Back in October, the U.S. Court of Appeals for the 5th Circuit issued a radical decision that has only grown more alarming in the months since: It declared the Consumer Financial Protection Bureau unconstitutional in an opinion that seemed designed to destabilize America’s entire financial system. The 5th Circuit’s ruling would, experts say, send the economy into a tailspin, crashing the housing market and triggering a bank panic that would make the 2008 recession look like child’s play. And that’s just the start: Longer-term, the decision would open up financial regulators to partisan interference and subversion while threatening trillions of dollars in entitlement spending for programs like Medicare and Social Security.
The Supreme Court will review the 5th Circuit’s CFPB ruling next term to decide whether the federal judiciary should sabotage the economy. But a decision from SCOTUS is still more than a year away—a year of growing economic pain and uncertainty. In the meantime, banks are getting nervous, and Republicans are trying to exploit the uncertainty to defund and deregulate financial watchdogs.
So it is very good news that, on Thursday, the 2nd U.S. Circuit Court of Appeals upheld the CFPB’s constitutionality in its own review of the question, condemning the 5th Circuit decision as totally unmoored from logic, precedent, and constitutional text. There is a good chance that SCOTUS will consolidate the 2nd and 5th Circuit cases, hearing and deciding both at once. Even better news: The 2nd Circuit decision was written by Judge Richard J. Sullivan, a Donald Trump appointee and Federalist Society member whose opinion should carry real weight at this Supreme Court. As fears of a recession grow, it is ever more vital for judges like Sullivan to affirm the judiciary will not provoke or exacerbate any looming crisis.
To see why Sullivan’s opinion is so important, look first at the 5th Circuit’s rash and incoherent decision. The 5th Circuit’s decision was written by a Trump appointee, Judge Cory Wilson, and joined by two other Trump appointees, Judges Kurt D. Engelhardt and Don Willett. Wilson took aim at a feature of the CFPB that has long frustrated conservatives: its independence. Created as part of the Dodd–Frank Act in 2010, the agency was designed to protect consumers against fraud and exploitation in consumer loans, home mortgages, credit cards, and retail banking. Congress safeguarded its independence by preventing the president from firing its director and securing its funding through the Federal Reserve. The Supreme Court struck down this first feature in 2020. But today, the CFPB continues to draw funds from the Federal Reserve, which is, in turn, chiefly funded by interest it earns on securities.
According to Wilson and the 5th Circuit panel, this independent funding renders the whole agency unconstitutional. For a hook, he cited the Constitution’s appropriations clause, which states that “no money shall be drawn from the treasury, but in consequence of appropriations made by law.” For its entire history, the Supreme Court has interpreted this provision to mean that Congress must authorize any federal spending. Yet Wilson read a hidden requirement into the clause: Congress may not establish permanent, independent funding for an agency, he asserted, but must instead periodically reauthorize its budget through an appropriations bill. And because the CFPB is funded outside annual appropriations, it violates this heretofore unknown rule.
Unpersuaded? So was Judge Sullivan. In his ruling on Thursday, Sullivan dismantled Wilson’s arguments piece by piece, in an analysis that exudes bafflement. (He was joined by Judge John M. Walker, a George H.W. Bush appointee, and Judge Amalya Lyle Kearse, a Jimmy Carter appointee.) The case came to the 2nd Circuit after a New York City–based debt-collection law firm challenged a CFPB investigation on the grounds that it is funded unconstitutionally. This argument gave the court an opportunity to squarely reject the 5th Circuit’s folly.
“As a threshold matter, we cannot find any support for the Fifth Circuit’s conclusion in Supreme Court precedent,” Sullivan wrote. “To the contrary, the Court has consistently interpreted the Appropriations Clause to mean simply that ‘the payment of money from the Treasury must be authorized by a statute.’ ” For support, he cited five Supreme Court cases—from 1877 through 2020—that affirmed this principle. “We are not aware,” Sullivan wrote, “of any Supreme Court decision holding (or even suggesting) that the Appropriations Clause requires more than this ‘straightforward and explicit command.’ ” And since “Congress expressly appropriated the CFPB’s funding,” the court has no power to blow up its budget.
