CFPB Funding System Gets High Court Review at Biden’s Behest (1)

The US Supreme Court will consider whether the Consumer Financial Protection Bureau’s funding system is constitutional, taking up a case President Joe Biden’s administration says is casting doubt on every action taken by the agency over 12 years.

The showdown centers on a never-enforced payday-lending rule that the 5th US Circuit Court of Appeals threw out in the face of an industry challenge. The 5th Circuit said the CFPB, which gets funding through the Federal Reserve, was set up in violation of the constitutional provision that requires a congressional appropriation for government spending.

The Supreme Court indicated Monday it will consider the case in the nine-month term that starts in October, declining the administration’s request to put the case on an expedited schedule.

In urging high court review, the Biden administration said the 5th Circuit’s Oct. 19 ruling has already had “immense legal and practical significance.” US Solicitor General Elizabeth Prelogar said the ruling has affected more than half the bureau’s 22 enforcement cases, giving defendants an argument for dismissal.

Prelogar, the administration’s top Supreme Court lawyer, also said the decision cast doubt on the CFPB’s mortgage-disclosure regulations. The ruling “threatens the validity of virtually all past CFPB actions, including numerous regulations that are critical to consumers and the financial industry,” she said.

The CFPB regulates mortgages, credit cards, auto loans and other consumer finance products. It has been a political lightning rod since its creation following the 2008 global financial crisis.

Democrats tout the agency as a necessary check on corporate power and a guardian of ordinary Americans, with whom its popularity may grow if the US economy goes into a recession. But it’s reviled by some Republicans and businesses groups that claim the agency lacks accountability.

‘Perpetual Funding’

The Supreme Court’s conservative majority has been on a drive to constrain the so-called administrative state by cutting the authority of regulatory agencies and putting them under tighter presidential control.

The new case will test how far the justices are willing to go, presenting a novel legal argument for limiting Congress’ flexibility in setting up regulatory agencies. The New Orleans-based 5th Circuit, the country’s most conservative appeals court, said Congress has abdicated its constitutional spending power by giving the bureau a “self-actualizing, perpetual funding mechanism.”

The CFPB receives whatever it requests from the Federal Reserve up to a capped amount, without having to go through Congress every year.

“Wherever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it,” the 5th Circuit said in a unanimous opinion issued by three judges appointed by then-President Donald Trump.

The case could potentially have implications for the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Comptroller of the Currency — all of which get their funding outside the annual appropriations process — though the 5th Circuit suggested its reasoning didn’t extend that far.

“The best that can be said here is that the Supreme Court appears to appreciate the gravity of this case and the danger for the CFPB, the Federal Reserve, consumers and overall financial stability,” said Elyse Hicks, a lawyer at the progressive Americans for Financial Reform. “But the justices now need to reverse what the lower courts have wrought, which is already causing trouble.”

Delay Questioned

Senator Sherrod Brown, an Ohio Democrat who chairs the Senate Banking Committee, implicitly criticized the court for not scheduling the case for a decision in the term scheduled to end in late June. “A delay in hearing this case only hurts consumers, as this is an urgent issue that has horrifying implications for consumers and our entire financial system,” Brown said.

The Supreme Court turned away a related appeal by industry groups, refusing to hear other arguments for invalidating the payday-lending rule.

In its appeal, the Biden administration said the 5th Circuit ruling was out of step with the longstanding interpretation of the appropriations clause as a restriction on the executive branch, not on Congress.

“Congress enacted a statute explicitly authorizing the CFPB to use a specified amount of funds from a specified source for specified purposes,” Prelogar argued. “The appropriations clause requires nothing more.”

Two industry groups are challenging the payday-lending rule, which would bar those loans unless the lender can determine that the borrower can repay the debt. The 2017 rule also would prohibit lenders from trying to withdraw payments from a customer’s bank account after two attempts fail due to lack of funds.

The groups, led by the Community Financial Services Association, attacked the rule on an array of grounds, most of which the 5th Circuit rejected. The groups contend the 5th Circuit reached the right conclusion on the appropriations clause, particularly given the agency’s sweeping powers.

“The 2010 Congress abdicated its fiscal power over the CFPB’s budget and abrogated the ability of its successors to wield that check against the agency’s exercise of executive power,” the groups argued.

Aggressive Tack

The Biden administration also contends the 5th Circuit overstepped by tossing out the payday-lending rule to resolve the case. Prelogar said the panel failed to consider whether it could have severed any unconstitutional provisions, and she said the appeals court improperly assumed that a rule is void if it is issued using funds that weren’t validly appropriated.

The CFPB dialed back its efforts during the Trump era but has taken a more aggressive tack under Director Rohit Chopra, a longtime consumer advocate tapped by Biden to crack down on predatory lending and inequities in the consumer finance system.

Under his tenure, major enforcement actions have been brought, including one against Regions Bank for allegedly charging clients illegal overdraft fees for almost three years. Regions, which the CFPB said was a “repeat offender,” didn’t admit or deny the alleged wrongdoing and said at the time it disagreed with the agency’s characterizations.

The Chamber of Commerce, American Bankers Association and the Consumer Bankers Association recently sued the agency for giving inspectors more leeway to classify a lending decision as discriminatory.

The Consumer Bankers Association on Monday called for “reform” of the CFPB.

“As the agency responsible with overseeing an industry that affects millions of Americans, the bureau lacks the accountability measures necessary to develop well-founded rules and deliver market stability despite shifting political winds, ultimately hindering the very people we are all working to serve, consumers,” said the group, whose members include the nation’s retail banks as well as Wall Street, regional and online lenders.

But Mike Litt, consumer campaign director at the consumer-advocacy group US PIRG, said subjecting the CFPB to the congressional appropriations process could leave it starved for funding.

“If the CFPB has to rely on congressional funding, the banking industry could try to influence members of Congress to withhold funding from regulators unless they do their bidding,” Litt said in an email.

The Supreme Court has already dealt one major blow to the CFPB’s independence, ruling in 2020 that the president must be able to fire the director for any reason. The court struck down a provision that said the director could be removed only for “inefficiency, neglect of duty, or malfeasance in office.”

The lenders say that decision offers another reason for the payday-lending rule to be tossed out. The rule was issued when the CFPB director was Richard Cordray, a Barack Obama appointee who stayed in the job after Trump became president. The lenders say Trump would have fired Cordray — and prevented the rule from being issued — had it not been for the unconstitutional job protections.

The new case is CFPB v. Community Financial Services Association, 22-448.

(Updates with reaction starting in 13th paragraph.)

--With assistance from Katanga Johnson.

To contact the reporter on this story:
Greg Stohr in Washington at gstohr@bloomberg.net

To contact the editors responsible for this story:
Elizabeth Wasserman at ewasserman2@bloomberg.net

Greg Stohr

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