Supreme Court to review case challenging CFPB's funding mechanism

Washington — The Supreme Court on Monday agreed to take up a case taking aim at the Consumer Financial Protection Bureau, putting the agency in the crosshairs of the conservative court once again.

At the crux of the court battle is the mechanism for funding the consumer watchdog, which was the brainchild of Democratic Sen. Elizabeth Warren of Massachusetts. Unlike most of the federal government's agencies and departments, which are funded through congressional appropriations, the CFPB is funded by the Federal Reserve. The high court will review a decision by a federal appeals court that found the funding structure violates the Appropriations Clause of the Constitution, which states that "no money shall be drawn from the Treasury, but in consequence of appropriations made by law."

Since the CFPB was established in 2010 through the Dodd-Frank Wall Street Reform and Consumer Protection Act, the consumer watchdog has been a target of numerous court battles mounted by conservatives. In 2020, the Supreme Court ruled that the structure of the CFPB violates the separation of powers, as its director must be removable by the president at will. Still, the court said the agency may continue to operate.

The latest dispute to be heard by the court, likely in its next term beginning in October, involves the mechanism passed by Congress for funding the CFPB. Under Dodd-Frank, passed in the wake of the financial crisis, Congress specified that the agency would receive up to a capped amount of funding each year — 12% of the Federal Reserve's operating expenses — from the earnings of the Federal Reserve System. The law stated the CFPB's funds "shall not be subject to review by the" House and Senate Appropriations Committees. 

In 2022, the amount that the CFPB could receive through this funding system was roughly $734 million, and the CFPB requested and received $641.5 million this fiscal year, the Biden administration said in court filings.

But in 2020, two associations, the Consumer Financial Services Association of America and the Consumer Service Alliance of Texas, sued the CFPB, claiming in part that the watchdog's funding mechanism violates the Constitution because it's improperly insulated from congressional supervision. The associations' lawsuit centered around a 2017 payday lending rule.

A federal district court sided with the CFPB, but a three-judge panel on U.S. Court of Appeals for the 5th Circuit found the bureau's funding structure unconstitutional. All three of the judges, Don Willett, Kurt Engelhardt and Cory Wilson, were appointed by former President Donald Trump.

The Biden administration appealed the decision to the Supreme Court, arguing the lower court "relied on an unprecedented and erroneous understanding" of the Appropriations Clause and warning that the 5th Circuit's decision "calls into question virtually every action the CFPB has taken" since its creation.

"Congress enacted a statute explicitly authorizing the CFPB to use a specified amount of funds from a specified source for specified purposes. The Appropriations Clause requires nothing more," Solicitor General Elizabeth Prelogar wrote in a petition asking the court to take up the case. "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."

But the two associations urged the Supreme Court to leave the lower court's decision in place, arguing in court papers that Congress in 2010 "deliberately circumvented" the Appropriations Clause by "vesting the CFPB with discretionary authority to fund its operations by taking as much as hundreds of millions of dollars directly from the Federal Reserve each year forever."

"The Bureau's defenses of Congress's unprecedented abdication of its fiscal oversight all fail," lawyers for the groups wrote.

In response to the Supreme Court's decision to take up the dispute, Warren said the CFPB and its funding structure have withstood "years of desperate attacks from Republicans & corporate lobbyists."

"If the Supreme Court follows precedent, it will strike down the Fifth Circuit's decision before it throws our economy into chaos," she tweeted.