CFPB's Funding System Gets Supreme Court Test at Biden's Behest

The U.S. Supreme Court will consider whether the Consumer Financial Protection Bureau’s funding system is constitutional, taking up a case President Joe Biden’s administration says is casting doubt on every action taken by the agency over 12 years.

The showdown centers on a never-enforced payday-lending rule that the 5th US Circuit Court of Appeals threw out in the face of an industry challenge. The 5th Circuit said the CFPB, which gets funding through the Federal Reserve, was set up in violation of the constitutional provision that requires a congressional appropriation for government spending.

The Supreme Court indicated Monday it will consider the case in the nine-month term that starts in October, declining the administration’s request to put the case on an expedited schedule.

In urging high court review, the Biden administration said the 5th Circuit’s Oct. 19 ruling has already had “immense legal and practical significance.” US Solicitor General Elizabeth Prelogar said the ruling has affected more than half the bureau’s 22 enforcement cases, giving defendants an argument for dismissal.

Prelogar, the administration’s top Supreme Court lawyer, also said the decision cast doubt on the CFPB’s mortgage-disclosure regulations. The ruling “threatens the validity of virtually all past CFPB actions, including numerous regulations that are critical to consumers and the financial industry,” she said.

The CFPB regulates mortgages, credit cards, auto loans and other consumer finance products. It has been a political lightning rod since its creation following the 2008 global financial crisis.

Democrats tout the agency as a necessary check on corporate power and a guardian of ordinary Americans, with whom its popularity may grow if the US economy goes into a recession. But it’s reviled by some Republicans and businesses groups that claim the agency lacks accountability.

‘Perpetual Funding’

The Supreme Court’s conservative majority has been on a drive to constrain the so-called administrative state by cutting the authority of regulatory agencies and putting them under tighter presidential control.

The new case will test how far the justices are willing to go, presenting a novel legal argument for limiting Congress’ flexibility in setting up regulatory agencies. The New Orleans-based 5th Circuit, the country’s most conservative appeals court, said Congress has abdicated its constitutional spending power by giving the bureau a “self-actualizing, perpetual funding mechanism.”

The CFPB receives whatever it requests from the Federal Reserve up to a capped amount, without having to go through Congress every year.

“Wherever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it,” the 5th Circuit said in a unanimous opinion issued by three judges appointed by then-President Donald Trump.

The case could potentially have implications for the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Comptroller of the Currency — all of which get their funding outside the annual appropriations process — though the 5th Circuit suggested its reasoning didn’t extend that far.

“The best that can be said here is that the Supreme Court appears to appreciate the gravity of this case and the danger for the CFPB, the Federal Reserve, consumers and overall financial stability,” said Elyse Hicks, a lawyer at the progressive Americans for Financial Reform. “But the justices now need to reverse what the lower courts have wrought, which is already causing trouble.”

Delay Questioned

Senator Sherrod Brown, an Ohio Democrat who chairs the Senate Banking Committee, implicitly criticized the court for not scheduling the case for a decision in the term scheduled to end in late June. “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,” Brown said.

The Supreme Court turned away a related appeal by industry groups, refusing to hear other arguments for invalidating the payday-lending rule.

In its appeal, the Biden administration said the 5th Circuit ruling was out of step with the longstanding interpretation of the appropriations clause as a restriction on the executive branch, not on Congress.