Consumer Financial Protection Bureau’s fate is again in the hands of the Supreme Court
By Joan Biskupic, CNN Senior Supreme Court Analyst
The Supreme Court may decide as soon as Friday whether to tackle a new case that could further constrain the power of US regulators to delve into American businesses and individual lives.
In recent rulings, this conservative-dominated high court has been diminishing regulatory control for consumer protection, public health and the environment. The justices’ opinions have revealed major separation-of-powers concerns, along with a particular disdain for the countless pages of rules government imposes and a disregard for agency expertise, whether involving health services, workplace safety or consumer affairs.
The new case picks up from a battle three years ago involving the Consumer Financial Protection Bureau, when opponents targeted the agency’s structure and tried to dismantle its authority to safeguard mortgages, car loans, credit cards and other lending practices.
By a narrow vote, the justices struck down the CFPB’s single-director setup but allowed it to otherwise continue operating. Now, the agency is back before the high court, under scrutiny for its funding, which Congress established outside the usual appropriations process to ensure the bureau’s independence.
The court majority in 2020 signaled an openness to the new grounds now asserted to topple the CFPB. What’s more, Chief Justice John Roberts fixated on the issue during oral arguments in the previous case and may have been planting seeds for where the court is today.
“Does the independence of the agency from the budgetary process further weaken the democratic accountability through the president,” he asked at one point during the oral arguments in March 2020. He later added: “they don’t even have to go to Congress to get their money.”
This line of argument against the CFPB is based on novel, largely unexplored grounds that, if adopted, would undermine a range of independent government entities including the Federal Reserve Board and Office of the Comptroller of the Currency.
The nine justices are scheduled to vote in a private session on Friday whether to take up the Biden administration’s appeal of a ruling that invalidated the CFPB funding mechanism and threatens its entire mission.
The court’s decision on whether to slate the case for oral arguments this spring will be the first step in determining the fate of an agency established in 2010 after the collapse of the housing market amid shady loan practices.
Roberts’ role to efforts to limit federal agency powers
Roberts has shepherded many of the anti-regulatory decisions, for example, writing a 2022 ruling that limited the Environmental Protection Agency’s ability to restrict carbon emissions from power plants.
When he authored the 2020 5-4 CFPB decision striking down the director set-up shielded from presidential removal, he suggested that its funding scheme — which was not tested in the case — could exacerbate constitutional concerns.
“The CFPB’s receipt of funds outside the appropriations process further aggravates the agency’s threat to Presidential control,” Roberts wrote in the 2020 case of Seila Law v. CFPB. “The President normally has the opportunity to recommend or veto spending bills that affect the operation of administrative agencies.”
He added that such “financial freedom” could make the bureau more likely to “slip from the Executive’s control, and thus from that of the people.”
That one-paragraph reference in a 37-page opinion falls short of any certain endorsement of the argument, and since then only the New Orleans-based 5th US Circuit Court of Appeals, known for pushing legal boundaries, has declared that Congress breached the Constitution “appropriations clause” by sidestepping the usual appropriations process and enacting a law separately authorizing agency spending.
US Solicitor General Elizabeth Prelogar, in a letter to the high court soon after the 5th Circuit ruled, emphasized the urgency of a resolution on the validity of the CFPB funding and asked the justices to make the case, CFPB v. Community Financial Services Association of America, a late addition to the current 2022-23 annual session. Rulings on cases this term are expected by the end of June.
Prelogar said the “sweeping holdings” of the 5th Circuit against the agency’s independent-funding arrangement, “threaten the validity of virtually every action the CFPB has taken in the 12 years since it was created — as well as its ongoing activities.”
The specific dispute, arising from CFPB authority over “payday” lenders, has already been joined by familiar players in the war over regulatory power: Noel Francisco, who was the US solicitor general during the Trump administration, is representing the lending associations that have challenged the CFPB. (The Trump administration declined to defend the bureau in 2020.)
Perpetuating the usual political divide, an array of Democratic-run states, led by New York, is siding with the Biden administration position in favor of the CFPB, and Republican-run states, led by West Virginia, are backing the agency’s challengers.
