asked both parties, “So, Congress could change it tomorrow?”[18]We know Justice Kavanaugh is quite uncomfortable with the vast powers of the CFPB from his opinion in the PHH Case, but most observers of the oral argument on October 3 agree that neither he, nor a majority of the SCOTUS Justices, are likely to conclude CFPB’s funding authorization crossed any lines which clearly violate the Constitution. Couple that with little concern by the Justices about remedies for invalidation of that funding[19] and I think it is obvious to predict victory for the CFPB.
Where does this leave us?
CFPB and its regulations and enforcement actions will survive and, importantly, so will this funding arrangement. Yet, CFPB and its director still have too much unaccountable power which will continue to be cause for concern about due process, accountability and separation of powers.
For a timely example using my Hydra analogy, CFPB just decided on its own to increase its enforcement staff by 50%[20]without any direction from Congress or the President (as far as we know). Because it controls its own budget, we really don’t have any idea why that massive increase in staff was necessary. As reported by National Mortgage News, an internal memo from CFPB Enforcement Chief Eric Halperin only told us, “These additional resources will enable us to open more investigations, including matters with significant market impact and against large market actors, consistent with the Bureau's priorities.” [emphasis added]. So, the CFPB gets to set its own enforcement priorities and fund those priorities itself with no role for Congress or accountability to the public unless Congress decides to vote to change their funding authorization or leadership structure (or the President fires the Director).CFPB just increased its own power of the sword by 50% and no one can effectively second guess it.
Meanwhile, on the heels of an embarrassing data security breach revealed last April by an employee of the agency responsible for enforcing compliance against financial firms, I recently observed this headline: “CFPB agrees to settle employee discrimination lawsuit for $6 million”. So, there’s another use of the Congressional “appropriation” that might warrant some more oversight and accountability, but that money is out of Congress’s hands.[21]
[1] I would not call myself a “detractor”. I consider myself more of a "cynic", but I recognize that CFPB plays an important role in consumer finance that not only benefits consumers, but also the financial services industry generally. In addition to my criticism, however, I have pointed out my appreciation for certain CFPB actions numerous times in these Musings (see e.g., https://mortgagemusings.com/f/ed-44-praising-chopra). As another example, the QM/ATR rule was critical not only for the protection of consumers, but the entire housing finance industry which is otherwise be prone to a "race to the bottom" on underwriting.
[2] In contrast to how Richard Cordray operated as CFPB Director, Rohit Chopra seems to focus most of his agency’s enforcement efforts against defendants who are financially capable of defending their actions against CFPB in court. To her credit, other than the Townstone case, Kathleen Kraninger, as CFPB Director, exercised regulatory humility in exercising those vast powers and in being responsive to Congressional oversight.
[3] And we’re sad when Kong dies because he really was a good monster if you were just nice to him.
[4] I have used the “800 lb. gorilla” metaphor previously in these Musings, but 800 lbs. is insufficiently large to describe the CFPB.
[5] Consumer Financial Protection Bureau v. Community Financial Services Association of America Ltd.
[6] Article I, Section 9, Clause 7: “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law;”. That's all it says. This idea dates back to the concept of separating the power of the purse from the power of the sword. That is, if the Executive branch has an unlimited budget to do what it pleases, there can be no meaningful legislative oversight.
[7]The 5th Circuit’s remedy was narrower, but left the door open to a wider challenge.
[8]The new Supreme Court term always begins on the “First Monday in October”. In 1981, that was the title of a fictional movie (based on an earlier play) about the first woman on the Supreme Court. That same year, Sandra Day O’Conner proved that life imitates art by becoming the real first woman on SCOTUS. Today, 4 of the 9 SCOTUS justices are women.
[9] Lately, CFPB has lost for overreaching in interpretative and enforcement cases (see e.g., Townstone and supervision of “unfairness discrimination”), but sometimes it’s just for being shamelessly unlawful itself (see e.g.,https://media.ca11.uscourts.gov/opinions/pub/files/202114468.pdf).
[10]See footnote 28 of Musing Ed. 67.
[11] The use of the term “chaos” reminds me of the Israeli Netflix series Fauda about an undercover counterterrorism unit of the Israeli Defense Forces and their work to pursue Palestinian terrorists. Fauda means chaos in Arabic. I am about halfway through the second season, but I cannot watch it further with the inexcusable horror of Hamas’ attacks still fresh and while hostilities continue. While clearly from an Israeli perspective, Fauda allows for some moral ambiguity on both sides in its portrayal of the struggles between Israelis and Palestinians. However, there is no moral equivalence to justify Hamas’ slaughter, rape and kidnap of innocents (and then to proudly post its atrocities on social media). This is only going to lead to more suffering and death. I pray for the entire region.
[12]Chaos was also predicted in the Amicus Brief filed by the MBA, Homebuilders and Realtors if the CFPB’s funding didn’t get sorted out. My friend Jeff Naimon and his Orrick partners’ work on that amicus brief had the honor of being specifically cited by Solicitor General Prelogar in her arguments when asked about remedies by Justice Sotomayer. I would add that no other Justice seemed concerned about remedies, so that is another reason why I think the CFPB will prevail.
[13] I am aware that making SCOTUS predictions based on oral argument is a fool’s errand. I’ll own that because this blog isn’t my day job. That said, there is also little downside to any regulated business assuming the CFPB will continue versus the alternative.
[14] Unfortunately, keeping rules such as QM/ATR and TRID also means keeping a whole lot of CFPB rulemaking and enforcement bathwater.
[15] To be clear, “baking” anything into another word is not a textualist argument, so here is where a textualist judge like Justice Gorsuch might (and did) ask something like, “what else you got?”. But that line of questioning also came from Justices Barrett, Jackson, Kagan, Kavanaugh and even Alito and Thomas.
[16]Justice Kagan made sure he didn’t.
[17]Solicitor General Prelogar conceded that the Appropriations Clause offers no remedy for Congress if a President chose not to spend appropriated money, but noted that Congress could remove the discretion about spending from the Executive. I wonder how this issue relates to the recent decision by the Biden Administration to recommence building of the border wall with Mexico due to funds appropriated for such use during the Trump years.
[18]In the words of Progressive Insurance’s Dr. Rick, “the answer is yes”.
[19] The MBA’s big concern was what happens if you invalidate the funding mechanism. Does it have to go back to a dysfunctional Congress to create a different appropriation that is Constitutional? Other than Justice Sotomayer this was not what the Justices were interested in.
[20] This would increase their current enforcement staff of 150 by roughly 75 attorneys. This is a good time for young lawyers to look for a job at CFPB.
[21] Using public funds to settle employment claims can result in challenging legislative oversight issues. For example, consider the wrongful termination claims of whistleblowers against embattled Texas Attorney General Ken Paxton.