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The Supreme Court’s Restoration of Executive Prerogative

By Todd Zywicki

In its brief history, the Consumer Financial Protection Bureau (CFPB) has been the subject of three of the most important separation of powers cases in the last half century. In the first two cases, NLRB v. Noel Canning (2014), which addressed the recess appointment power of the President, and Seila Law LLC v. Consumer Financial Protection Bureau (2020), which dealt with the authority of the President to remove a sitting head of a single-member independent agency, the Supreme Court sided with the challengers.

In the third case, Consumer Financial Protection Bureau v. Community Financial Services Association of America (CFSA), decided last week, the Court rejected by a 7-2 vote CFSA’s challenge, holding that although the CFPB’s novel funding scheme was unprecedented, it was not improper under the Constitution’s Appropriations Clause. In so holding, however, the Supreme Court has unwittingly aided the rise of the Imperial Executive—while further demoralizing and degrading the role of Congress in the constitutional system. In fact, as Justice Alito argues in his compelling dissent, when combined with the Supreme Court’s earlier decision in Seila Law, the Supreme Court’s ruling actually exacerbates the separation of powers issues that already plagued the CFPB’s structure from its inception.

That the CFPB would be the subject of repeated constitutional challenges is not surprising. As I noted soon after the CFPB’s creation, the CFPB was the most-powerful and least-accountable agency in the history of the country. The original structure of the CFPB created a system with a single Director appointed for a five-year term, subject to confirmation by the Senate, and after that removable by the President only “for cause.” This insulation from both Congress and the President was backed by the unique funding mechanism designed for the CFPB—nominally identified as a “Bureau” of the Federal Reserve, the CFPB was not subject to annual appropriations by Congress, such as is the Federal Trade Commission. Instead, the CFPB is entitled to draw fund directly from the Federal Reserve Board, subject to a statutory percentage-based cap (which the CFPB has never approached) derived from the Fed’s revenues. The Fed, in turn, draws its funds from the sale of securities and from assessments on its member banks.

This structure thus creates what the Fifth Circuit described in its opinion last year, which struck down the CFPB’s funding structure, as a “double insulation” from Congress’s Appropriations power: the Fed itself derives its funding from its own operations (not from Congress) and the CFPB in turn derives its funding from the Fed (and thus also not from Congressional appropriations).

As a “single member” independent agency, the CFPB also lacked the internal checks and balances that characterize multi-member bipartisan agencies such as the Federal Trade Commission and Securities Exchange Commission. Moreover, this extreme degree of independence was combined with a vast scope of enforcement, rulemaking, and policy-making discretion exceeding that of any other single-member agency that preceded it.

As a result, in the years following the CFPB’s creation in 2010 as part of the Dodd-Frank Financial Regulatory Reform law, it was essentially a perpetual motion machine with a roving commission that reached to the far corners of the American economy. Once confirmed, the Director would remain in place for at least a five-year term (and under the statute would continue until a replacement was named) and during that period the Director would have a functionally unlimited budget to support operations with no need to answer to Congress or even the President. Within that scope, the Director had the power to hire every member of the CFPB staff (including the Deputy Director) with no Congressional input.

As Justice Jackson notes in her concurring opinion in CFPB v. CFSA, this extreme independence was intentional, as Congress “designed the funding scheme to protect the Bureau from the risk that powerful regulated entities might capture the annual appropriations process.”

In Seila Law, the Supreme Court reined-in one element of this apparatus by holding that the “for cause” removal limitation was unconstitutional and severing that provision from the CFPB’s statute, making the Director removable by the President. CFSA v. CFPB challenged the second leg of this novel structure, attacking the CFPB’s funding design.


The Supreme Court’s Opinion in CFSA v. CFPB

Justice Thomas wrote the 7-2 majority opinion in CFSA v. CFPB, joined by concurring opinions by Justice Kagan (joined by Justices Sotomayor, Kavanaugh, and Barrett), and a separate concurring opinion by Justice Jackson. Justice Alito wrote a dissenting opinion joined by Justice Gorsuch. All the opinions were remarkably short by the standards of recent Supreme Court opinions, including Justice Thomas’s 22-page majority opinion.

The brevity of Justice Thomas’s opinion is likely explained by the fact that the majority upheld the CFPB’s funding structure, largely because of a lack of any compelling textual, historical, or functional reason to strike it down. To summarize Justice Thomas’s opinion succinctly, he concluded the Constitution places no clear limits on the Appropriations power beyond the requirement that Congress (1) “identify a source of public funds” and (2) “authorize the expenditure of those funds for designated purposes to satisfy the Appropriations Clause.”

