Supreme Court to hear CFPB case Tuesday, with agency's future in the balance

Washington — The Consumer Financial Protection Bureau is poised to face the most significant test of its 13-year existence Tuesday when the Supreme Court considers the constitutionality of the mechanism through which the agency is funded.

The CFPB, which is the brainchild of Sen. Elizabeth Warren and was created by a Democratic-led Congress in 2010, has long been criticized by Republicans who have over the years sought to weaken the bureau. Now, the case before the high court Tuesday could jeopardize the CFPB's future and actions the agency has taken since its creation.

At the crux of the dispute is the scheme through which the CFPB is funded, which was laid out through the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in response to the 2008 financial crisis. Under the law, the bureau receives up to a capped amount of funding annually from the Federal Reserve. In fiscal year 2022, the CFPB drew roughly $641.5 million from the Fed, below the inflation-adjusted cap of about $734 million, according to court filings.

The funding structure for the CFPB differs from other federal agencies, which receive money through the congressional appropriations process.

The CFPB case

The legal fight arose from a challenge to a 2017 payday lending rule issued by the CFPB that was brought by a pair of trade associations. The groups argued in part that the rule is invalid because the bureau's funding mechanism violates the Constitution. A federal district court ruled in favor of the CFPB, but the U.S. Court of Appeals for the 5th Circuit reversed the lower court's decision and invalidated provisions of the payday lending rule as "the product of the bureau's unconstitutional funding structure."

The appeals court found that Congress abdicated "its appropriations power under the Constitution" and ceded its "power of the purse to the bureau." The three-judge panel concluded that the CFPB's funding structure to be a violation of the Appropriations Clause, which states that "no money shall be drawn from the Treasury, but in consequence of appropriations made by law."

The Biden administration appealed the 5th Circuit's decision and asked the justices to consider whether the lower court erred when it found the statute providing funding to the CFPB to be unconstitutional.

"Congress enacted a statute explicitly authorizing the CFPB to use a specified amount of funds from a specified source for specified purposes. The Appropriations Clause requires nothing more," Solicitor General Elizabeth Prelogar told the court in a filing. "The court of appeals' novel and ill-defined limits on Congress's appropriations authority contradict the Constitution's text and congressional practice dating to the Founding."

The Biden administration noted that because Congress specified that the CFPB receives a capped amount of funding and included when and how the money can be spent, the law "satisfies the classic elements of an appropriation and falls comfortably within Congress's historical practice."

But the trade associations have argued that Congress in 2010 "crafted the CFPB to operate free of any political accountability, including fiscal oversight," and criticized the agency's funding stream as "perpetual."

"Whatever the breadth of Congress's discretion, a statute that cedes to the Executive the power to decide the total sum that will be drawn, in perpetuity and for a law-enforcement agency, is neither an 'Appropriation' nor a valid 'Law' — it is a void delegation of exclusive legislative power," lawyers for the trade groups wrote in a filing to the Supreme Court.

They argued that the structure nullifies the Appropriations Clause by "allowing a single Congress to unite purse and sword in an Executive agency that it wishes to permanently shield from political accountability, unless and until the President and both chambers of Congress are willing to restore fiscal oversight."

The case has attracted input from red states and blue states, as well as Republican and Democratic members of Congress.

In a friend-of-the-court brief, more than 140 current and former lawmakers, including Warren, argued that by appropriating funds on a standing basis, instead of annually, Congress used a funding structure for the CFPB that it had already found effective for other financial regulators, but with more constraints on the bureau.

"Congress's long-exercised authority to structure appropriations as it sees fit to solve a wide array of national problems is as crucial now as it was at the Founding," they argued. "The history underpinning the establishment of the Consumer Financial Protection Bureau (CFPB) well illustrates Congress's authority to craft appropriations that are tailored to the problem at hand."

But on the other side of the aisle, a group of 132 Republican members of Congress argued that Dodd-Frank included many provisions that were designed to insulate the CFPB from the appropriations process, which amounted to a transfer of congressional power to an executive agency.

"Dodd-Frank worked a stunning role reversal, with the CFPB dictating its own level of funding each year, while Congress remained largely out of the picture," they told the court. "The CFPB certainly believes itself to be in the driver's seat."

Defenders of the CFPB told the court that its funding scheme creates "stability and predictability," to the benefit of smaller financial institutions that often have less access to the political decision-makers than big banks.

"The CFPB has played — and continues to play — precisely the role that Congress envisioned: by listening and being responsive to all participants within the financial system, the CFPB has protected the stability of the system as a whole. The CFPB's funding mechanism has played a key role in this success," a coalition of community development credit unions, community development financial institutions and other industry groups, told the court in a friend-of-the-court brief.

A trio of organizations representing the mortgage industry, housing industry and realtors urged the Supreme Court to exercise caution if it invalidates the 2017 payday lending rule by issuing a ruling that "does not call into question other crucial regulations" issued by the CFPB.

Warning of the "potentially catastrophic consequences" of a decision impacting the mortgage and real-estate markets, they told the high court that a broad decision "could set off a wave of challenges and the housing market could descend into chaos, to the detriment of all mortgage borrowers."

The CFPB has escaped a potentially devastating ruling from the Supreme Court before — in 2020, the high court found its structure to be unconstitutional, but stopped short of dismantling the agency. In a decision authored by Chief Justice John Roberts, the court said the agency could continue operating, but concluded that its director had to be removable by the president.

A decision from the Supreme Court is expected before the end of June 2024.

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