CFPB's future in the balance as Supreme Court hears case

Analysts speculate on the consequences of the potential ruling

CFPB's future in the balance as Supreme Court hears case

The Consumer Financial Protection Bureau (CFPB), which was established under a Democratic government a decade ago, is set to face the Supreme Court in a challenge to the legality of the regulator’s funding, which has been contested by lawmakers, businesses, and the courts over the last six years.

A Bloomberg report said chances are high that most of the justices will agree with the Fifth Circuit Court of Appeal’s ruling that the bureau’s budget design—funding it through the Federal Reserve instead of Congress—is unconstitutional as it circumvents the congressional appropriations process. The highly anticipated case could result in curbing the bureau’s power and cause a domino effect among other regulators throughout the government that are also funded by annual congressional spending bills.

What prompted the case?

The CFPB has long been criticized by Republicans who have sought to weaken the powers of the bureau over the years, the report suggested. The bureau was formed through the Dodd-Frank Wall Street Reform and Consumer Protection Act in response to the 2008 financial crisis.

Under the law, the bureau receives funding from the Federal Reserve. This structure has been described as different from other federal agencies, which typically receive funding through congressional appropriations processes, a CBS News report said. In fiscal year 2022, the CFPB received around $641.5 million in funding from the Fed, below the inflation-adjusted cap of about $734 million, according to court filings.

A legal challenge was brought by small-dollar lenders challenging a 2017 payday CFPB rule, which resulted in restricting their activity. The groups argued the bureau’s ruling is invalid as the regulator’s funding mechanism violates the Constitution.

A federal district court ruled in favor of the CFPB. However, the US Court of Appeals for the Fifth Circuit overturned the ruling of the lower court and invalidated provisions of the payday lending rule as “the product of the bureau’s unconstitutional funding structure,” according to the CBS News report.

The Biden administration appealed the Fifth Circuit’s ruling and asked the justices to consider whether the appellate court erred when it found the funding mechanism of the CFPB to be unconstitutional.

“Congress enacted a statute explicitly authorizing the CFPB to use a specified amount of funds from a specified source for specified purposes. The Appropriations Clause requires nothing more,” Solicitor General Elizabeth Prelogar told the court in a filing. “The court of appeals’ novel and ill-defined limits on Congress’s appropriations authority contradict the Constitution’s text and congressional practice dating to the founding.”

In 2020, the Supreme Court ruled that “the Dodd-Frank Act contains an express severability clause” holding that another part of the CFPB’s funding structure violated the separation of powers.

Both supporters and critics have asked whether a ruling against the CFPB could apply to other regulators with independent funding.

“I think philosophically there are going to be five to six votes that probably would like to decide against the CFPB,” said Alan Kaplinsky, former chair of the consumer financial services group at Ballard Spahr. “What they’re not going to want to do is decide the case and in doing that put a big cloud over the constitutionality of the Fed, FDIC and [the Office of the Comptroller of the Currency] — that would be a horrendous result. I don’t think any of them would want that, it would create economic chaos.”

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