Beyond that bare minimum requirement, Thomas’s view is that the questions of appropriations should be seen essentially as political questions to be resolved through negotiations between Congress and the President. Thomas he points to a handful of limited examples of self-funding agencies from history, such as the early funding of the Customs Office and Post Office. Perhaps most important, however, Thomas implies that the fatal flaw in the challenger’s argument is that although they argue that to be valid under the Appropriations Clause in terms of amount and duration (of time), they were unable to point to any basis for those requirements in text or history or where a Court might draw a line. In light of any basis for imposing those requirements or discernible principle for how to apply them, Thomas implied that the Framers’ impliedly left those questions to be sorted out between the President and Congress.

Writing in concurrence, Justice Kagan added to Thomas’s originalist opinion a claim about the propriety of the Court deferring to the tradition and practice of accommodation between Congress and the President. She particularly points to the longstanding financial independence of the financial regulatory agencies (such as the Fed, Office of the Comptroller of the Currency, and others) which have long been self-funding and subsisted largely on assessments from the parties they regulate. Finally, Justice Jackson added a functionalist justification, arguing that the budgetary independence of the CFPB was an essential part of Congress’s scheme in Dodd-Frank and the Supreme Court should not lightly rejected that reasoning.

Writing in dissent, Justice Alito rejected all of these rationales. First, pointing to the text of the Appropriations Clause, he argues that it should be read as a “term of art” within in the historical context in which it was written. And that historical context is well understood—it arose from the centuries-long struggle between Parliament and the King over control of the purse which was, more fundamentally, control over the governance of policy itself, including the war power. U.S. history after the Constitution’s ratification reinforced this reading, as agencies—with very limited exceptions—were funded by annual appropriations from the Treasury. Third, “While there have been departures from this dominant model,” such as the Customs and Post Offices, “nothing like the CFPB’s funding scheme, of double-insulation from Congress’s appropriations power, “has previously been seen.” Moreover, all those agencies had narrow, circumscribed power and none of those agencies possessed the vast scope of policymaking and enforcement authority possessed by the CFPB. Finally, where those agencies subsisted on self-funding mechanisms, those were grounded in services provided to those who use them, such as the Customs and Post Offices charging for its services. Similarly, the financial regulatory agencies such as OCC and FDIC charge for their services regulating those entities, which is in turn grounded in their benefits they receive through government-provided deposit insurance and other similar services.

Adding all this up, Alito comes down on the conclusion that while it might be difficult to draw a particular line to determine what is required for a valid exercise of Congress’s Appropriations power, it is not required to be able to draw a bright line to know that, in this case, it goes too far. Agreeing with Justice Jackson, Alito agrees that Congress created the CFPB with “maximum unaccountability.” But Alito notes that is exactly the problem. And while Seila Law pared back some of that, it left the budgetary issue unaddressed. And when combined with the Court’s decision in CFPB v. CFSA, Seila Law actually “worsens the appropriations problem” and “increased the power of the Executive over appropriations.” Because Seila Law vests the President with authority to remove the CFPB Director at will, now the President can instruct the Director to requisition the amount of money the President thinks is desirable then spend it as directed. In this sense, Justice Alito echoes an argument I made a decade ago, namely, that in understanding the problems with the structure of CFPB, it is necessary to examine the overall structure for the composite degree of accountability and power, rather than weighing whether each of its individual compon2ents will pass constitutional muster.


Analyzing CFPB v. CFSA

In Noel Canning, the Supreme Court refused to step aside and permit President Obama to unilaterally declare Congress in recess, allowing him to exercise the executive’s appointment power and circumvent the advice and consent clause. In Seila Law, the Supreme Court refused to allow the Executive to cede its power to remove the CFPB Director even though President Obama agreed to that loss of Executive authority in Dodd-Frank. In both cases, the Court noted that upholding the separation of powers and checks and balances is not an end in itself, but rather a means to the end of preserving individual liberty. As a result, the Supreme Court has an obligation to uphold constitutional structure even when Congress or the President gives away its powers if doing so threatens individual liberty.

Yet, in CFPB v. CFSA, the Supreme Court upheld the unprecedented funding scheme of the agency on the ground that some future Congress could choose to rescind that open-ended delegation of power. The ruling held that checks on the exercise of the appropriations power are political, not legal.

But the approach taken by the Court in CFPB v. CFSA misses the larger point in the modern discussion over the separation of powers. Justice Thomas’s opinion follows the logic laid out initially by James Madison and the Framers—that the separation of powers should be viewed as a zero-sum struggle for power between the legislative and executive branches. It follows that neither branch would be willing to cede power unless there is some good reason in principle or prudence to do so; hence, historical practice provides a reliable guide to interpreting the structural Constitution.

Although the Framers got many things right, on this point experience and subsequent developments prove the Framers’ intuitions incorrect. At the very least, modern attempts to interpret the Framers’ intuitions require an understanding of the more than two centuries of historical practice between the Framers time and ours.

