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The U.S. Supreme Court on Monday said it would hear a case that will decide the future of the Consumer Financial Protection Bureau.
The case revolves around the constitutionality of the CFPB’s funding mechanism. After the CFPB issued a payday-lending rule in 2017, industry groups challenged the rule in court, arguing in part that the agency’s funding structure–which draws money from the Federal Reserve rather than annual Congressional appropriations–is unconstitutional. Last fall, the Fifth Circuit federal appeals court rejected most of the trade groups’ arguments against the rule but ruled that the CFPB’s funding structure violates the Constitution’s appropriations clause and separation of powers doctrine.
That decision not only overturned the payday-lending rule and put a legal cloud over every action the CFPB has taken since its launch 12 years ago, it also raised questions about a host of other government agencies and programs that are funded outside the annual Congressional appropriations process, legal experts say.
“This is existential for the CFPB,” said David Silberman, a former CFPB official and a senior fellow at the Center for Responsible Lending, a nonprofit research and policy group. If the Supreme Court were to rule that the agency is unconstitutionally funded and that nothing it does is lawful, “the CFPB essentially can’t do anything unless and until Congress enacts an appropriation, and that means on a going-forward basis each year this becomes a political football.”
Given the sweeping implications of the appeals-court decision, the CFPB urged the Supreme Court to hear the case–quickly. The appeals court’s decision “threatens to inflict immense legal and practical harms on the CFPB, consumers, and the nation’s financial sector,” the CFPB said in its November 2022 petition to the Supreme Court, which also asked that the nation’s highest court hear the case during its current term, which ends in June.
The CFPB, created as part of the Dodd-Frank Act in response to the global financial crisis, was designed to be a powerful and independent enforcer of consumer financial laws. In establishing the new agency, Congress gave it some insulation from political influence, providing that the CFPB director could not be fired without cause–such as neglect of duty or malfeasance in office–and that the agency would get its funding from the Federal Reserve rather than relying on Congressional appropriations. The first layer of independence was eroded in 2020, when a Supreme Court ruling made it easier for the president to remove the CFPB director. Now, the second layer of independence is at issue.
In its 2020 ruling, the Supreme Court found that the Dodd-Frank provision protecting the CFPB director from removal without cause was unconstitutional. But the court decided that provision could be separated from the rest of Dodd-Frank, leaving the CFPB’s authority intact.
The current case has much broader implications, legal experts say.
So long as the appeals-court decision stands, “any bank or financial institution that’s under investigation has a card to play, to say ‘we’re not cooperating because of the Fifth Circuit decision,” Silberman said. The appeals court’s decision has already been cited as a legal defense by financial firms not only in the Fifth Circuit but across the country, so “its broader impact is being witnessed every day,” said Stephen Hall, legal director and securities specialist at Better Markets, a nonprofit that promotes the public interest in financial markets.
The Constitution’s appropriations clause, which is at the heart of the case, “just says funds shouldn’t be drawn from Treasury without appropriations from Congress,” said Lauren Saunders, associate director at the National Consumer Law Center, a consumer advocacy group. The CFPB’s funding fits squarely with that clause, the agency said in its petition. “Congress enacted a statute explicitly authorizing the CFPB to use a specified amount of funds from a specified source for specified purposes,” the petition said. “The appropriations clause requires nothing more.” Congress has also provided for funding of a host of federal entities through sources other than annual appropriations bills, CFPB said in its petition, citing the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and others.
The Community Financial Services Association of America and Consumer Service Alliance of Texas, the trade groups involved in the case, said in their Supreme Court filing opposing the CFPB’s petition that the 2010 Congress had “deliberately circumvented” appropriations clause safeguards “by vesting the CFPB with discretionary authority to fund its operations by taking as much as hundreds of millions of dollars directly from the Federal Reserve each year forever.”
If the Supreme Court ultimately rules against the CFPB, it won’t necessarily undo everything the agency has ever done, Hall said, but “the Supreme Court will be challenged to figure out what the appropriate remedy is, and how they go about doing that without dismantling the agency is a key question.” If they get that far, he said, a Congressional fix may be needed. “And that may well be where things end up, a troubling prospect that will almost certainly undermine the CFPB’s independence.”
