The payday lending industry urged the U.S. Supreme Court to strike down the Consumer Financial Protection Bureau (CFPB), arguing that the unorthodox scheme that Congress authorized to fund the powerful regulator is unconstitutional.
This appeal gives the court’s 6–3 conservative majority an opportunity to continue its campaign to restrain the so-called administrative state by curtailing the authority of regulators.
Some in the financial sector worry there may be massive upheaval if the Supreme Court rules the funding mechanism is unconstitutional.
Attorney Robert Loeb filed a friend-of-the-court brief on behalf of the Mortgage Bankers Association, the National Association of Home Builders, and the National Association of Realtors.
The federal agency, which regulates consumer financial products such as credit cards, mortgages, and car loans, was the brainchild of Sen. Elizabeth Warren (D-Mass.). Democrats fiercely defend the CFPB, formed after the financial crisis of 2008–09, saying it serves a useful function as a check on corporate power. The agency was created in 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Republicans accuse the agency of overreach.
Then-House Financial Services Committee Chairman Jeb Hensarling, a Texas Republican who has since left Congress, called the CFPB “arguably the most powerful, least accountable agency in U.S. history,” in 2017.
“CFPB zealots have the power to determine the ‘fairness’ of virtually every financial transaction in America. The agency defines its own powers and can launch investigations without cause, imposing virtually any fine or remedy, devoid of due process,” he said.
The CFPB was targeted by the Trump administration, which disputed its constitutionality.
The U.S. Court of Appeals for the 5th Circuit found for the CFSA (Community Financial Services Association of America), ruling that the CFPB’s unusual funding mechanism was unconstitutional so it couldn’t make the rule.
That mechanism was created to keep the agency independent. Although it may seek funding from Congress, the agency is excluded from the normal congressional appropriations process, and, instead, receives most of the money it needs to operate from the Federal Reserve System, which collects fees from member banks.
But that independence is precisely what makes the funding system unconstitutional, the 5th Circuit held. According to the appeals court, the mechanism violates the U.S. Constitution’s appropriations clause, which states, “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.”
The clause “ensures Congress’s exclusive power over the federal purse,” which is needed to make sure that other branches of government don’t exceed their authority, the appeals court stated.
“Wherever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it,” the 5th Circuit stated.
The CFSA, which represents payday lenders, had sued over the CFPB’s rule that prevented lenders from trying to withdraw payments from borrowers’ bank accounts after two consecutive attempts failed for insufficient funds.
A payday loan is a short-term loan, typically for a small amount such as $500 or less that is expected to be repaid with the borrower’s upcoming paycheck. The high-interest loans, which generally require proof of identity, income, and a bank account, appeal to borrowers with bad credit. The lender usually requires a signed check or permission to electronically withdraw money from the borrower’s bank account.
During oral arguments, CSFA attorney Noel Francisco said, “This case is about checks and balances.”
The founders of this country believed that the power to execute laws and the power to appropriate funds should be kept separate, said Mr. Francisco, who was President Donald Trump’s solicitor general.
“That’s why Alexander Hamilton said that the unification of sword and purse was the very definition of tyranny,” he said.
Congress here “authorized the CFPB to spend whatever it deems reasonably necessary in perpetuity, subject only to a cap so high it's almost never relevant, all for the very purpose of making this the most independent agency in American history.
“If it can do that, then it can authorize the president to spend whatever he deems reasonably necessary as long as he doesn't exceed $10 trillion, and that would work a sea change in the separation of powers.”
Justice Clarence Thomas asked Mr. Francisco to complete the following sentence: “Funding of the CFPB violates the Appropriations Clause because … ”
“Because Congress has not determined the amount that this agency should be spending,” the attorney said.
“Instead, it has delegated to the director the authority to pick his own appropriation, subject only to an upper limit that's … so high it's rarely meaningful.”
The three liberal justices pushed back against Mr. Francisco.
“I’m trying to understand your argument, and I’m at a total loss,” Justice Sonia Sotomayor said.
Justice Ketanji Brown Jackson expressed concern that if the court accepted Mr. Francisco’s arguments, courts could interfere with the congressional appropriations process.
“How do we avoid the judiciary becoming suddenly a supra legislature” going agency by agency, she said.
Mr. Francisco said that under the Constitution’s Appropriations Clause: “Congress has to make the determination as to what the government should be spending. It cannot transfer that core legislative power to the executive branch.
“And the problem here is when you allow that transfer for a very, very long period of time, subject to a limit so high you're almost never going to hit it, you've essentially created a blueprint for the total collapse of sword and purse, the very thing that the Framers thought was necessary.”
U.S. Solicitor General Elizabeth Prelogar argued that the 5th Circuit erred when it ruled against the CFPB and imposed “a sweeping retrospective remedy.”
The circuit court ignored the severability clause in the Dodd-Frank law when it struck down the funding scheme, she said.
In the past, other agencies have been funded the way the CFPB is being funded, Ms. Prelogar said.
“Here, though, we have a specific type of appropriation, a capped lump-sum appropriation that's standing for a single agency, and our historical argument is that this is nothing new or unprecedented.”
This is the second challenge in three years to the constitutionality of the CFPB that has reached the Supreme Court.
The Supreme Court issued a ruling in June 2020 altering the bureau’s structure but upholding its constitutionality.