Most notable, it has long been recognized that the Framers’ Constitution simply had a tin ear when it comes to anticipating the development of political parties. For most practical purposes today, relationships between Congress and the President are defined by a separation of parties, not powers. Any doubt about the validity of the predominance of partisanship today was obviated in the dispute over the recess appointments in Noel Canning, in which Senate Democrats led by Minority Leader Harry Reid actually supported President Obama’s authority to declare Congress as being in recess in order to circumvent the advise and consent requirement of Dodd-Frank. As noted, the authority to confirm the Director was essentially the legislature’s sole means of accountability over the Bureau, and Senate Democrats were willing to voluntarily surrender that power for partisan advantage.

This gives rise to a more important structural issue that relates to the sort of historical evidence Kagan and others point to. Notably, there is a fundamentally different dynamic in relations between Congress and the President during periods of unified governance (when the same parties control Congress and the Presidency) versus divided government (when at least one house of Congress and the President are of different parties). As is well understood, Congress is much more willing to defer to the President during periods of unified government than divided government, as doing so assists the members of the majority party in accomplishing their personal political goals, including reelection. (This is a point that I briefly discuss in my co-authored casebook and am currently developing more fully.)

All the opinions in CFSA v. CFPB, including Alito’s dissent, miss this fundamental point. The primary problem with the CFPB’s structure is not that it represents Congress ceding its authority over the purse to an unaccountable agency (now, even more surreal, an executive agency that draws its funding from an independent agency, i.e., the Federal Reserve, with no formal appropriation from Congress). The problem is that Congress in 2010 ceded the authority of future Congresses over the CFPB’s budget.

Why did it do that? Because at the time, Washington was controlled by a unified Democratic government which saw the CFPB as an ideological ramrod for future political purposes. And this is what Justice Jackson implicitly acknowledges—Congress’s goal was, in fact, designed to tie the hands of future Congresses, including in the 2010 midterms when Democrats expected to (and in fact, did) lose at least one house of Congress. Similarly, the original arrangement for a Director with a five-year term removable only for cause was designed to tie the hands of a future Republican President who might be elected in 2012. And while Justice Jackson parrots the line that the extreme independence of the CFPB was necessary to protect the agency from “capture” by powerful special interests, this ignores the full understanding of the economic literature on agency governance as well as the agency’s history since its founding, namely that the CFPB’s structure does not insulate it from interest-group capture, it simply means that the agency will be captured by other interests, namely the bureaucratic staff and favored interest groups such as trial lawyers and consumer advocacy groups.

Periods of unified government tying the hands of future Congresses (or doing so implicitly through the sort of deference to tradition Kagan identifies) turns out to be a one-way ratchet that is much harder to undo than to do in the first place. To start, this process obviously requires the establishment of unified government. But it also entails that the President voluntarily sign a bill that gives back the power that was granted to him—a decision based entirely on principle. That such an act would escape a Presidential veto is so unlikely as to border on the absurd. Even more absurd is the notion that a veto would be overridden by Congress. Experience teaches that Presidents rarely surrender a power that it given to them. In fact, it is more likely that the President would use this power to the advantage of his party (with the tacit approval of Congress) than to give it back.

As my former professorial colleague (and now Federal Judge) Neomi Rao observed in her last major law review article as a professor, Madison’s framework for the separation of powers rests on a fundamental confusion between the incentives of the “collective Congress” and those of individual members of Congress. While it is usually in the interests of Congress as a body (the collective Congress) to resist delegation of their powers to the Executive, it is often in the individual interests of members of Congress to do so where it advances their own political (and electoral) prospects. CFPB’s unique structure illustrates that point perfectly.

Ironically, Chief Justice Roberts (author of the Seila Law opinion) came tantalizingly close to recognizing this reality in the oral arguments in the case. Addressing the Solicitor General Roberts observed, “legend has it there have been times when the same party controlled both houses of Congress and the White House, and in that situation, you can see Congress empowering the President in a way that might seem unusual to the Framers.” As noted, this is claim is not merely “legend,” it is now well-supported by theoretical understanding and empirical evidence. Nevertheless, Roberts let the matter drop and it apparently played no role in any of the opinions in the case, which relied on traditional Madisonian principles.

The Madisonian Constitution is dead. It was killed by partisanship. Until the Supreme Court understands this, the separation of powers is going to become increasingly irrelevant as a means of protecting individual rights and the powers of future generations of elected officials.


Todd Zywicki is the George Mason University Foundation Professor of Law, Antonin Scalia Law School and a Former Chair of the Consumer Financial Protection Bureau Taskforce on Federal Consumer Financial Law.


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