Supreme Court takes case challenging CFPB constitutionality

Supreme Court takes case challenging CFPB constitutionality

The Supreme Court on Monday agreed to hear arguments in a case challenging the constitutionality of funding for the Consumer Financial Protection Bureau.

The order taking the case came four months after a federal appeals court panel unanimously ruled that the CFPB’s funding mechanism was unconstitutional.

That ruling, which tossed out a CFPB regulation targeting payday lenders, had called into question every order and other action issued by the consumer watchdog in its history, the Biden administration has said.

Included in those actions is a recent record $1.7 billion civil fine, in addition to $2 billion in mandated customer reimbursements, imposed by the agency on Wells Fargo for abuses related to customer accounts.

The CFPB, which was created by the Dodd-Frank Act on the heels of the 2008 global financial crisis, is funded by the Federal Reserve, not Congress.

That funding choice was adopted by a Democratic-controlled Congress to help safeguard the CFPB from political pressure. Republicans have expressed opposition to the existence of the agency, which oversees consumer markets such as credit cards and home mortgages.

In its ruling in October, a three-judge panel on the U.S. Court of Appeals for the 5th Circuit said the funding mechanism violated the Constitution and that the agency’s funding instead should be appropriated by Congress from the U.S. Treasury.

“The Bureau’s funding scheme is unique across the myriad independent executive agencies across the federal government,” the panel noted in its ruling, written by Judge Cory Wilson. “It is not funded with periodic congressional appropriations.”

The Biden administration had asked the high court to hear its appeal of that ruling, which the court agreed to do in its order Monday.

But the Supreme Court also said that it will hear arguments in the case during its next term, which starts in October, not during the current term as the Biden administration had requested. That means a final decision in the case could be delayed until June 2024.

Sen. Elizabeth Warren, D-Mass., who first proposed the creation of the CFPB, in a statement, said, “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.”

“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,” Warren said.

But a lawyer for the two payday-lending advocacy groups that are the plaintiffs in the case said the court’s decision to hear the dispute “reflects the importance of the separation-of-powers issues at stake in this case.”

“As we have demonstrated, and the Fifth Circuit Court of Appeals has held, the CFPB’s self-funding mechanism lacks any contemporary or historical precedent, improperly shields the agency from congressional oversight and accountability, and unconstitutionally strips Congress of its power of the purse under the Appropriations Clause of the Constitution,” said the attorney, Christian Vergonis, of the law firm Jones Day.

Vergonis said that his clients, the Community Financial Services Association of America and Consumer Service Alliance of Texas, “look forward to presenting these arguments to the Supreme Court.”

The private government watchdog group Accountable.US, in a statement, called the lawsuit by the payday plaintiffs “baseless,” and said it is “the crown jewel in a long-running, highly organized effort by greedy industries and right-wing politicians in their pocket to take out the CFPB because it works so well to protect consumers from abuse.”

“It’s apt that predatory lenders are leading this latest assault as no industry has a bigger ax to grind against the CFPB after facing numerous fines for mistreating consumers,” said Liz Zelnick, Accountable.US’s director of economic security and corporate power.

The Supreme Court in a 2020 ruling allowed the CFPB to continue operating but also said that a provision of the law that created the agency was unconstitutional because it violated the separation of powers rule.

That provision had said that the director of the CFPB could be removed from that position “only for cause.”

The court, in its 5-4 ruling that year, said that the director must be removable by the will of the president, for any reason.

Since its creation in 2010, the CFPB has recovered more than $15 billion for customers.

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