Consumer finance watchdog clings to Supreme Court lifeline 

WASHINGTON (CN) — The Supreme Court on Tuesday appeared likely to offer aid to a consumer finance watchdog as it faces a funding challenge that could hobble the agency and its regulations across the financial sector. 

Formed in the wake of the 2008 financial crisis, the Consumer Financial Protection Bureau was lawmakers’ solution to reining in predatory financial tactics, like payday lending. It was tasked with implementing and enforcing consumer finance laws to make markets fair, transparent and competitive. 

The very lenders the bureau was intended to target are now fighting to convince the justices that the agency was unconstitutionally funded. But it wasn’t clear their argument was persuasive on the high court bench. 

“So what you’re saying is a provision of the Constitution is unconstitutional,” Justice Ketanji Brown Jackson said of the payday lenders' arguments before the court. 

The trade association challenging the bureau represents payday lenders, who typically serve financially vulnerable people in need of extra assistance, offering small-dollar, high-cost loans.

On average, interest rates on these loans are around 400%. Some reach as high as 1,400%. 

The lenders began their suit by taking aim at the bureau's Payday Lending Rule, aimed at preventing consumers from taking out loans they can’t repay and halting lenders from using harmful tactics when collecting repayments.

Community Financial Services Association of America would go on to expand its challenge well beyond just one rule, threatening to defund the agency altogether. 

The association claims the bureau's funding mechanism is unconstitutional because it is not a part of yearly appropriations battles in Congress. Instead, it was created through the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. A direct response to the 2008 financial crisis, lawmakers wanted to shield the bureau from partisan headwinds.

In keeping with the era of independence, lawmakers funded the bureau from the earnings of the Federal Reserve System. 

The trade group says this funding mechanism violates the Appropriations Clause and upends the separation of powers within the government. 

“This case is about checks and balances,” Noel Francisco, an attorney with Jones Day representing the trade group, said during oral arguments.

Francisco, who worked as solicitor general under the Trump administration, argued the bureau’s funding scheme handed power over the agency from Congress to the executive branch. 

Justice Brett Kavanaugh rebutted that claim, noting lawmakers could take back that authority if they wanted it. 

“Congress can change it tomorrow,” the Trump appointee said of the funding scheme. 

Most of the justices’ issues with the lenders' arguments stemmed from their inability to make sense of them. 

“I’m trying to understand your argument, but I’m totally lost,” Justice Sonia Sotomayor said. 

Even Justice Clarence Thomas, who appeared more sympathetic to the lenders, asked for clarification. 

As far as Justice Elena Kagan could gather, the lenders thought the Constitution required individual, line-item appropriations. She questioned that argument, pointing out that the very first Congress didn't follow that guidance. 

“That would be flying in the face of 250 years of history,” the Obama appointee said. 

While the consumer protection agency’s spending isn't directly approved by lawmakers every year, its budget is not infinite. Funds are capped at 12% of the Fed's total operating expenses. In 2022, that cap stood at $734 million, and the bureau requested $641.5 million. 

The lenders argued that, by not meeting the cap, the Consumer Financial Protection Bureau demonstrated it had access to unlimited funds. Kagan offered another theory.

“Maybe it's good evidence that CFPB should be doing more,” she said. 

Jackson, who was most critical of the lenders' arguments, predicted that finding the bureau's funding unconstitutional wouldn’t shift the power balance back to Congress — but instead to the courts. 

“How do we avoid the judiciary becoming a super-legislature?” the Biden appointee asked. 

Government attorneys meanwhile warned the justices of the high consequences of upending the bureau's funding. Up to 400 items in the 2022 used similar funding mechanisms, including Social Security and the debt limit. 

“It would create a profound disruption,” U.S. Solicitor General Elizabeth Prelogar said. 

A Texas federal court ruled against the lenders. The Fifth Circuit stepped in to revive the suit, offering a remedy that would throw into question every rule the consumer finance watchdog has ever made. 

The government cited an amicus brief from mortgage bankers who said that the result would be catastrophic. 

“Today, virtually all financial transactions for residential real estate in the United States depend upon compliance with the CFPB’s rules, and consumers rely on the rights and protections provided by those rules,” the bankers wrote. “Importantly, the industry has invested billions of dollars into structuring its operations for compliance with the CFPB’s regulations and other guidance.”

Follow @KelseyReichmann

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