The Supreme Court on Thursday rejected a broad challenge to the Consumer Financial Protection Bureau, reversing a lower-court ruling that would have undermined the watchdog agency Congress created in the wake of the financial crisis to protect borrowers from predatory lenders, junk fees and other abuses.
In a 7-2 decision written by Justice Clarence Thomas, the court said the CFPB’s funding mechanism is constitutional. The agency draws its budget through profits of the Federal Reserve, not an annual appropriation by Congress.
The CFPB ruling is the first of a series of closely watched decisions the justices will issue this term that could broadly reshape the power and reach of federal agencies. Thursday’s decision was praised by consumer advocates and President Biden, who called it “an unmistakable win for American consumers.”
An adverse ruling could have raised broader questions about how Congress funds the Federal Reserve - and even Social Security and payments to the national debt. It might have also opened challenges to more than a decade of enforcement actions and more than $20 billion recovered by the CFPB on behalf of consumers.
Some legal experts said the victory likely ensures the long-term survival of the powerful and controversial CFPB - which has long been a target of conservatives and some corporate interests - if not an end to attacks on the way it regulates industry. The challenge in this case came from trade associations for payday lenders.
“This is likely the last of the existential threats to the CFPB,” said John Coleman, an attorney who specializes in regulation of the financial industry and was formerly the deputy general counsel for the CFPB. “Those who disagree with CFPB’s exercise of its authority will now have to resort to typical means to check that exercise, including the courts, Congress and the ballot box.”
Legal experts expressed little surprise at the ruling, after a number of justices seemed skeptical during October oral arguments about the U.S. Court of Appeals for the 5th Circuit’s rationale for why the funding mechanism didn’t pass legal muster. The Court of Appeals for the D.C. Circuit had previously affirmed CFPB’s funding structure, and U.S. Solicitor General Elizabeth B. Prelogar said the 5th Circuit was the first federal appeals court “in the nation’s history” to question Congress’s prerogative to decide how to fund agencies.
“That Justice Thomas authored the opinion suggests how weak the industry’s argument was,” said Joann Needleman, an attorney who specializes in financial services regulation and is a former member of a CFPB board. Needleman noted that Thomas has long been skeptical of federal regulation.
Under the Constitution, the justice wrote, “an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes.”
“The statute that provides the Bureau’s funding meets these requirements,” Thomas added.
Two other conservative justices, Neil M. Gorsuch and Samuel A. Alito Jr., dissented, saying the ruling would allow the agency to “bankroll its own agenda” without oversight from Congress. “There is apparently nothing wrong with a law that empowers the Executive to draw as much money as it wants from any identified source for any permissible purpose until the end of time,” Alito wrote.
The case involved a 5th Circuit decision that said the funding source Congress adopted to ensure the CFPB’s independence violated the Constitution’s command requiring congressional appropriation of money. The decision, by a panel of three judges nominated by President Donald Trump, said the agency’s insulation from congressional committees doubled the violation.
The Court of Appeals found “[e]ven among self-funded agencies, the Bureau is unique,” adding its creation was “an innovation with no foothold in history or tradition.”
The Biden administration rejected that view, telling the justices that the Constitution bestowed the power of the purse to Congress but set few limits on how appropriations could be made. It also said the Postal Service, Mint and other federal agencies had historically had similar funding mechanisms.
The CFPB was created by Congress in response to the 2008 financial crisis, putting scattered federal consumer protections under one structure. Sen. Elizabeth Warren (D-Mass.), who at the time advised the Obama administration and played a lead role in the legislation, appeared on the steps of the Supreme Court on Thursday to praise the ruling.
“The CFPB is here to stay,” Warren said. “When you have an agency that is this good at doing its job to protect consumers, then a lot of banks, a lot of payday lenders, a lot of Republicans come after it and try to shut it down.”
Chris Vergonis, one of the lawyers representing the challengers to CFPB’s funding, called the court’s decision disappointing.
“We continue to believe that the challenged CFPB rule is legally flawed, threatens access to credit, and harms the millions of American consumers who rely on small-dollar loans to manage budget shortfalls and unexpected expenses,” he said.
The Dodd-Frank Wall Street Reform and Consumer Protection Act moved to insulate the CFPB from political influence by making the agency independent from Congress’s annual appropriation process.
The agency instead is funded from the profits of the Federal Reserve, which itself is funded through bank assessments. The bureau’s budget may not exceed 12 percent of the Fed’s annual operating expenses or $734 million in 2022. So far, the agency has not asked for all of its authorized budget in any given year.
Thursday’s ruling exposed an unusual split between the court’s most conservative members on how to read the appropriations clause of the Constitution. Thomas said that based on historical practice Congress need only “identify a source of public funds and authorize the expenditure of those funds.” Alito, joined by Gorsuch, disagreed.
In a separate concurrence, Justice Elena Kagan said it is not just founding-era history that supports the CFPB’s funding structure, but continuing tradition and practice.
“Throughout our history, Congress has created a variety of mechanisms to pay for government operations,” she wrote, joined by Justices Sonia Sotomayor, Brett M. Kavanaugh and Amy Coney Barrett. “Whether or not the CFPB’s mechanism has an exact replica, its essentials are nothing new.”
The case, Consumer Financial Protection Bureau v. Community Financial Services Association of America, began as a challenge to the Payday Lending Rule, the CFPB regulations for payday loans, car title loans and other loans with high interest rates. The association challenged the rule on statutory and constitutional grounds. But the appeals court seized on a separate argument over the CFPB’s funding structure to invalidate the rule.
The most consequential remaining cases before the court on federal power are a pair of lawsuits challenging Chevron U.S.A v. Natural Resources Defense Council, a landmark ruling that requires courts to defer to a federal agency’s interpretations of ambiguous laws as long as those readings are reasonable. The legal precedent established by Chevron has formed the basis for countless federal regulations. Lower courts still rely on the ruling, but the Supreme Court has moved away from its holdings in recent years.
The court will also rule on the legality of in-house tribunals at the Securities and Exchange Commission.
In a previous ruling on the CFPB in 2020, the Supreme Court made it easier for the president to remove the agency’s head.