The latter red-state group implored the justices in a “friend of the court” brief to accept the case and stop this “era of expansive executive power.” They call the CFPB “a failed experiment in administrative governance.”
Countering that sentiment, the blue states accentuate the bureau’s work for consumers as a “valued enforcement and regulatory partner to the States.” They cite the joint federal-state action against Nationstar Mortgage for deceptive practices relating to servicing mortgages: “That action resulted in almost $75 million in relief to more than 40,000 borrowers.”
Created after 2008 meltdown
Congress established the CFPB to oversee various federal laws against unfair, deceptive or abusive lending practices after the 2008 financial meltdown. Rather than finance the bureau with regular congressional appropriations, Congress dictated that its funding come directly from the Federal Reserve, which derives its money from bank assessments.
The specific CFPB rule in the new case limits a lender’s ability to obtain loan repayment through preauthorized account access. It prohibits attempts to withdraw payments from accounts after two consecutive attempts have failed due to insufficient funds. (Excessive withdrawal attempts can subject borrowers to extra banking fees.)
A US district court upheld the regulation and spurned various claims that the CFPB was unconstitutional, including that the bureau’s funding mechanism impinged the Constitution’s appropriations clause. The district court judge noted that the appropriations clause bars money from being paid out of the Treasury unless it has been appropriated by an act of Congress but said that a statute authorizing an agency to receive certain funding meets that demand.
The 5th Circuit reversed, declaring that the Constitution gives Congress “exclusive power over the federal purse” and Congress cannot cede that power to other entities, such as the Federal Reserve.
“The Appropriations Clause … does more than reinforce Congress’s power over fiscal matters,” the appellate panel wrote in October, “(I)t affirmatively obligates Congress to use that authority to maintain the boundaries between the branches and preserve individual liberty from the encroachments of executive power.”
Noting that the CFPB receives funding from the Federal Reserve, which is itself outside the appropriations process, the three-judge appellate panel added, “Congress did not merely cede direct control over the Bureau’s budget by insulating it from annual or other time limited appropriations. It also ceded indirect control by providing that the Bureau’s self-determined funding be drawn from a source that is itself outside the appropriations process — a double insulation from Congress’s purse strings that is ‘unprecedented’ across the government.”
The 5th Circuit panel drew heavily from an earlier 2022 opinion by the 5th Circuit’s Judge Edith Jones, a long-serving bulwark of conservatism. Jones, a 1985 appointee of President Ronald Reagan, grounded her opinion on her originalist understanding on the Constitution, which she said ensured an institutional check on government spending.
Prelogar told the Supreme Court that the 5th Circuit interpretation is “an unprecedented and erroneous understanding.”
“Congress enacted a statute explicitly authorizing the CFPB to use a specified amount of funds from a specified source for specified purposes,” Prelogar wrote in a court filing. “The Appropriations Clause requires nothing more. The court of appeals’ novel and ill-defined limits on Congress’s spending authority contradict the Constitution’s text, historical practice, and this Court’s precedent.”
Representing the lender associations, Francisco said the 5th Circuit was correct in its constitutional interpretation. He is urging the justices to stay out of the dispute but says if it takes up the case, it should also review sections of the 5th Circuit decision that the lenders lost, specifically relating to the validity of the rule, which, he wrote, targets conduct that would fall outside “the statutory definition of unfair or abusive conduct.”
In the Supreme Court’s earlier CFPB case, Roberts’ aside regarding the appropriations clause highlighted a president’s ability to use “budgetary tools” to influence an agency’s policies.
The reference did not escape Justice Elena Kagan, who wrote for the four dissenters in 2020 and she addressed Roberts’ point herself, in a footnote.
She observed that Roberts had expressed concern that the CFBP obtains funding outside the normal appropriations process.
“But so too do other financial regulators, including the Federal Reserve Board and the FDIC,” she wrote. “And budgetary independence comes mostly at the expense of Congress’s control over the agency, not the President’s.”
That, she added, implicitly brushing aside implicit separation-of-powers issues, “actually works to the President’s advantage.”
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