CFPB withstands constitutional challenge in Supreme Court

The justices rejected an argument that imperiled the CFPB, with a decision that protects people from unlawful financial services practices.

The US Supreme Court has upheld the Consumer Financial Protection Bureau (CFPB) as a federal agency and its funding structure as established by Congress, rejecting a constitutional challenge by the banking industry and preserving a broad set of regulations that govern everything from credit cards to personal loans and home mortgages.

More broadly, the ruling means that laws allowing executive branch agencies to be funded independently and with no expiration date are not unconstitutionally structured.

The high court’s decision

The court’s decision, a 7-2 ruling with Justices Samuel Alito and Neil Gorsuch dissenting, is a major victory for the Biden administration and Democrats who have championed the independent agency as a critical overseer and enforcer of corporate financial abuses affecting consumers since the 2008 financial crisis.

Conservatives have spent years attacking the CFPB as a source of undue and costly government regulation, and this case centered on a group of payday lenders that alleged the indirect funding of the CFPB through the Federal Reserve System rather than annual congressional appropriations violated the Constitution’s Appropriations Clause, which says no taxpayer funds should be spent without “appropriations made by law.”

Justice Clarence Thomas wrote the opinion, saying while the associations made several arguments for why the agency’s funding mechanism was constitutionally unsound, “none is persuasive.”

“Under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes,” Thomas wrote. “The statute that provides the Bureau’s funding meets these requirements. We therefore conclude that the Bureau’s funding mechanism does not violate the Appropriations Clause.”

Biden and Warren celebrate

President Joe Biden hailed the ruling, saying in a statement that it marked “an unmistakeable win for American consumers.”

Senator Elizabeth Warren (D-MA), who proposed that the bureau be created and helped set it up, welcomed the decision in a celebratory appearance outside the Supreme Court building.

“This news is fabulous,” she 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.”

The constitutional challenge

In 2018, the Community Financial Services Association of America and the Consumer Service Alliance of Texas sued the CFPB in an effort to throw out a new regulation from the agency that cracks down on payday and other short-term loans.

A federal judge ruled in favor of the CFPB after it modified that regulation barring lenders from repeatedly seeking to withdraw loan repayments from consumers’ bank accounts if there are insufficient funds. (The new rule has not yet gone into effect.)

“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.”

Senator Elizabeth Warren from Massachusetts

But the legal question before the Supreme Court rested on a subsequent decision by the New Orleans-based Fifth US Circuit Court of Appeals, which ruled in October 2022 that the bureau’s funding mechanism was unlawful.

The ruling by one of the most conservative appeals courts in the nation could not hold up, even with the conservative majority in the current US Supreme Court.

Settlements with financial institutions

Although the CFPB reached a number of settlements with financial institutions while the Supreme Court case was pending, numerous courts across the US had stayed active litigation pending the Supreme Court decision. Some institutions also had successfully challenged – at least temporarily – the CFPB’s ability to issue and enforce civil investigative demands, impeding the CFPB from its enforcement capabilities.

The CFPB’s final credit card late fee rule triggered a preliminary injunction earlier this month, just four days before the rule was set to take effect, putting the rule on hold at least until the Supreme Court decision. That rule can likely now proceed.

And with the constitutionality question cleared up, the CFPB’s litigation docket will progress again, as there are a few other challenges facing it.

The agency is likely mindful of its mandate in the current political climate – touting its consumer-protection accomplishments over the past three and a half years under President Biden.