The Supreme Court will, in its next term, take up a case that could imperil the fate of a federal agency born out of the 2008 financial crash and tasked with enforcing consumer protection laws.
The high court announced on Feb. 27 that it would hear a case focused on the constitutionality of the Consumer Financial Protection Bureau’s funding structure. The move follows an appellate court’s ruling late last year against the legality of the “unique” funding method.
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Unlike most federal agencies, the CFPB’s funding is not regularly approved by Congress through its appropriations process. Instead, the agency draws its money from the Federal Reserve System, which generates its own funding through earnings. The amount the CFPB can take from the Fed is capped at 12% of the central bank’s operating expenses.
In October, the Court of Appeals for the Fifth Circuit ruled Congress doesn’t have the “power of the purse” over the agency and that the funding arrangement therefore violates the Constitution’s appropriations clause.
But some financial experts and Democratic lawmakers say that if the Supreme Court upholds the lower court’s ruling, the consequences would be “disastrous,” leading to “financial chaos” and a possible domino effect that would also endanger the future of the Federal Reserve.
“I think that’s very serious,” Peter Conti-Brown, a professor of financial regulation at the Wharton School of the University of Pennsylvania, said of the appellate court’s decision. “The Fifth Circuit got it very wrong. And this is a gigantic threat to Fed independence.”
Conti-Brown, who also serves as a nonresident fellow at the Brookings Institution, said the funding structure is meant to insulate the U.S. central bank and consumer protection agency from political interference. “If we lose that in the Supreme Court for the CFPB, we lose it for the Fed,” he told the Macro Musings podcast. “I think it would be disastrous for both agencies.”
Sen. Mark Warner (D-VA), a member of the Senate Banking Committee, said the “CFPB has recovered nearly $15 billion in financial relief for customers” since its birth in 2010. “If the Fifth Circuit’s decision, which could make every rule put forward by the CFPB unconstitutional, is permitted to stand, there will be financial chaos as all sorts of transactions governed by CFPB policies could grind to a halt, and consumers would be left without the protections they expect and deserve,” the Virginia Democrat said in a statement.
The 2008 financial crisis, fueled by lax lending practices and subprime mortgages, saw scores of people lose their homes and jobs and markets crater, culminating in the Great Recession. In the fallout, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the CFPB. The law consolidated “consumer financial protection authorities that had existed across seven different federal agencies into one,” the CFPB says on its website. “Consumer financial protection had not been the primary focus of any federal agency, and no agency had effective tools to set the rules for and oversee the whole market.”
The CFPB, the brainchild of Sen. Elizabeth Warren (D-MA) when she worked as a Harvard Law professor and later for then-President Barack Obama, now enforces rules related to credit cards, mortgage and auto loans, and other elements of consumer financial markets and promotes financial literacy.
But over the years, Dodd-Frank and the CFPB have faced opposition from conservatives, Republican lawmakers, and business groups. In 2018, Congress passed, and then-President Donald Trump signed, legislation rolling back some of the 2010-era regulations. Trump, who called the CFPB a “total disaster” while in his first year in office, also tapped longtime agency critic Mick Mulvaney to serve as its acting director. Under his leadership, the CFPB saw some of its enforcement powers curbed and investigations paused.
In 2020, the Supreme Court also ruled in a separate case that the president had the power to fire the CFPB director at will, declaring previous limits on the president’s ability to remove the director unconstitutional. The case was brought by Seila Law, a California firm that the CFPB was investigating for possibly violating telemarketing sales law.
More recently, congressional Republicans, who now have a slim majority in the House, have renewed their long-standing critiques of the CFPB. “As Republicans have said for years, the CFPB’s unconstitutional funding structure improperly insulates it from Americans’ representatives in Congress,” Rep. Patrick McHenry (R-NC), chairman of the House Financial Services Committee, said in a statement after the Supreme Court agreed to hear the most recent case, titled CFPB v. Community Financial Services Association of America.
“Republicans promised the American people we would restore accountability to the federal bureaucracy,” McHenry said. “The House Financial Services Committee is committed to delivering transparency with legislation like Congressman Barr’s TABS Act to bring the unaccountable CFPB under the annual appropriations process.”
In the recent case, the Community Financial Services Association of America argued that the CFPB’s funding method flouts the appropriations clause, which stipulates: “No money shall be drawn from the Treasury, but in consequence of appropriations made by law.”