“We likewise find no support for the Fifth Circuit’s reasoning in the Constitution’s text,” Sullivan went on. “Nothing in the Constitution” demands that “agency appropriations be ‘time limited’ or that appropriated funds be drawn from a particular ‘source.’ ” Indeed, he pointed out, the Constitution’s only time limitation in this area forbids Congress from appropriating money to the army for longer than two years. The “negative implication” of this limitation is that the Framers knew how to slap a time limit on appropriations and chose not to do so with agency funding.
“Nor do we find support for the Fifth Circuit’s reasoning in the history of the Appropriations Clause,” Sullivan continued. He then dove into the historical record, using Alexander Hamilton’s explanation of the clause to explain how Congress satisfied its commands when creating the CFPB. The upshot is that the agency’s funding is perfectly “consistent with the historical practices of English, colonial, and state governments that formed the basis of the Founders’ understanding of the appropriations process at the time of the Constitution’s enactment.” The 2nd Circuit therefore “respectfully decline[s] to follow the Fifth Circuit’s decision.”
Sullivan’s opinion reads like something Chief Justice John Roberts or Justice Brett Kavanaugh would write. And that may be the point. The Supreme Court is already set to settle this issue next term, and Sullivan’s analysis sounds tailored to the court’s swing votes. He has an influential voice: Sullivan was viewed as a potential future nominee to the Supreme Court when Bush put him on the district court, and today he’s a prominent “feeder” judge, sending many of his own clerks up to the justices. The conservatives who now make up the center of the court respect him far more than Wilson. They will take his opinion very seriously; it may well form the basis of SCOTUS’ eventual decision.
That’s encouraging, because this case could literally crash the economy. The long-term political ramification are certainly frightening: Wilson’s reasoning would call into question the constitutionality of the Federal Reserve, FDIC, OCC, and other financial regulators that, like the CFPB, are funded independently. And it could empower judges to strike down programs like Medicare that are funded through “mandatory spending” rather than annual appropriations. This spending amounts to more than $5 trillion a year, and the 5th Circuit could subject some or all of it to the whims of unelected judges.
But there’s an even more immediate threat: The 5th Circuit’s decision is literally a recipe for a recession. That’s because the CFPB provides indispensable stability to the financial sector through regulations that include “safe harbor” provisions which protect lenders who follow the rules. The Mortgage Bankers Association has already explained how the abrupt destruction of this system would wreak havoc on just one area regulated by the CFPB, home lending. If CFPB regulations disappear—as they would if a court invalidates the entire agency—mortgage markets “grind to a halt.” Why? Because lenders who once shielded themselves from liability by complying with CFPB rules could no longer “have any confidence that their transactions comply with law.”
These lenders would, in turn, be unable to guarantee secondary market investors that their loans are actually legal, so investors would stop purchasing loans. Consumers would then “be largely unable to buy or sell their homes” due to “cessation of available credit,” leading builders to halt construction on new houses. This domino effect would topple “the national mortgage market,” setting off a housing crisis far worse than that of 2008.
And that’s just the consequence for housing. A similar chain reaction would occur in other areas the CFPB regulates, including the banking sector. Lenders would stop providing all manner of loans to avoid exposure to massive liability, and borrowers could refuse to pay on the grounds that their loans are suddenly unlawful. Liquidity would dry up almost overnight, setting off a Great Depression–style run on the banks that would culminate in, well, another Great Depression.
As the American Prospect’s David Dayen has detailed, bankers are currently urging Congress to write CFPB rules into statute in a vain attempt to avoid this mess. But the Republican-controlled House has shown little interest. Instead, Republicans want to exploit the 5th Circuit’s decision by forcing financial regulators like the CFPB to beg for money each year. This shift would give Congress the opportunity to hobble their operations by shrinking or zeroing out their budget, undoing many guardrails set up in Dodd–Frank.
Does the Supreme Court want to own all that? Probably not. Now Sullivan has given it a compelling reason to shoot down Wilson’s anti-constitutional fan fiction. Hopefully, in a year or so, SCOTUS will step in as the adult in the room and put this nonsense to bed for good. Until then, the 2nd Circuit’s opinion may be all the assurance we have that the judiciary won’t break the economy. Let’s hope it’s enough.