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  • Allon Advocacy

SCOTUS Considers the CFPB’s Constitutionality

The Supreme Court yesterday heard oral arguments in a case that could have major implications for the CFPB.

There’s been a lot going on in Washington this week, so you’d be forgiven if you hadn’t realized that the Supreme Court of the United States (SCOTUS) came back into session Monday.

The second case on its docket? Consumer Financial Protection Bureau v. Community Financial Services Association, Limited. Oral arguments were yesterday, but the nine SCOTUS justices likely won’t issue a ruling in this case until at least next spring, and potentially not even until late June.

What issues are at the heart of this case, what could it mean for the future of the Consumer Financial Protection Bureau (CFPB) and the Bureau’s regulatory actions, and what indications did justices give yesterday about how they might rule?

We will answer those questions in this week’s Allon Update, but, first, some history.

Twelve Years of Turmoil

The CFPB was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by President Obama in 2010. Congress, led by Democrats at the time, gave the Bureau broad rulemaking, enforcement, and adjudicatory powers to protect consumers and address unfair, deceptive, or abusive acts or practices in the consumer-finance sector.

The Bureau officially opened its doors in 2011 and has been the subject of intense scrutiny ever since. Indeed, as Bloomberg’s editorial board explained this week, “To industry executives, the Bureau [is] an out-of-control police force with no accountability. Lawsuit after lawsuit challenged its legitimacy.”

In fact, this week’s arguments are not the first time the Bureau has found itself in front of SCOTUS justices.

The last time the Bureau came before the nation’s highest court was 2020. At issue in that case was the fact that, according to the Dodd-Frank Act, the CFPB’s single director could not be removed by the President at will.

As legal experts at White & Case explained, “In an effort to protect the Bureau’s independence, Congress structured the CFPB as an agency headed by a single director appointed by the president and confirmed by the Senate to serve a five-year term.” Additionally, once appointed, the president could only remove the CFPB director for “inefficiency, neglect of duty, or malfeasance in office.”

Opponents attacked this structure and, in 2020, SCOTUS sided with them, ruling 5-4 that the Bureau’s leadership structure was unconstitutional and vested too much power in the hands of one person. In his majority opinion, Chief Justice John Roberts noted the Bureau’s structure “is almost wholly unprecedented.” He could find only four comparable examples and each of “these isolated examples are modern and contested” and “do not involve regulatory or enforcement authority remotely comparable to that exercised by the CFPB.”

While Chief Justice Roberts and the four other justices in the majority concluded the Bureau’s “single-director structure is an innovation with no foothold in history or tradition,” they did not require the Bureau to be dissolved. They merely said the U.S. president must have the power to remove the director at will.

The Bureau survived to fight another day, and that day came quickly.

What Is CFPB v. Community Financial Services Association, Limited?

As outlined by Dodd-Frank, the Bureau receives its funding not through the annual congressional appropriations process — the process that has caused so much angst, turmoil, and budgetary uncertainty over the last 20 years, to say nothing of the last 24 hours — but from the Federal Reserve.

In a legal challenge to a 2017 CFPB rule setting the limits on the fees and interest that payday lenders charge consumers, the Community Financial Services Association (CFSA) argued that the CFPB’s funding structure is unconstitutional. The U.S. District Court for the Western District of Texas disagreed, however, upholding the constitutionality of the Bureau’s funding structure and the CFPB’s payday lending rule, too.

The CFSA immediately appealed that ruling and, in 2022, the Fifth Circuit Court of Appeals agreed with the CFSA, finding that the Bureau’s budget design is, in fact, unconstitutional because it circumvents the congressional appropriations process. That court’s majority wrote, “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.”

The Firth Circuit also ruled that, because the funding structure is unconstitutional, all regulations previously issued by the Bureau should be voided.

The Biden administration quickly appealed that ruling to SCOTUS, arguing, “no other court has ever held that Congress violated the Appropriations Clause by passing a statute authorizing spending.” And that is where we are today.

What Happens If SCOTUS Agrees with The Fifth Circuit?