But the Biden administration, in its request to the Supreme Court to hear the case, argued that the funding method is constitutional, as it was approved by Congress through the Dodd-Frank Act. In the petition, Solicitor General Elizabeth Prelogar noted that the Supreme Court has previously held that the clause “means simply that no money can be paid out of the Treasury unless it has been appropriated by an act of Congress.”
“By prescribing the source, amount, duration, and purpose of the CFPB’s funding,” the Dodd-Frank Act “more than satisfies the classic elements of an appropriation,” the petition said.
The higher court’s decision in Seila Law, as well as decisions in recent years from other courts, have also upheld the CFPB’s broader constitutionality. “The provisions of the Dodd-Frank Act bearing on the CFPB’s structure and duties remain fully operative without the offending tenure restriction,” Chief Justice John Roberts wrote.
Warren, who also serves on the Senate Banking Committee, pointed to those legal precedents in her statement following the Supreme Court’s announcement. “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,” she said. “If the Supreme Court follows more than a century of law and historical precedent, it will strike down the Fifth Circuit’s decision before it throws our financial markets and economy into chaos.”
Nikitra Bailey, executive vice president of the National Fair Housing Alliance, echoed Warren’s remarks, saying the Fifth Circuit’s “incorrect assertion that the CFPB’s structure violates the Constitution’s Appropriations Clause is just one more assault in a long line of attacks against the consumer protection agency, seeking to undermine its legitimacy.”
“But the CFPB’s legitimacy is incontrovertible, and its funding structure is not unlike that of other banking regulators,” Bailey said in a statement.
Financial and legal experts have questioned the conclusions of the Fifth Circuit’s three-judge panel, all of whom were appointed by Trump, and cast doubt on whether the Supreme Court will agree with them, despite the higher court’s conservative majority.
“Given the Court’s current makeup, some assume that the Fifth Circuit’s ruling will be upheld,” Rachel Rodman, a partner at Cadwalader, Wickersham, and Taft and former CFPB attorney, wrote on LinkedIn. “I am not so sure. Look to Seila Law as precursor. There, the Chief Justice Roberts built on existing SCOTUS precedent [Free Enterprise Fund v. Public Company Accounting Oversight Board] to rule that the Director’s for-cause removal restriction was unconstitutional. There is no such precedent here.”
Rodman, who now represents clients in the fintech and banking sector, also said the Supreme Court “has actually not shown much appetite for torpedoing federal agencies. While Seila Law is a significant holding for purposes of separation of powers doctrine, it has not meant the end of the CFPB.”
“It is hard for me to see how SCOTUS can affirm the Fifth Circuit’s ruling without essentially terminating the CFPB, putting other financial regulators at risk, and handing a huge mess back to Congress,” she said.
Conti-Brown, the Wharton professor, said the appellate court’s ruling “makes no sense,” called some of its arguments “incoherent,” and argued that a Supreme Court ruling against the CFPB’s funding structure would jeopardize the Fed, too. “The Fed funds itself from the proceeds essentially of its open market operations, including in periods of loss like it’s doing today, just books that loss on its balance sheet. … And the CFPB is the beneficiary of that same process,” he said. “So if the CFPB’s budgetary autonomy falls, then the Fed’s should fall immediately thereafter and that would be catastrophic.”
Conti-Brown said that would spell the end of the U.S. central bank’s vital independence because then members of Congress “could hold the Fed hostage for any purpose or no purpose every single year.”
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With the high court agreeing to hear the case next term, a decision should come by sometime in 2024. Sen. Sherrod Brown (D-OH), chairman of the Senate Banking Committee, seemed to critique the court’s planned timeline. “The CFPB’s funding structure is constitutional and the CFPB should be allowed to continue its crucial work,” he said in a statement. “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.”
In any case, the CFPB is welcoming the Supreme Court’s announcement, telling Politico the agency is “pleased” with the high court’s decision to hear the case. “We are confident in the constitutionality of the CFPB’s funding mechanism, which is not novel or unusual,” spokesperson Sam Gilford said. “As it did for the Federal Reserve Board and other federal banking regulators, Congress authorized the CFPB’s funding through legislation other than annual spending bills. This type of funding is a vital part of the nation’s financial regulatory system.”
Emma Loop is a Washington, D.C.-based freelance reporter. She has written for multiple publications including The News Station, Buzzfeed, and Foreign Policy.
