Supreme Court To Hear Case That Could Be The Undoing Of Major Financial Regulator

Supreme Court To Hear Case That Could Be The Undoing Of Major Financial Regulator

Katelynn Richardson on October 2, 2023

• The Supreme Court will hear oral arguments Tuesday on the constitutionality of the Consumer Financial Protection Bureau’s funding through the Federal Reserve, rather than Congressional appropriations.
• Pacific Legal Foundation Director of Separation of Powers Litigation Steve Simpson anticipates that the six conservative justices will be “very skeptical” of the CFPB’s funding mechanism but said the “big question” is what they will do about it.
• “Do you unwind everything the CFPB has done from the beginning because of that, or do you just declare that that has to be fixed but all of the actions of the CFPB up until now are valid?” Simpson said. “I think that’s going to be the hard question.”

The Supreme Court will hear oral arguments Tuesday in a Supreme Court case that could have serious ramifications for a financial regulator.

When Congress established the Consumer Financial Protection Bureau(CFPB) in 2010, it specified that the regulator would receive funding from the Federal Reserve in the “amount determined by the Director to be reasonably necessary,” up to a cap adjusted annually for inflation. Trade groups who sued the agency over a 2017 payday lending rule allege this funding mechanism is unconstitutional.

While the Fifth Circuit rejected most of the payday lender’s other arguments against the CFPB’s Payday Lending Rule, which requires lenders to obtain permission to withdraw from a consumer’s bank account after two failed collection attempts, it said “one arrow has found its target.”

“Congress’s decision to abdicate its appropriations power under the Constitution, i.e., to cede its power of the purse to the Bureau, violates the Constitution’s structural separation of powers,” Judge Cory T. Wilson wrote in the 5th Circuit opinion.

Pacific Legal Foundation Director of Separation of Powers Litigation Steve Simpson, who is defending a small Chicago mortgage company from a CFPB lawsuit, anticipates that the six conservative justices will be “very skeptical” of the CFPB’s funding mechanism. He told the Daily Caller News Foundation that the “big question” is what they will do about it.

“Do you unwind everything the CFPB has done from the beginning because of that, or do you just declare that that has to be fixed but all of the actions of the CFPB up until now are valid?” he said. “I think that’s going to be the hard question.”

The regulator contends that its funding mechanism is not unique: the early Congress established the Post Office to be funded through postage rates and the Patent Office to be funded through fees paid by applicants.

“[S]ince the Founding, Congress has frequently provided agencies with standing authority to spend funds derived from sources such as fees, assessments, and investments,” Solicitor General Elizabeth Prelogar wrote in the brief. “In fact, unlike the CFPB, some agencies have no absolute cap on the amount of funding they can receive and spend from those sources.”

Democratic Massachusetts Sen. Elizabeth Warren, who was an early supporter of the idea for the agency after the 2007-2008 financial crisis, warned Thursday that the Supreme Court’s ruling could also impact banking regulators like the Federal Deposit Insurance Corporation (FDIC), as well as Social Security and Medicare, which are also funded outside annual appropriations process. She noted the irony of the case coming as Congress attempted to avert a potential government shutdown.

The Fifth Circuit noted in its ruling that other agencies such as the Federal Reserve and the FDIC do not wield “enforcement or regulatory authority remotely comparable to the authority the [Bureau] may exercise throughout the economy.”

The payday lenders argue the CFPB is “double-insulated” from oversight, as the Federal Reserve itself is not funded directly through Congress. Agencies funded through fee collection are at least answerable “directly to the public.”

“The CFPB can take as much money from the Federal Reserve System as it deems ‘reasonably necessary,’ so long as it does not exceed a nine figure ceiling set so high the agency has never come close to hitting it (let alone also exhausting the agency’s accumulated endowment),” the payday lenders argue.

This isn’t the first time the CFPB has been to the Supreme Court.

In 2020, the Supreme Court heard Seila Law v. Consumer Financial Protection Bureau. The justices ruled 5-4 that the regulator’s control by a single director violated the separation of powers.

Simpson said CFPB’s lawsuit against his client “characterizes” what CFPB does. “It overreaches constantly, and it does so because it knows it can get away with it,” Simpson told the DCNF. “Its approach typically is to sue or threaten regulated entities and then dare them to fight back.”

Simpson is defending Townstone Financial against a lawsuit the CFPB filed over a handful of statements its owner made regarding Chicago crime, which the regulator argues “would discourage African-American prospective applicants from applying for mortgage loans.” The agency supplied no tangible examples of individuals who were discouraged from applying for a loan as a result of the owner’s statements.

An amicus brief filed by the New Civil Liberties Alliance on behalf of The Law Offices of Crystal Moroney in July similarly alleges the CFPB’s structure contributes to its aggressive enforcement, using tools that are “stronger and more extensive than those possessed by other enforcement agencies.” In this case, the CFPB sought to compel disclosure of documents related to the firm’s debt collection practices without alleging that they ever violated a federal statute, according to court documents.

“CFPB had no reason to impose reasonable limits on its investigation of Moroney—an investigation not prompted by any articulated suspicion that Moroney was not fully complying with the law—because its funding is (for all practical purposes) unlimited, and it had no fear of being answerable to Congress for overly aggressive investigations,” they wrote. “The result was the needless destruction of a once-thriving small business.”

The firm filed a petition asking the Supreme Court to review the case on a similar question about the funding structure in June.

If the CFPB’s funding mechanism were invalidated, Simpson said it would be akin to a “mini government shutdown,” with the CFPB ceasing to function until Congress addressed the issue.

“Congress would have to act very quickly to repair the funding mechanism,” he said.

The CFPB did not immediately respond to the DCNF’s request for comment.