Overseeing the Overseer: The Unchecked Power of the CFPB
In 2010, the Dodd-Frank Wall Street Reform & Consumer Protection Act created the Consumer Financial Protection Bureau (CFPB) after years of irresponsible excess in financial derivatives within the mortgage industry. The CFPB, a consolidation of seven federal agencies, currently enforces most regulations related to consumer finance. Enforcing consumer protections often invites broad interpretation, giving the agency extensive power over many economic sectors. The agency issues rules, investigates consumer complaints, supervises entities regulated by consumer protections, and takes enforcement action. This power, it seems, has not come with proportional oversight. While the CFPB is not alone in having unaccountable authority granted by Congress, the bureau’s unique characteristics make its constitutionality dubious.
Initial legal challenges to the CFPB pertained to its governance. In Seila Law LLC v. Consumer Fin. Protection Bureau (2020), the Supreme Court discussed the constitutionality of the removal protections for the CFPB’s director. The CFPB is headed by a single director appointed by the President and confirmed by the Senate for a five-year term. After confirmation, the President could only remove the director for cause, a vague and variable term in American legal history. In Myers v. United States (1929), Chief Justice Taft opined that the President’s ability to remove appointed bureaucrats was a power independent of Congress. However, the ruling concerned removals based on practical grounds such as insubordination, treason, or indolence.
What about when the President sought to remove bureaucrats for political purposes? Less than five years after Myers, this question presented itself when an FTC Commissioner was removed by the President due to his political affiliation. In Humphrey’s Executor v. United States (1935), the Court clarified that the President possessed unconstrained removal power only with respect to agencies which were strictly executive. Federal agencies like the FTC which were not strictly executive but established by Congress as “predominantly quasi-judicial and quasi-legislative” could limit presidential removal power. The Court argued that quasi-judicial and quasi-legislative agencies were intended by Congress to be independent from political, presidential influence. However, to alleviate concerns about the separation of powers, the Court clarified that if the President were to interfere with these agencies by removing bureaucratic leaders, the President must have “cause” as enumerated by Congress.
This essentially gave “independent” agencies immunity from the President’s full control so long as they could argue that their purpose was quasi-judicial or quasi-legislative, rather than executive. However, the CFPB could not make its case. In Seila Law, the Court concluded that the CFPB fell under neither category, ruling its director’s removal protections unconstitutional. The CFPB clearly possessed broad executive authority to issue rules and penalties through civil action and adjudication. However, the Court spared ruling the entirety of the CFPB unconstitutional when it severed the CFPB’s removal protections in its opinion. The CFPB remained free to operate, but its director became removable at the will of the President without cause.
While the CFPB survived this first challenge, the Supreme Court will hear CFPB v. Community Fin. Servs. Ass’n of Am. during its October 2023 Term. To further the agency’s independence, Congress permits the CFPB to draw 12% of the Federal Reserve’s annual budget to fund itself. In 2022, the CFPB drew $642 million from the Federal Reserve, $93 million less than the 12% cap ($734 million). Funds accumulated by the CFPB do not expire. It is the only federal agency to be funded in this way, and the Fifth Circuit in CFPB ruled this funding mechanism unconstitutional in violation of the Constitution’s Appropriations Clause. The clause is one of Congress’s most important checks on the federal bureaucracy, allowing it to defund or enrich agencies according to political priorities.
The Appropriations Clause states that “no Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” The CFPB asserts that this clause only applies to agencies explicitly drawing money from the Treasury. This textualist approach argues that funding from the Federal Reserve cannot be constitutionally challenged. While a principled legal argument, it is an irresponsible one. Suppose the Court upholds the CFPB’s funding mechanism. This communicates to Congress that if it establishes an agency which receives funding from a source other than the U.S. Treasury, it can prevent a duly-elected, future Congress from altering such funding without an appropriate majority in both houses of Congress and a favorable President to sign such a change into law. Traditional, annual appropriations do not involve fractional funding or uncertain commitments well into the future, unlike the CFPB’s accumulation of non-expiring funds.
What if the U.S. military, or the Department of Homeland Security, was allocated funds in this way? If their role is extremely important to the nation’s welfare, why aren’t they given this financial independence from annual appropriations? It is clear, then, that financial independence from annual appropriations does not reflect an agency’s importance. Rather, it signals political, preferential treatment granting certain immunities from oversight. Though the CFPB was created as a bureau of the Federal Reserve, the Fed exerts no influence on the CFPB’s policy. This fall, the Supreme Court should not tell Congress that this is acceptable bureaucratic practice, especially when it attempts to circumvent the authority of those the American people elect to legislative office.
Edited by Sofia Marie Matson