US Supreme Court rejects challenge to top consumer finance agency

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The US Supreme Court has turned away a legal challenge to the country’s top consumer finance watchdog, ruling that funding for the Consumer Financial Protection Bureau is constitutional.

The 7-2 decision on Thursday reversed a lower court decision that found the CFPB’s funding mechanism violated the constitution’s appropriations clause, which governs money held in the US Treasury. Had the decision gone the other way, it would have raised existential questions around the agency.

Most federal agencies receive funding from Congress on an annual basis. But the CFPB, which was created under the 2010 Dodd-Frank Act, is instead funded by a capped sum provided annually by the Federal Reserve.

A decision against the CFPB could have opened the door to potential challenges against other agencies whose funding system does not involve annual appropriations, such as the Federal Reserve, said Aziz Huq, professor at the University of Chicago Law School.

“Had the lower court’s ruling stood, I can imagine an argument for striking down the mechanism whereby the Federal Reserve gets its funding,” he said. “If the CFPB is struck down, that has repercussions in one policy area. If the Federal Reserve is hobbled, that has not just American but global repercussions”.

The Supreme Court’s majority opinion was penned by Clarence Thomas, one of the high court’s most conservative justices, joined by a mix of liberals and other conservatives. He wrote that the law determining the CFPB’s funding scheme met the appropriations clause’s requirements that it authorise “expenditures from a specified source of public money for designated purposes”.

The opinion featured his “textualist” approach to interpreting the constitution, which looks to what its words would have meant to those who wrote it. It highlighted “open-ended” funding schemes that Congress adopted in the 1700s for the Post Office and customs services.

In their dissent, conservative justices Samuel Alito and Neil Gorsuch argued that the majority opinion upheld “a novel statutory scheme under which the powerful Consumer Financial Protection Bureau may bankroll its own agenda without any congressional control or oversight”.

Thomas writing the majority opinion was “telling,” in that it “fractured . . . the court’s ideological right flank,” Huq said.

The case stemmed from a lawsuit brought by trade associations representing payday lenders, which had challenged a 2017 CFPB rule focused on high-interest consumer loans. They argued the agency’s funding system threatened the separation of powers by allowing it to indefinitely determine its annual funding subject to an “illusory cap”.

The CFPB said: “For years, lawbreaking companies and Wall Street lobbyists have been scheming to defund essential consumer protection enforcement. The Supreme Court has rejected their radical theory that would have devastated the American financial markets.”

The opinion means other lawsuits challenging CFPB rules “will have to be decided on their merits and not any questions about the bureau’s legality”, Ian Katz, financial policy analyst at research firm Capital Alpha Partners, said in a note.

Democrats hailed the high court’s ruling. President Joe Biden said: “In the face of years of attacks from extreme Republicans and special interests, the court made clear that the CFPB’s funding authority is constitutional and that its strong record of consumer protection will not be undone.”

Republicans were more critical. Patrick McHenry, Republican chair of the House of Representatives financial services committee, urged Congress to “fix the mistakes of Dodd-Frank which set the dangerous precedent of tapping the central bank to fund partisan political objectives”.