Justices to take up case on fate of consumer watchdog

The Supreme Court agreed on Monday to hear a case that could hobble the Consumer Financial Protection Bureau and advance a key project of the conservative legal movement: to limit the power of independent agencies.

A ruling against the bureau, created as part of the 2010 DoddFrank Act after the financial crisis, could cast doubt on every regulation and enforcement action it took in the dozen years of its existence. That includes extensive rules — and punishments against companies that flout them — that the agency has written to govern mortgages, credit cards, consumer loans and banking.

The central question in the case, Consumer Financial Protection Bureau vs. Community Financial Services Association of America, No. 22- 448, is whether the way Congress chose to fund the agency violated the Appropriations Clause of the Constitution, which says that “no money shall be drawn from the Treasury, but in consequence of appropriations made by law.”

A unanimous three- judge panel of the 5th U. S. Circuit Court of Appeals, in New Orleans, ruled in October that the bureau’s funding mechanism ran afoul of that clause.

“Wherever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it,” Judge Cory T. Wilson wrote in an opinion joined by Judges Don R. Willett and Kurt D. Engelhardt in the ruling. Former President Donald Trump appointed all three judges on the panel.

The bureau is funded by the Federal Reserve System, in an amount determined by the bureau so long as it does not exceed 12% of the system’s operating expenses. In the 2022 fiscal year, the agency requested and received $641.5 million of the $734 million available. The 2010 law said the bureau’s funding requests “shall not be subject to review by” the House and Senate Appropriations Committees.

The 5th Circuit’s decision was at odds with ones from other courts. In 2018, for instance, the District of Columbia Circuit said there was nothing unusual about the funding mechanism.

In urging the Supreme Court to hear the Biden administration’s appeal, Solicitor General Elizabeth B. Prelogar said the ruling “threatens to inflict immense legal and practical harms on the CFPB, consumers and the nation’s financial sector.”

A decision against the consumer bureau could imperil other agencies.

“If the Supreme Court accepts this deeply flawed argument against CFPB funding, it would set a dangerous precedent that would be used to challenge agencies with legally indistinguishable funding, including the Federal Reserve, FDIC, Medicare and Social Security,” said Nadine Chabrier, a senior

policy and litigation counsel at the nonpartisan research group Center for Responsible Lending.

But opponents of the bureau, including Republican lawmakers, countered that the agency was uniquely problematic and hoped the case would resolve a recurring question.

In 2020, the Supreme Court ruled that a different part of the law creating the consumer bureau was unconstitutional, saying that Congress could not insulate the bureau’s director from presidential oversight given the scope of the job’s authority.

“The director has the sole responsibility to administer 19 separate consumer-protection statutes that cover everything from credit cards and car payments to mortgages and student loans,” Chief Justice John Roberts wrote for the majority.

He mentioned the bureau’s funding in passing, noting that its budget had exceeded half a billion dollars in recent years.

“Unlike most other agencies,” the chief justice wrote, “the CFPB does not rely on the annual appropriations process for funding. Instead, the CFPB receives funding directly from the Federal Reserve, which is itself funded outside the appropriations process through bank assessments.”

Roberts made the same point when the case was argued. “They don’t even have to go to Congress to get their money,” he said.

In the administration’s petition seeking review, Prelogar wrote that “the CFPB’S funding mechanism is entirely consistent with the text of the Appropriations Clause, with longstanding practice and with this court’s precedent.”

She added that barring congressional committees from reviewing the funding “simply allocates authority among different congressional bodies” and that “the Appropriations Clause is not concerned with such matters of internal congressional housekeeping.”

The case was brought by two trade groups representing payday lenders. They challenged a regulation limiting the number of times lenders can try to withdraw funds from borrowers’ bank accounts.

The 5th Circuit struck down the regulation, saying it was “wholly drawn

through the agency’s unconstitutional funding scheme.”

The Supreme Cour t turned down a request from the Biden administration to decide the case in its current term, which ends in late June or early July. The justices will instead hear arguments in the fall and probably not issue a decision until 2024.

That could complicate the agency’s operations as other challenges mount. More than a dozen companies have cited the 5th Circuit ruling in seeking to have lawsuits or penalties the bureau has filed against

them thrown out.

“A delay in hearing this case only hurts consumers, as this is an urgent issue that has horrifying implications for consumers and our entire financial system,” Sen. Sherrod Brown, D- Ohio, chair of the Senate Banking Committee, said in a statement.

House Republicans have previously introduced legislation that would bring the CFPB into the traditional appropriations process and remain committed to passing such a bill, Rep. Patrick T. Mchenry, R-N.C., chair of the Financial Services Committee, said in a statement.