U.S. Supreme Court to Hear Fight Over Consumer Watchdog Agency’s Funding

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The U.S. Supreme Court on Monday agreed to decide whether the Consumer Financial Protection Bureau’s funding structure established by Congress violates the U.S. Constitution in a case that President Joe Biden’s administration has said threatens the agency’s ability to function and risks market disruption.

The justices took up the CFPB’s appeal of a lower court’s ruling in a lawsuit brought by trade groups representing the payday loan industry that the consumer watchdog agency’s funding mechanism violated a constitutional provision giving lawmakers the power of the purse. The agency draws money each year from Federal Reserve earnings rather than budgets passed by Congress.

The justices will hear the case during the court’s next term, which begins in October. The Biden administration had asked that the case be heard in the court’s current term.

The case is the latest to come before the Supreme Court seeking to rein in the authority of federal agencies. The court’s 6-3 conservative majority has signaled skepticism toward expansive regulatory power in rulings in recent years including one in 2022 that limited the Environmental Protection Agency’s authority to issue sweeping regulations to reduce carbon emissions from power plants.

The CFPB, which enforces consumer financial laws, was created after the 2008 financial crisis as part of a federal law known as the Dodd–Frank Wall Street Reform and Consumer Protection Act. A Democratic-led Congress in 2010 set up the agency to draw funding annually from the Federal Reserve, the U.S. central bank, which last fiscal year transferred around $642 million to the consumer protection agency.

“Despite years of desperate attacks from Republicans and corporate lobbyists, the constitutionality of the CFPB and its funding structure have been upheld time and time again,” Warren said. “If the Supreme Court follows more than a century of law and historical precedent, it will strike down the 5th Circuit’s decision before it throws our financial markets and economy into chaos.”

The payday loan industry trade groups filed their lawsuit in 2018. The plaintiffs – the Community Financial Services Association of America and the Consumer Service Alliance of Texas – argued that the CFPB’s “perpetual budget” was improperly exempted from congressional supervision, violating the constitutional principle of separation of powers among the U.S. government’s executive, legislative and judicial branches.

The lawsuit also took aim at a CFPB regulation designed to curb “unfair” and “abusive” payday lending practices. The 2017 rule barred lenders from trying to withdraw loan repayments from a borrower’s bank account after two consecutive attempts failed due to insufficient funds unless the consumer consented.

A federal judge in 2021 sided with the agency. But the New Orleans-based 5th U.S. Circuit Court of Appeals last October found the CFPB’s funding structure to be unlawful, deciding that the arrangement violated the Constitution’s “appropriations clause,” which vests spending authority in Congress. The ruling by a panel of three judges appointed by Republican then-President Donald Trump also vacated the 2017 regulation.

Biden’s administration told the Supreme Court that the design set up by Congress for the CFPB’s funding structure – providing that a fixed amount go to the agency each year – was effectively “a standing, capped lump-sum appropriation.” The administration painted the 5th Circuit’s ruling as an extreme outlier, noting that the U.S. Court of Appeals for the District of Columbia Circuit and at least six federal district courts have found the agency’s funding arrangement constitutionally sound.

The Supreme Court ruled 5-4 in 2020 that legal restrictions on a president’s ability to fire the CFPB director without cause was an unconstitutional infringement upon presidential authority, though the justices stopped short of invalidating the agency.

The court heard arguments in November in two other cases involving agency power. The conservative justices in those cases appeared inclined to make it easier to challenge the regulatory power of agencies in disputes involving the Federal Trade Commission and the Securities and Exchange Commission.