The fate of a financial watchdog rests in the Supreme Court's hands
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The Supreme Court is set to hear arguments in a case Tuesday that could crush the Consumer Financial Protection Bureau (CFPB).
Why it matters: Created in the wake of the 2008 financial crisis, the agency is tasked with protecting consumers from the predatory shenanigans of banks and nonbank financial firms — and it looks to rein in things like the reckless mortgage lending that crashed the economy back then.
The question: Is the agency's funding constitutional?
At stake: A ruling knocking down its funding could imperil the agency's future work and call into question all the regulations and rules it's issued in the 13 years since its founding — including critical mortgage standards that keep the housing market functioning.
- A ruling against the CFPB could also leave other similarly funded financial regulators and agencies, including the Federal Reserve, the Federal Deposit Insurance Corporation, and even the Social Security Administration, vulnerable to the same fate.
Background: The case was initially brought by payday lenders seeking to stop a rule prohibiting lenders from trying to withdraw a repayment from a customer's account more than two times — if their first two efforts fail because the customer doesn't have the funds.
- The idea behind the rule was to protect borrowers from getting whopped with repeated fees and penalties.
- The lenders argued that the behavior addressed in the rule isn't abusive or harmful — and that the CFPB's funding is unconstitutional, and therefore, the rule is, too.
- A three-judge panel of Trump appointees on the Fifth Circuit agreed the agency's funding mechanism was illegal, shocking legal observers.
Zoom out: The CFPB does not get its funding through an annual appropriations process in Congress.
- Instead, it's funded through the Federal Reserve system — regional Fed banks pay fees to fund the CFPB, up to a cap established in Dodd-Frank that's inflation-adjusted. The Fed Board is also funded through those fees. (A great explanation for all this comes from an amicus brief written by financial regulation scholars.)
- The idea was to shield the CFPB from the whims of legislators and the influence of lobbyists.
The other side: "By simple virtue of the Bureau's funding mechanism, then, it is one of the most opaque, least transparent, and potentially most abusive agencies in the federal government," writes Mick Mulvaney, who served as interim head of the CFPB during the Trump administration, in an amicus brief in support of the payday lenders in the case.
- The Chamber of Commerce has also said that it believes the CFPB's funding mechanism is unconstitutional.
- In its amicus brief, the Chamber — with several banking trade groups — says that the Supreme Court could give Congress time to act to fund the agency before pulling funding and "upsetting the Bureau's ongoing activities."
The bottom line: The CFPB, originally dreamed up by Sen. Elizabeth Warren (D-Mass.), has long been a target for Republicans and the financial industry. This case represents opponents' best shot at weakening the agency.
- A decision is expected next year.
