Consumer bureau future at stake as Supreme Court takes up funding challenge

The Supreme Court said Monday it will take up a challenge to the Consumer Financial Protection Bureau’s funding structure, in a case that could sharply curtail the agency’s power and jeopardize its previous actions.

GOP lawmakers and many businesses have targeted the bureau ever since it was created more than a decade ago, but if the high court upholds a lower court’s decision against the CFPB, the ruling could have an impact on other agencies as well. The Supreme Court will hear the case next term, after denying a government petition to expedite it.

The CFPB draws its money from the Federal Reserve, not through the normal congressional appropriations process. An appellate court ruled in October that violates the Constitution’s separation of powers doctrine, in a case brought by payday lending groups against the agency’s 2017 small-dollar lending rule.

That decision cast doubt on a slew of CFPB regulations and renewed the partisan fight over the agency’s structure. Congress gave the bureau its own funding stream in the 2010 Dodd-Frank law to shield it from political pressure. Republicans have opposed the setup, arguing that it makes the agency unaccountable.

The CFPB is “pleased” that the high court will review the lower court decision, agency spokesperson Sam Gilford said.

“We are confident in the constitutionality of the CFPB’s funding mechanism, which is not novel or unusual,” Gilford said. “As it did for the Federal Reserve Board and other federal banking regulators, Congress authorized the CFPB’s funding through legislation other than annual spending bills. This type of funding is a vital part of the nation’s financial regulatory system.”

The Community Financial Services Association of America, the payday lender trade group behind the initial legal challenge at the heart of the case, said the court’s decision to grant a review “reflects the importance of the separation-of-powers issues at stake in this case.”

“The CFPB’s self-funding mechanism lacks any contemporary or historical precedent, improperly shields the agency from congressional oversight and accountability, and unconstitutionally strips Congress of its power of the purse,” the group said in a statement. “We look forward to presenting these arguments to the Supreme Court.”

The Supreme Court has already taken aim at the regulatory state, notably with a decision in June imposing strict limits on the Environmental Protection Agency’s authority to regulate greenhouse gases. In that ruling, the high court’s six conservative justices invoked the so-called major questions doctrine, saying that agencies like the EPA need congressional approval before “asserting highly consequential power.”

In the CFPB case, the government has asked the Supreme Court to reverse the 5th Circuit Court of Appeals’ October decision against the agency, saying the law authorizing the Fed to fund the agency up to a capped amount satisfies the Constitution’s Appropriations Clause.

“No other court has ever held that Congress violated the Appropriations Clause by passing a statute authorizing spending,” Solicitor General Elizabeth Prelogar said in the government’s petition for the Supreme Court to intervene.

The 5th Circuit’s decision “threatens to inflict immense legal and practical harms on the CFPB, consumers, and the Nation’s financial sector,” Prelogar wrote.

The decision also “threatens the validity of all past CFPB actions,” she wrote, since the lower court tossed out the 2017 payday lending rule on the grounds that it was devised by an unconstitutionally funded agency.

If the justices do decide the funding mechanism is unconstitutional, the government says, the process can be invalidated without jeopardizing the CFPB’s work. Government lawyers appealed to the high court’s “strong presumption favoring severability,” meaning that a law is still valid even if one or more of its provisions are struck down. They quoted a 2020 decision by the court on the CFPB noting that “the Dodd-Frank Act contains an express severability clause.”

In that case, the Supreme Court ruled 5-4 that another provision of the agency’s structure — a single director who could only be fired by the president for cause, rather than at will — violated the separation of powers. The decision chipped away at the bureau’s political independence but preserved the agency by severing the removal clause from the rest of the law that created the CFPB.

If the high court tosses out the bureau’s funding stream but severs it from the rest of Dodd-Frank, it will fall to Congress to overhaul the way the agency is funded — opening the door for other reforms to the agency as well. Republicans have repeatedly sought to replace the bureau director with a bipartisan commission, for instance.

“Both parties will have to [compromise] — more so the Democrats,” said Richard Hunt, former president and CEO of the Consumer Bankers Association and a longtime critic of the CFPB. “Republicans will need to agree to fund the CFPB, and Democrats will need to agree to a five-person bipartisan commission at the very least.”

House Financial Services Chair Patrick McHenry (R-N.C.) signaled he is ready to move legislation to overhaul the agency, including a bill that Rep. Andy Barr (R-Ky.) has introduced in previous sessions that would place the agency under the annual appropriations process.

“As Republicans have said for years, the CFPB’s unconstitutional funding structure improperly insulates it from Americans’ representatives in Congress,” McHenry said in a statement.

“This problem is compounded when the Bureau is led by a rogue regulator, as it is now,” he added, referring to Director Rohit Chopra, who has regularly clashed with GOP lawmakers. “Republicans promised the American people we would restore accountability to the federal bureaucracy. The House Financial Services Committee is committed to delivering transparency with legislation.”

Democrats, meanwhile, maintain that the CFPB’s independent funding is constitutional and follows the pattern set for other financial regulators, including the Federal Deposit Insurance Corp. and the Comptroller of the Currency.

Sen. Elizabeth Warren (D-Mass.), who is credited with conceiving of the bureau and helping set it up, noted that the funding structure has survived previous legal challenges.

The D.C. Circuit in 2018 found that “the way the CFPB is funded fits within the tradition of independent financial regulators” and did not violate the Constitution’s Appropriations Clause.

“Despite years of desperate attacks from Republicans & corporate lobbyists, the constitutionality of CFPB & its funding structure have been upheld,” Warren tweeted Monday. “If the Supreme Court follows precedent, it will strike down the Fifth Circuit’s decision before it throws our economy into chaos.”