WASHINGTON (CN) — Almost two decades ago, Congress took action to prevent another financial crisis. Now the Supreme Court is hearing arguments attempting to unravel lawmakers’ work.
Next week the Supreme Court is scheduled to hear a challenge to the constitutionality of a watchdog agency tasked with protecting consumers from predatory financial actors. The challenge is brought by trade groups representing some of the very people the agency was tasked to protect against, and if they get their way, it could send the housing market into chaos, threaten the financial security of millions of Americans, and throw the country into recession.
“If upheld, the court of appeals’ decision would defund virtually all the work of the Consumer Financial Protection Bureau,” financial regulation scholars told the Supreme Court. “The ensuing regulatory chaos would stifle credit markets, destabilize banks, and likely throw the economy into recession.”
An extreme ruling in the case could open the floodgates to deregulating the banking industry.
“There are no material differences in the funding mechanisms of the CFPB and the other federal bank regulators," the scholars wrote. “The CFPB and its peers — and the consumers and lenders who depend on them — rise and fall together.”
The trade association, Community Financial Services Association, represents payday lenders like Enova International, USA Cash Services, and Purpose Financial. These lenders offer small-dollar, high-cost loans to financially vulnerable people looking for extra assistance.
On average, these loans range from $100 to $1,000, have a loan term of two weeks, and have extremely high interest rates that average around 400%. However, the nonpartisan watchdog Acccountable.us found some of these lenders far exceed that average. The group found that USA Cash Services gives out loans with annual percentage rates as high as 1,400%. Advance America provides loans with APRs of 664%.
“The Community Financial Services Association of America, so CFSA, isn't some run-of-the-mill group representing banks that provide a service,” said Liz Zelnick, director of economic security and corporate power at Accountable.us, in a media briefing on the case. “These are the worst of the worst predatory lenders in the financial industry. They represent payday loan companies whose entire business model is to maximize profits off the backs of working Americans who are just trying to get by.”
In April 2018, CFSA filed a lawsuit against the Payday Lending Rule. This regulation prohibits lenders from giving out payday loans without determining that the borrowers will be able to repay them. It also prevents lenders from trying to withdraw payments from a consumer’s account after two failed attempts. The government reasoned that after two consecutive attempts, additional efforts to obtain repayment would also likely fail and instead result in further harm to the customer.
Within their challenge to the Payday Lending Rule, the trade group argued that the agency as a whole was unconstitutional because of the way it is funded.
Through the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress created the Consumer Financial Protection Bureau in 2010 in response to the 2008 financial crisis. The bureau's stated goal was to implement and enforce consumer financial law to make sure markets are fair, transparent and competitive. The agency would do this by creating rules targeting unfair, deceptive or abusive practices in the industry.
The goal was to make the bureau independent, so lawmakers decided its funding would come from earnings of the Federal Reserve System. This step removes the agency from political appropriations fights.
The bureau receives a capped amount of annual funding. Every year the bureau’s director will decide how much money is required for the functions of the CFPB, but that amount can never rise above 12% of the total operating expenses of the Federal Reserve System. In 2022, that cap was around $734 million; the bureau received $641.5 million.
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