The Supreme Court have scheduled oral arguments to take place on Tuesday in Consumer Financial Protection Bureau v. Community Financial Services Association of America. The plaintiff maintains that the current method of funding for the CFPB is unconstitutional as it is exempt from congressional appropriations on a yearly basis. Depending on the judiciary's verdict, previously enforced regulations of the CFPB could be declared unlawful. The ruling could also potentially cast a shadow of uncertainty over the financing of institutions such as the Federal Reserve and government systems like Social Security.
The Supreme Court is set to hear oral arguments on Tuesday in a case that could spell trouble for the Consumer Financial Protection Bureau (CFPB), an agency established in the aftermath of the 2008 financial crisis. At the heart of the case—CFPB v. Community Financial Services Association of America—is the legality of the CFPB's funding. If the high court sides with the CFSA, a trade association representing payday loan providers, the consequences for consumers could be far-reaching—including the possible invalidation of any rules issued by CFPB in the past 12 years. According to legal experts and consumer advocates, a ruling in CFSA's favor could also lead to questions about the funding models of other regulators such as the Federal Reserve and government programs like Social Security. On Monday, the consumer advocacy group, Better Markets, wrote that the CFPB's future "is on the line before the Court." A decision could come as late as June 2024.
In 2011, the Dodd-Frank financial reform law was passed in response to the Great Recession and, as part of it, the CFPB was established. This federal agency was created to protect consumers from harmful banking practices. As of now, the CFPB has gotten restitution of $17.5 billion for around 200 million beneficiaries, according to the organization's own figures. The recent court challenge isn't the first to possibly jeopardize the CFPB. The Supreme Court declared part of its design to be unconstitutional in 2020 during Seila Law v. CFPB, yet left the agency intact.In 2018, the CFSA trade association sued the CFPB, trying to invalidate a 2017 CFPB regulation that was intended to reduce payday lender scams.
The U.S. Court of Appeals for the 5th Circuit ultimately ruled in October 2022 that the CFPB's funding mechanism violated the Constitution's appropriations clause. This stems from the fact that the agency, as opposed to other parts of the federal government, is not subject to annual appropriations. This is the budget process whereby Congress allocates funding to various departments, and its breakdown almost led to a government shutdown on Sunday. To avoid any political pressures, the CFPB's funding is independent from Congress and sourced through the Federal Reserve. Each year, the CFPB Director requests funds capped at 12% of the Federal Reserve System's total operating expenses.
The Fifth Circuit deemed the structure unconstitutional, making the payday rule unlawful. The Congressional Research Service considered this to be an unprecedented decision. It stated that the Fifth Circuit's decision is a noteworthy one, since it is supposedly the first one of its kind to suggest that Congressional action can breach the Appropriations Clause, instead of executive or judicial action.
John Coleman, partner at the law firm Orrick and former deputy general counsel for litigation at the CFPB, declared that should the Supreme Court concur, it could create an "existential" threat to the agency. He specified that should its finance stream be judged unconstitutional, the agency would likely remain intact as a production of Congress, however, its ability to pay employees would be questionable. Absent staff, the agency would be impotent.
Experts said a ruling like this could bring the agency's past and future rulemakings into question. The Congressional Research Service stated that such a decision "could cast legal doubt over every substantive action that the CFPB has taken since at least July 21, 2011, when the Bureau's authorities went into full effect, if not since its inception a year earlier, as well as any future Bureau action." Any related regulations, enforcement, or examinations done in the past 12 years could be affected. The groups representing the real estate industry have voiced their concerns, citing the potential "devastating" impact on the mortgage market if this were to pass.
Rachel Gittleman, financial services outreach manager at the Consumer Federation of America, said that many other government agencies and programs are funded outside the annual appropriations process, including the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Federal Housing Finance Agency, National Credit Union Administration, Farm Credit Administration, Farm Credit Insurance Corp., Medicare, Medicaid, Social Security, the Affordable Care Act, and unemployment benefits. Coleman, however, believes that such an outcome is unlikely; if the Supreme Court were to rule against the CFPB, it would probably maintain the legitimacy of the CFPB's earlier regulations and give Congress an allotted period to determine another method of funding, although this could be hard with the current challenge of a divided legislature in the midst of an election year. "We will learn a great deal more on Tuesday after we hear from the justices," he concluded.
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