NEW YORK (Legal Newsline) - A federal appeals court ruled the Consumer Financial Protection Bureau’s funding mechanism is constitutional as the U.S. Supreme Court considers a Fifth Circuit decision that went the other way.
The Second Circuit ruled in a long-running case against a law firm that provides tax advice, rejecting arguments the CFPB is operating illegally. The decision conflicts directly with the Fifth Circuit, which ruled last October that by funding the CFPB by the Federal Reserve Bank instead of through annual appropriations bills, Congress violated the Appropriations Clause of Article 1 of the Constitution. Sen. Elizabeth Warren, chief architect of the CFPB, proposed the unique funding mechanism to insulate the agency from political pressures.
The Supreme Court in February agreed to hear the Fifth Circuit case, CFPB v. Community Financial Services Association of America, with responses required by July. West Virginia and 15 other states filed a brief against the CFPB, calling it “a failed experiment in administrative governance.”
The Second Circuit addressed its sister circuit directly in its March 22 decision, CFPB v. Law Offices of Crystal Moroney, saying “we cannot find any support for the Fifth Circuit’s conclusion in Supreme Court precedent.” The Constitution only says payments from the Treasury “must be authorized by statute,” and the law establishing the CFPB explains in detail how it will be funded, the 2nd Circuit ruled. Nothing in the Constitution says appropriations have to be annual or “drawn from a particular `source,’” the appeals court ruled.
The CFPB can spend up to 12% of the Federal Reserve’s earnings, after which it has to ask Congress for additional funding. Congress specified the purpose, limits and source of funding in the statute creating the agency, the court ruled, and didn’t need to do more.
The appeals court also rejected arguments that agency actions were null and void after the Supreme Court invalidated another feature of the agency under which its director was appointed for a five-year term and could only be fired for “inefficiency, neglect of duty, or malfeasance in office.” The high court ruled in 2020 that provision impermissibly insulated the CFPB chair from accountability, but the following year said anyone challenging CFPB actions under the prior regime must prove they wouldn’t have happened except for the since-invalidated removal provision.
Moroney Law was challenging civil investigative demands dating back to 2017, under which the CFPB sought records the law firm said threatened client confidentiality. Among other arguments, the firm said the CFPB violates the nondelegation doctrine, under which Congress isn’t supposed to delegate its responsibilities to another branch of government.
The Supreme Court has only invoked that doctrine twice, both times in the 1930s, the Second Circuit said, and in forming the CFPB it stated the purposes and funding sources for the agency in specific enough terms to survive challenge.