Payments 3.0: A Supreme Reprieve for the CFPB?

After last month, the Consumer Financial Protection Bureau’s future seems more secure.

On Oct. 3, the Supreme Court heard oral arguments in Consumer Financial Protection Bureau v. Community Financial Services Association of America. The CFSA originally sued the CFPB over its payday-lending rule in 2018.

As previously reported in Digital Transactions, in October 2022 the Federal Court of Appeals for the Fifth Circuit held the CFPB’s funding mechanism is unconstitutional because its money comes from the Federal Reserve rather than Congressional appropriations. The CFPB appealed the Fifth Circuit’s decision to the Supreme Court.

Many in the payments industry expected the funding question could lead to the Supreme Court’s either ruling the Bureau is unconstitutional or at least requiring its funding to come from direct appropriations. The latter outcome was viewed as a way of making the Bureau more accountable or to reduce its power by reducing its budget.

The oral arguments have tempered the industry’s expectations.

“I had one opinion going in, and another coming out,” said Brian Tate, the president and chief executive of the Innovative Payments Association.

Tate, who attended the oral arguments, said the questions from the justices about the focus of the CFSA’s argument made him think the case could go either way.

According to the transcripts, the CFSA’s argument rested on the concept of “separating the sword from the purse,” meaning that the powers of the executive branch are tempered by Congress’s control of funding.

The Justices appeared to want a clear test for determining whether any funding mechanism was constitutional or not, as evidenced by Justice Clarence Thomas’s question: “Mr. Francisco [Noel J. Francisco, the CFSA’s lawyer], just briefly, I’d like you to complete this sentence. Funding of the CFPB is … violates the Appropriations clause because?”

Francisco’s answer: “Because Congress has not determined the amount that this agency should be spending. Instead, it has delegated to the director the authority to pick his own appropriation, subject only to an upper limit that’s…so high it’s rarely meaningful,” This did not completely satisfy the justices.

Both conservative and liberal justices pushed back on these arguments.  Justice Brett Kavanaugh pointed out that Congress has the power to change the CFPB’s funding through future legislation. Justice Ketanji Brown Jackson said it appeared Congress had exercised its power of the purse by deciding how the CFPB is funded. She agreed with Kavanagh that it could change the funding if it saw the need.

This column can’t cover the entirety of the hearing. But the transcripts are worth reading for anyone interested in the outcome of this case. The Court will base its decision on the briefs as well as the oral arguments, so it might still be persuaded that the CFPB’s funding is unconstitutional and send its funding back to Congress.

The justices did question Solicitor General Elizabeth Prelogar about whether the CFPB’s funding negates “the exacting control” that Congress has, and whether it was too aggressive to read the appropriations clause of the Constitution to say Congress can fund agencies in a manner that gives away its power.

So, while predicting the final decision is tough, I think it’s safe to say we will not see the CFPB abolished by the Court. The Court may decide the Fifth Circuit made a mistake when it said the Bureau’s funding is unconstitutional and overturn the decision without any further changes. Or the Court may tell Congress it needs to revisit the CFPB’s funding, but let the current regulations stand.

This suggests that, barring a big surprise, financial companies should plan on complying with the current rules going forward.

—Ben Jackson bjackson@ipa.org