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Deja Vu

The Supreme Court Could Destroy the Consumer Financial Protection Bureau

The watchdog agency is facing the justices again, but this time its very existence is on the line.

Bill Clark/CQ-Roll Call, Inc/Getty Images

The Supreme Court announced on Monday that it will hear another major case on the constitutionality of the nation’s top consumer protection watchdog agency. If the justices agree with a lower court ruling that effectively struck down the agency, it could have immense consequences for the financial industry, for the structure of other major federal agencies, and for Americans who rely on the agency’s anti-predatory rules when taking out mortgages and other types of loans.

The case, Consumer Financial Protection Bureau v. Community Financial Services Association of America, has a big name and a fairly short history. Congress created the CFPB as part of the Dodd-Frank Wall Street reforms in 2010 to ensure that one agency would be charged with enforcing the myriad federal consumer protection laws. Its portfolio gives it rulemaking power over banks, mortgage brokers, debt collectors, and other financial services that Americans interact with every day.

At issue in this case is a regulation first issued by the agency in 2017 for payday lenders. Among other things, the payday lending rule banned lenders from making loans to people without making sure they could repay them and forbade lenders from trying to make a third automatic withdrawal from a debtor’s checking account if the first two failed. The latter part of the rule sought to prevent lenders from forcing debtors into overdraft fees from their banks.

The Trump administration later sought to rewrite that rule before it took effect. In the intervening period, in 2020, the Supreme Court ruled in Seila Law v. CFPB that a provision in Dodd-Frank that only allowed the president to fire the agency’s director for cause was unconstitutional. After the ruling, the CFPB issued a new rule that scrapped the repayment rule but kept the automatic withdrawal rule. A coalition of payday-lending groups took the agency to court to block the revised rule from going into effect.

What grievous legal error, you might ask, prompted these lenders to go to the mat over a rule protecting their customers from overdraft fees? One of their arguments was that the CFPB’s funding structure violated the Constitution’s appropriations clause, which states that “no money shall be drawn from the Treasury, but in consequence of appropriations made by law.” In other words, you can’t spend taxpayer dollars without permission from Congress.

CFPB’s unusual funding structure, the lenders argued, ran counter to that basic rule. The Dodd-Frank reforms sought to give the agency a measure of independence from Congress and the executive branch, mirroring the protections that exist for the Federal Reserve, the Federal Trade Commission, the Securities and Exchange Commission, and other federal financial regulators. To that end, the CFPB does not receive annual funding from Congress but instead draws upon an account within the Federal Reserve to fulfill its budget each year.

A federal district court judge rejected the lenders’ arguments and ruled in favor of the CFPB’s structure. They appealed it to the Fifth Circuit Court of Appeals, which proved to be a much more receptive audience. As I noted in October, the CFPB is a bête noire of sorts in conservative circles, and especially in conservative legal circles, for its unusual structure and broad jurisdiction. One of Justice Brett Kavanaugh’s most significant opinions as a D.C. Circuit judge before his high-court nomination was on the agency’s for-cause provision. Kavanaugh wrote that unless the president could fire the CFPB director at will, that person will pose “a significant threat to individual liberty and to the constitutional system of separation of powers and checks and balances.” (He later voted with the majority of justices to strike the provision down again in Seila Law.)

Judge Cory Wilson’s opinion for the Fifth Circuit panel framed the issue in similarly dramatic terms. It opened with a prefatory quote on “elective despotism” by James Madison. Wilson quoted at length from founding-era documents about the power of the purse, the separation of powers, and so on. These are important principles, of course, but they are intoned in this case with the apparent desire to make a decision about the scope of the appropriations clause exude gravitas.

Unsurprisingly, Wilson then found the structure to be unconstitutional. “An expansive executive agency insulated (no, double-insulated) from Congress’s purse strings, expressly exempt from budgetary review, and headed by a single Director removable at the President’s pleasure is the epitome of the unification of the purse and the sword in the executive—an abomination the Framers warned ‘would destroy that division of powers on which political liberty is founded,’” he concluded. Double-insulated! An abomination! Good heavens.

This gives a reader the impression that the CFPB is unconstitutional because it is unusual. As the agency itself told the Supreme Court in its petition for review, that may not be the case. “In 1792, Congress established a national Post Office, to be funded through its collection of postage rates,” they explained. “The same year, it created a national mint, to be funded in part through its collection of fees.” It would be strange for the Founders to hold such a strict view of the appropriations clause when writing the Constitution and then immediately depart from it.

Similar unusual funding structures exist today for, among other things, the Federal Reserve, the Federal Deposit Insurance Corporation, or FDIC, the National Credit Union Administration, the Farm Credit Administration, and the Federal Housing Finance Agency, the agency told the justices. It pointed to a 1937 ruling where the Supreme Court noted that indirect appropriations structures were constitutional, observing that “means simply that no money can be paid out of the Treasury unless it has been appropriated by an Act of Congress.” Indeed, the CFPB noted, “no other court has ever held that Congress violated the Appropriations Clause by passing a statute authorizing spending.”

The justices took up the appeal at the request of the Biden administration, so nothing can be inferred just from their decision to hear the case. And while the court’s conservative justices have looked askance at the CFPB’s structure in the past, most notably in Seila Law, effectively abolishing it on shaky appropriations clause grounds might be a bridge too far. Seila Law itself was part of a broader shift against for-cause provisions for executive branch officials in general by conservative legal scholars and jurists.

If the court does agree with the Fifth Circuit, however, it could have dramatic consequences. The CFPB’s broad mandate and powers mean that its nullification could upend entire segments of the financial services industry, turning the clock back on years of CFPB rules designed to protect consumers from predatory practices. It could also inject legal uncertainty into a wide range of mortgages, student loan agreements, and other contracts already signed under the existing regulatory framework.

To that end, the Biden administration asked the justices to fast-track the case for consideration this term even though that window typically closes in January. If the justices do so, an opinion would be expected by the end of June. A ruling against the CFPB would also force Congress into tough negotiations over how to fix the agency, with House Republicans likely to fight to limit its powers or perhaps refuse to revive it altogether. The Supreme Court will have to decide whether it’ll be a long, hot summer for lawmakers, regulators, lenders, and consumers—or whether the appropriations clause is a little less literal than the Fifth Circuit thought it was.