By: Rafael Andino

The Supreme Court recently heard arguments that could threaten the existence of the Consumer Financial Protection Bureau (“CFPB”), one of Congress’ responses to the 2008 financial global crisis.^[1] This case not only threatens the regulatory landscape of the financial industry, but also affects other federal agencies who receive funding in a similar fashion, such as the Federal Reserve, the U.S. Postal Service, the U.S. Mint, and the Federal Deposit Insurance Corporation.^[2] The CFPB is tasked with protecting consumers from predatory practices from banks and other financial institutions, as well as preventing reckless mortgage lending, a practice which led to the economic crash of 2008.^[3] The CFPB was created by the Dodd-Frank Act, the 2010 post-economic crash law that reworked the rules of finance.^[4] The Dodd-Frank Act housed the CFPB inside the Federal Reserve and provided for it to be funded by up to 12% of the Federal Reserve’s 2009 operating costs – expenses that culminate at $597.6 million per year.[5] Since its inception, the CFPB has won $17.5 billion in restitution from companies that defrauded homeowners and veterans, imposed illegal overdraft fees and put erroneous information on people’s credit scores.[6]

In its challenge to the CFPB, the Community Financial Services Association of America, a trade association for the payday lending industry, argues that the agency’s funding through the Federal Reserve is unconstitutional under the Constitution’s appropriation clause.[7] The Supreme Court of the United States (“SCOTUS”) will review a United States Court of Appeals for the Fifth Circuit ruling that holds that the indirect funding mechanism for the CFPB unconstitutionally limits congressional control of the government’s “purse.”^[8] According to the Fifth Circuit, the CFPB’s money must be annually appropriated by Congress, or else the CFPB itself and any act it engages in is unconstitutional.[9] The funding mechanism allows the Bureau to request the amount of money it needs each year from the Federal Reserve, which, in turn, is funded by fees it imposes on financial institutions and interest on the securities it possesses.^[10] The CFPB automatically receives the requested amount, subject to a cap set by Congress.^[11] The Fifth Circuit created a new interpretation of the appropriations clause that requires Congress to only fund agencies under its “sufficient control.”[12] There is no textual basis for that argument,” said Aziz Huq, a professor at the University of Chicago Law School.[13] “There is no historical basis for the argument that an appropriation is something more than a law that Congress passes authorizing a fiscal stream.”[14]

If the Court decides to overturn the CFPB’s funding structure or void its enforcement power, it will create significant disarray in a financial system that has organized itself around the rules that the CFPB has put in place.[15] An amicus brief filed by an industry group, the Mortgage Bankers Association, stated that such a decision “could set off a wave of challenges and the housing market could descend into chaos, to the detriment of all mortgage borrowers.”^[16] As a result of lower courts’ decisions, financial lenders are already using the Fifth Circuit’s decision to try to evade CFPB action.^[17]

The same is true for several important federal agencies, including the Federal Reserve itself, which is funded through assessments on regional reserve banks.[18] While the Community Financial Services Association of America wants the court to invalidate the CFPB’s funding mechanism only, it’s difficult to imagine how a new interpretation of the appropriations clause would not threaten to impair funding for other key agencies. A decision voiding the CFPB’s funding mechanism cannot be done without calling into question the funding for the entire financial regulatory system, from the Federal Reserve downward.[19]

“The CFPB’s future is at stake in this court decision, along with the future of every other banking regulator,” said Senator Elizabeth Warren, who originally came up with the idea for the CFPB before entering politics.[20] “And the possible fallout doesn’t stop there. Social Security and Medicare are also operated outside of annual appropriations. A bad decision by the Supreme Court could wreck the financial security of millions of families and turn our economy upside down.”[21] A decision on the constitutionality of the CFPB’s funding mechanism is expected next year and the result will create ripples that will be felt in not only the financial industry, but in numerous agencies throughout the federal government.[22]

^[1] See Paul Blumenthal, The Supreme Court May Soon Eviscerate The Consumer Financial Protection Bureau, Yahoo News (Sept. 30, 2023), https://news.yahoo.com/supreme-court-may-soon-eviscerate-120009477.html.

^[2] See Nina Totenberg, Supreme Court to hear case that threatens existence of consumer protection agency, NPR (Feb. 27, 2023), https://www.npr.org/2023/02/27/1159748990/supreme-court-cfpb.

^[3] See Emily Peck, The fate of a financial watchdog rests in the Supreme Court’s hands, Axios (Oct. 2, 2023), https://www.axios.com/2023/10/02/cfpb-supreme-court-decision-regulation.

^[4] See Katy O’Donnell, Democrats tried to protect the CFPB from politics. The Supreme Court may blow up that plan., Politico (Oct. 2, 2023), https://www.politico.com/news/2023/10/02/consumer-bureau-supreme-court-fight-00119181.

[5] See Blumenthal, supra note 1.

[6] Twelve years of protection consumers and honest businesses, Consumer Fin. Prot. Bureau (July 20, 2023), https://www.consumerfinance.gov/about-us/blog/twelve-years-of-protecting-consumers-and-honest-businesses/.

[7] See Brief for Respondents at 11, Consumer Fin. Prot. Bureau v. Consumer Fin. Servs. Ass’n of Am., No. 22-448 (U.S. Jan. 18, 2023).

^[8] See Kimberly Strawbridge Robinson, Roberts Court Loses Control of Conservative War on Agency Power, Bloomberg L. (Sept. 29, 2023), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/us-law-week/XFBSH2KG000000?bc=W1siU2VhcmNoICYgQnJvd3NlIiwiaHR0cHM6Ly93d3cuYmxvb21iZXJnbGF3LmNvbS9wcm9kdWN0L2JsYXcvc2VhcmNoL3Jlc3VsdHMvN2Q4NzMyZDczZTY1YThjOGFlODlkMThjNTE5MjAwYWMiXV0–271f811f481f1fea23acf7c79debb32fe6f56fc1&bna_news_filter=us-law-week&criteria_id=7d8732d73e65a8c8ae89d18c519200ac.

[9] See Totenberg, supra note 2.

^[10] Id.

^[11] Id.

[12] See Blumenthal, supra note 1.

[13] Id.

[14] Id.

[15] Id.

^[16] Brief for the Mortgage Bankers Associations, et. al., as Amicus Curae, at 4, Consumer Fin. Prot. Bureau v. Consumer Fin. Servs. Ass’n of Am., No. 22-448 (U.S. Jan. 18, 2023).

^[17] Blumenthal, supra note 1.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] See Peck, supra note 3.