Supreme Court upholds consumer watchdog’s funding

The US Supreme Court upheld the Consumer Financial Protection Bureau’s funding system, lifting a legal threat that could have derailed an agency set up after the 2008 financial crisis to regulate mortgages and other consumer-finance products.

Voting 7-2, the justices rejected arguments that the CFPB, which gets its money through the Federal Reserve, was set up in violation of the constitutional provision that requires a congressional appropriation for government spending.

A loss for the CFPB could have cast doubt on a dozen years of agency work, including rules governing credit cards, banking and loans. The decision reversed a federal appeals court ruling that the Biden administration said threatened to re-open even long-finalized rules and enforcement cases. The high court ruling rejected an industry challenge to a never-enforced payday lending rule.

The decision bolsters a bureau that under Biden-appointed Director Rohit Chopra has taken an especially aggressive tack. The agency has sought to stamp out abuses in the mortgage-lending market, scrutinize the use of artificial intelligence in credit underwriting and rein in bank overdraft fees.

The high court decision rejected a “radical theory that would have devastated the American financial markets,” the CFPB said in a statement. “The court repudiated the arguments of the payday loan lobby and made it clear that the CFPB is here to stay.”

A ruling against the government might have effectively killed the agency given that Congress would have had to provide funding — an unlikely prospect at the moment with Republicans in control of the House of Representatives.

Conservatives have targeted the CFPB, the brainchild of now-Senator Elizabeth Warren, since its creation, calling it a symbol of an unaccountable and overreaching federal bureaucracy.

“Small businesses will feel the negative impact of this decision,” said Beth Milito, executive director of the National Federation of Independent Business’s Small Business Legal Center. “We are disappointed with the court’s ruling, which will ultimately leave small businesses with expensive penalties and burdensome inspections at the hands of the CFPB.”

Unusual Breakdown

The case divided the court along unusual lines, with Justice Clarence Thomas writing the court’s majority opinion and fellow conservatives Samuel Alito and Neil Gorsuch dissenting.

The decision is a rare victory for regulation at the Supreme Court, which in other contexts has cut the power of administrative agencies and put them under tighter presidential control. The lower court ruling, issued by the conservative 5th US Circuit Court of Appeals, represented a novel use of the Constitution’s appropriations clause, which traditionally has been deployed as a restriction on executive branch spending power, not as a check on Congress.

The CFPB isn’t subject to the year-to-year congressional appropriation process and instead draws as much money as it needs – up to a cap it has never hit – from the Federal Reserve. In fiscal 2022, the agency received $641.5 million in funding, short of its $734 million cap.

The group challenging the payday-lending rule, the Community Financial Services Association of America, contended that Congress unconstitutionally gave away its appropriations power in setting up the bureau.

President Joe Biden’s administration said the CFPB’s funding system was little different from those for other regulatory agencies, including Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Federal Reserve itself.

Business groups took a careful approach toward the case. The US Chamber of Commerce and the American Bankers Association urged the justices to strike down the CFPB’s funding mechanism but suggested the court take the unusual step of delaying the decision’s effective date to give Congress time to set up a different system.

The mortgage-banking industry filed a separate brief asking the court to limit any ruling against the CFPB. The bureau has issued dozens of rules affecting consumer mortgages and the industry has invested billions of dollars toward compliance, according to three trade groups led by the Mortgage Bankers Association.

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