The Consumer Financial Protection Bureau is “completely off the separation of powers books.”

So wrote the U.S. Court of Appeals for the 5th Circuit in a decision last week holding that the bureau’s independent funding mechanism was unconstitutional because it violated Congress’ exclusive power to appropriate federal funds.

The decision heralds trouble ahead for this powerful and uniquely problematic federal agency.

The most remarkable feature of the Consumer Financial Protection Bureau is its unaccountability. Created in 2010 by the Dodd-Frank Act, the bureau acts (in the words of the Supreme Court) “as a mini legislature, prosecutor, and court” in the realm of consumer affairs, while enjoying near total insulation from the traditional political influences felt in every other sphere of government. 

And this unaccountability was entirely intentional: The agency’s architects shielded it from both presidential and congressional oversight, and entrusted control to a single, unelected director. Congress gave the bureau “capacious” authority and then set it free from all oversight to rove in search of problems and steer a course by its own lights. 

Two years ago, the Supreme Court declared that a provision that guaranteed the bureau’s director a five-year tenure except in cases of “inefficiency, neglect, or malfeasance” was an unconstitutional restraint on the president’s authority to remove his subordinates. 

On Oct. 19, the U.S. Court of Appeals for the 5th Circuit pierced the bureau’s second shield and held that its “unique” funding scheme is unconstitutional.

Unlike the vast majority of federal agencies, which must ask Congress for funding, the Consumer Financial Protection Bureau gets its funding directly from the Federal Reserve, which is also funded outside the usual congressional appropriations process.

The bureau’s director can demand up to 12% of the Federal Reserve’s operating budget as he pleases. The Fed cannot say no, and Congress cannot adjust that funding based on its assessment of the bureau’s priorities, activities, or performance.  This “double insulation” from the appropriations process gave it “an off-books charge card that rings up unappropriated monies.”

Just as the director’s tenure allowed the bureau to ignore the priorities of any given president, so the independent funding mechanism allowed the bureau to ignore Congress with impunity, secure in the knowledge that its operations would remain well-funded to the tune of $717.5 million annually. 

For example, during President Barack Obama’s administration, when members of Congress asked Richard Cordray, then the Consumer Financial Protection Bureau’s director, why he was spending hundreds of millions of dollars on a new headquarters building, he snapped back, “What does that matter to you?”

This free rein proved too much for the three-judge panel of the 5th Circuit. When confronted with a challenge to the bureau’s payday-lender rule, the court set the rule aside, not because it was beyond the scope of the power Congress gave the agency, but because it was the product of an unconstitutional funding structure. 

Only Congress, the court ruled, has the constitutional power of the purse, and it cannot give that power to an executive agency, especially where that agency is controlled by the president. To allow this double-insulated funding system to stand would “destroy that division of powers on which political liberty is founded.”

Both the Supreme Court and the 5th Circuit have noted that there is no historical precedent for an agency structured like the Consumer Financial Protection Bureau. But if the past provides no support, the future evokes only concern. The bureau might be first agency of its kind, but if unchecked, it might not be the last. The bureau’s structure would become the template for the design of future agencies.

That would result in future Congresses carving out increasingly large and numerous areas of policy from the rigors of the political process.  Those policy areas would be removed to a supposedly higher plane, where only the application of technical expertise would inform the applicable rules, enforcements, and adjudications. And there is no limiting principle to what priorities and what agencies should be placed outside the realm of political accountability. 

The result would be a government in which voters have little ability to affect any particular policy. They would be limited to selecting representatives, who would in turn select the real decision-makers.

The 5th Circuit’s ruling in the Community Financial Services v. CFPB case is unlikely to be the final word. Because the ruling casts into doubt the bureau’s every rule and adjudication, it has no choice but to appeal the ruling either to the full 5th Circuit or to the Supreme Court. 

No fewer than five justices of the high court have already joined an opinion that referenced the Consumer Financial Protection Bureau’s independence with concern. If the Supreme Court agrees with the 5th Circuit, Congress would be forced to reassert control over the bureau’s funding through the traditional appropriations process before it could carry on its work. 

Already, the 5th Circuit’s decision has raised voluble complaints from the bureau’s supporters, who fear that the decision will cause uncertainty about the rules governing consumer financial products, such as mortgages. Those are weighty concerns that ought to command attention from Congress, but their seriousness alone is not a basis for courts to ignore constitutional infirmities in the funding scheme or any other aspect of an agency’s structure.

The basic question for the courts is a legal one; namely, whether the Consumer Financial Protection Bureau’s structure satisfies the constitutional minimum for public accountability. If the answer is no, then the separation of powers dictates that Congress alone can fix the problem.

Whether it will is uncertain. Congress seems uninterested in controlling the administrative state, but if the Supreme Court upholds the 5th Circuit’s decision, that might just goad Congress to action.  

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