Supreme Court Takes Aim at the CFPB’s Existence Again: Explained

The US Supreme Court will once again weigh the Consumer Financial Protection Bureau’s fate, focusing on whether the agency’s independent funding violates the Constitution.

The high court on Monday elected to hear the Biden administration’s appeal of an October decision from the US Court of Appeals for the Fifth Circuit that found that the agency’s independent funding through the Federal Reserve was unconstitutional.

A ruling upholding that finding would wreak havoc on the agency’s operations. At the very least, the CFPB would find paying bills difficult, and its prior rules, enforcement actions and settlements could become potentially invalid.

The Biden administration, the slim Democratic majority in the Senate, and the Republican-controlled House then will be on the clock to find a way to keep the CFPB’s doors open or let the agency whither away.

The Supreme Court on Monday denied the Biden administration’s request for an expedited review of the Fifth Circuit’s ruling.

What issue will the Supreme Court weigh?

The case started when the Community Financial Services Association of America (CFSAA) sued the CFPB to challenge a rule targeting the payday lending industry, including provisions that would restrict lenders’ access to consumer bank accounts.

The Fifth Circuit, which sided with the trade group in October, used the case as a chance to wade into how Congress funded the CFPB as the agency was created in the 2010 Dodd-Frank Act.

The Fifth Circuit said that the CFPB’s funding source—bypassing Congressional appropriations —violated the Constitution’s separation of powers doctrine and appropriations clause. The appellate court’s finding sent a jolt through the agency, even though the issue was lightly briefed in the case.

CFSAA attorneys urged Fifth Circuit judges to focus on the CFPB rules’ procedural defects, not the constitutional question. The trade group made the same argument to the Supreme Court in a January filing. But the high court Monday denied its petition for a review of the rule itself.

What happens now?

After the CFPB’s loss in the Fifth Circuit, the Biden administration asked the Supreme Court to take up the case on an expedited basis, meaning the high court would hear and rule by June.

While the Supreme Court agreed to hear the case, it declined Monday to put it on the fast track. That means the CFPB, the consumer finance industry, and other interested parties won’t know for another year or so on whether the agency can keep the lights on.

The CFPB has long been conservatives’ target to defang. With a 6-3 conservative majority on the court, the CFPB faces long odds to get the Fifth Circuit’s ruling reversed.

What might work in the CFPB’s favor is that the Supreme Court has already had the chance to kill the agency once, and elected to avoid chaos.

In its June 2020 ruling in Seila Law LLC v. CFPB, the Supreme Court held that the CFPB’s single-director leadership structure was unconstitutional because Congress put restrictions on the president’s ability to fire the agency’s director.

However, that case presented an easy solution. Rather than eliminating the CFPB entirely and creating chaos in the financial system, the conservative majority severed Dodd-Frank’s for-cause removal provision of the law. The justices’ move gave the president the power to fire the CFPB director at will.

A simple fix like the one in Seila Law likely doesn’t exist in the challenge to CFPB funding. The Supreme Court doesn’t have the power to determine the funding structure. Only Congress can do that.

What can lawmakers do?

Supreme Court justices can take a few steps to ease the CFPB’s path should they rule that the agency’s funding is unconstitutional. They can allow the agency to spend down the funds it has or ratify its rules and other actions undertaken prior to the high court’s ruling.

Anything beyond those steps is up to the other two branches of government.

Since the Fifth Circuit ruling, Republicans have been calling on the Biden administration and Congressional Democrats to negotiate a plan to put the CFPB on appropriations.

The Biden administration and their Democratic allies on the Hill have resisted, saying the Fifth Circuit’s reasoning was incorrect. Many other agencies, including the Fed and the Federal Deposit Insurance Corp., are funded outside of appropriations, CFPB supporters note.

If the Supreme Court ignores the Biden administration’s arguments and upholds the Fifth Circuit ruling, Republicans are likely to push for drastic changes to the CFPB. Their proposals may include changing the leadership structure from a single director to a multi-member commission or dramatically weakening some powers.

Without a deal between the Biden administration and Congress to fund the agency after a Supreme Court ruling, the CFPB could simply cease functioning. That gives Democrats an incentive to play ball and Republicans major leverage.

One wild-card in the debate is the financial services industry’s reaction. Mortgage bankers will likely want to keep the CFPB’s post-financial crisis mortgage rules. Banks, even as they battle with the CFPB on issues like credit card late fees, routinely clamor for increased oversight of fintechs and other nonbank competitors, something only the CFPB can currently provide at the federal level.

The industry has indicated that they may push for a deal among lawmakers to keep the CFPB operational. They could also lobby for CFPB regulations to be codified.

The Consumer Bankers Association reacted quickly to the Monday decision, saying in a statement that it’s “ready to work with policymakers to further enhance this important agency.”

Read More:

From Bloomberg Law:

CFPB Asks Supreme Court to Weigh Fifth Circuit Funding Ruling

Payday Lenders Urge Supreme Court to Punt on CFPB Funding Issue

CFPB Funding Mechanism Violates Constitution, Fifth Circuit Says (1)

CFPB Appellate Ruling Portends ‘Chaos’ in Financial System

From Bloomberg News:

CFPB Funding System Gets Supreme Court Review at Biden’s Behest

From Bloomberg Opinion:

Consumer Financial Protection Ruling Is Illogical: Noah Feldman