If there’s one thing that financial firms and markets love, it’s certainty. If SCOTUS agrees with the Fifth Circuit, there would be chaos — at least initially. That’s because, as the Center for American Progress explained, the Bureau is responsible for enforcing dozens of statutes, including, but not limited to the:

  • Consumer Financial Protection Act

  • Electronic Fund Transfer Act

  • Equal Credit Opportunity Act

  • Fair Credit Reporting Act

  • Fair Debt Collection Practices Act

  • Gramm-Leach-Bliley Act of 2009

  • Homeowners Protection Act of 1998

  • Interstate Land Sales Full Disclosure Act

  • Truth in Lending Act

SCOTUS justices could decide to uphold the Fifth Circuit’s opinion and throw out every regulation the CFPB has issued in its 12-year history. That list is long and includes rules regarding everything from fair lending, debt collection, and home mortgage disclosures to predatory lending practices and, of course, the payday lending rule at the heart of this current case.

Of course, overturning the CFPB’s funding structure also would put a halt to the development of rules that are in the pipeline as of June 2024. Consumer Reports explained, “Amid such institutional uncertainty and budgetary constraints, it’s unlikely the CFPB could push even high-priority measures through the regulatory process. Examples of proposals that could wither this way include the CFPB’s February 2023 proposal aimed at excessive credit-card late fees ...”

The justices could take a more limited approach, however, only overturning rules that were not expressly requested by Congress.

The repercussions also could involve more agencies than the CFPB. Sen. Elizabeth Warren (D-Mass.), the architect of the CFPB, argued, “If the Supreme Court says that Congress doesn’t have the power to set up government agencies and laws without going through appropriations, understand, not only do all the banking regulators fall on their faces, Social Security and Medicare are now at risk.”

As the nonprofit advocacy firm Better Markets noted, a ruling against the CFPB’s funding mechanism could call into question the constitutionality of other financial regulators with similar funding structures, an outcome that would cast “a huge cloud over the regulatory framework governing finance” in the United States. This list of regulators includes the Federal Reserve, Comptroller of the Currency, Federal Deposit Insurance Corporation, National Credit Union Administration, Farm Credit Administration, and the Federal Housing Finance Agency.

How Is SCOTUS Likely to Rule?

As CNN noted, “In recent years, the Supreme Court has moved aggressively against the executive branch, invalidating rules for power-plant carbon emissions, Covid-19 precautions and student loan forgiveness.”

Based on oral arguments yesterday, it seems like the court’s majority may buck that trend.

Before diving into what happened yesterday, it is worth noting there are three justices on each side of the ideological spectrum who are likely unmovable in this case. Accordingly, the Bureau is counting on winning over two of the remaining three: Chief Justice Roberts and Justices Brett Kavanaugh and Amy Comey Barrett.

When he sat on the lower court that heard the challenge to the Bureau’s leadership structure, Kavanaugh wrote, “In terms of unilateral power, the director of the CFPB is the single most powerful official in the entire U.S. government, other than the president. The concentration of massive, unchecked power in a single director marks a dramatic departure from settled historical practice and makes the CFPB unique among independent agencies.”

Yesterday, however, it seemed Justice Kavanaugh was singing a different tune. He argued with the payday lending industry’s lawyer’s representation of the CFPB’s current funding structure, noting Congress could simply change it by amending Dodd-Frank. Justice Comey Barrett appeared to agree, noting the industry had conceded that “standing appropriations aren’t unconstitutional,” which, Comey Barrett mused, is how one might describe the CFPB’s current funding structure.

Even stalwart conservative Justice Clarence Thomas seemed to be skeptical of the arguments against the Bureau’s funding mechanism. As Roll Call reported, Justice Thomas asked payday lender lawyers to more sharply define how Congress violated the Constitution. Justice Thomas said, “I get your point that this is different, that it’s unique, that it’s odd, that they’ve never gone this far, but not having gone this far is not a constitutional problem.”

Justices also asked the industry’s lawyers repeatedly whether their client believed the only appropriate remedy would be to have all CFPB regulations and enforcements to date rescinded. The reply was that this case was specific to the CFPB’s payday lending rule and should not necessarily affect other regulations. While this response was met with skepticism by the court’s liberal wing, Chief Justice Roberts asked several questions that indicated he was exploring a narrowly-tailored ruling in favor of industry.

Of course, this analysis is simply reading tea leaves. Given that the court has about eight months before it issues a ruling, the justices will engage in quite a bit of internal deliberations between now and then that could change minds.

And so all that’s left is what Tom Petty famously sang is the hardest part: the waiting.

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