Former President Barack Obama, center, signs the Dodd Frank-Wall Street Reform and Consumer Protection Act, the law which created the Consumer Financial Protection Bureau, as then-Vice President Joe Biden and others look on, Wednesday, July 21, 2010. (Image via AP/Pablo Martinez Monsivais)
The Supreme Court agreed to hear a case Monday that threatens the very foundation of a federal agency created in 2011 to protect consumers from predatory lending—one that could cause widespread financial fallout. The case is known as Consumer Financial Protection Bureau v. Community Financial Services Association of America, Limited.
The Consumer Financial Protection Bureau (CFPB) is a federal agency created in 2011 under the Dodd-Frank Wall Street Reform and Consumer Protection Act as a response to the 2007-08 financial crisis. The CFPB, signed into law by then-President Barack Obama, regulates banks, credit unions, securities firms, and lenders. The CFPB is funded by the operating reserves of the Federal Reserve, which is in turn funded through bank assessments, and not via the Congressional appropriations process.
Two financial institutions sued the CFPB over specific rules governing payday lenders. The conservative U.S. Court of Appeals for the Fifth Circuit used the challenges to issue a broad ruling that the agency’s funding mechanism violates the Constitution’s requirement that any appropriations are “drawn from the treasury.”
Now, the Biden administration argues that the Fifth Circuit’s interpretation of the Appropriations Clause is incorrect and that Congress has long had the authority to use methods other than appropriations to fund entities. The government says that Congress “effectively enacted a standing, capped lump-sum appropriation—a commonplace way of appropriating funds,” which should be legal, just as traditional appropriations are.
The CFPB has already been dealt a harsh blow by the conservative Supreme Court. In 2020, the high court ruled 5 to 4 that Congress violated separation of powers regarding a different aspect of the CFPB. In that case, Seila Law LLC v. Consumer Financial Protection Bureau, the Court heard a challenge to the agency’s leadership framework.
Under the CFPB’s founding law, Congress authorized the president to remove the CFPB’s director only for “inefficiency, neglect of duty, or malfeasance in office.” The Supreme Court then ruled that Congress violated the separation of powers by providing for only such a narrow scope of removal by the president.
At the time the Court ruled in Seila, however, it chose not to invalidate the entire CFPB, but rather to simply invalidate the removal provision. Now, however, the Court will consider whether the funding mechanism for the agency is itself unconstitutional, thereby putting the agency’s entire future in jeopardy.
The Biden administration warns in its brief that a ruling to uphold the Fifth Circuit’s decision would “inflict immense legal and practical harms on the CFPB, consumers, and the Nation’s financial sector.” The administration argues that not only would consumers be harmed moving forward, but also that a ruling against the CFPB’s funding would call even past decisions into question. Such a result would mean that mortgage lenders would need to modify millions of disclosures and borrowers could even rescind mortgage transactions—with “catastrophic” destabilizing consequences.
A number of the justices have openly exhibited hostility toward federal regulatory agencies.
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