Supreme Court Rejects Effort To Gut Consumer Protection Agency

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The Consumer Financial Protection Bureau’s funding mechanism is not unconstitutional, the U.S. Supreme Court ruled on Thursday.

The court’s decision in the case of CFPB v. Community Financial Services Association saves the consumer financial regulator from an effort by payday lenders to invalidate every action it has taken since it was established in 2010.

The 7-2 decision was authored by Justice Clarence Thomas, a stalwart conservative on the court. Justice Samuel Alito dissented and was joined by Justice Neil Gorsuch.

The lawsuit began in 2017 after the payday lender trade group sued to overturn a CFPB rule prohibiting illegal debits from bank accounts. The payday lenders argued against the rule and that the CFPB and all of its actions since 2010 were unconstitutional due to its particular funding structure.

Created in the wake of the 2008 global financial crisis, Congress created the CFPB to protect consumers from predatory financial practices that played a role in the subprime mortgage debacle. In doing so, lawmakers sought to insulate the new agency from industry influence by funding it outside the ordinary appropriations process. The agency would be housed inside the Federal Reserve and allowed to draw up to $600 million in funds from the Fed’s treasury annually.

In the suit, the payday lenders argued that this funding mechanism violated Article I, Section 9 of the Constitution, also known as the Appropriations Clause, which states that “[n]o money shall be withdrawn from the Treasury, but in Consequence of Appropriations made by Law,” and that the mechanism wrongfully gave the agency “perpetual” funding.

The Supreme Court rejected a challenge to the Consumer Financial Protection Bureau's funding mechanism.
The Supreme Court rejected a challenge to the Consumer Financial Protection Bureau’s funding mechanism.
Rafael Henrique/SOPA Images via Getty Images

The Court disagreed. Thomas wrote in the majority decision: “Under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes. The statute that provides the Bureau’s funding meets these requirements.”

If the funding mechanism were unconstitutional, as payday lenders argued, then all actions taken by the agency must be invalidated. This would include billions of dollars in fines levied against payday lenders since the agency’s inception.

However, the government noted that Congress has frequently created agencies with funding mechanisms outside of the normal appropriations process since the country’s founding. Like the CFPB, the Customs Service, Postal Service and revenue officers were all funded through non-annual, standing appropriations, Solicitor General Elizabeth Prelogar argued before the court in October 2023.

Arguments before the court in October presaged a loss for payday lenders as two conservative justices joined the three liberals in expressing skepticism about their case.

“There’s nothing in the Appropriations Clause that imposes the limits you’re talking about,” Justice Amy Coney Barrett said.

Justice Brett Kavanaugh also questioned the premise of the payday lenders’ argument that the agency’s funding was “perpetual.”

“It implies it’s entrenched,” Kavanaugh said. But, he added, “Congress could change it tomorrow.”

The liberal justices were even more critical of the payday lenders’ case during arguments.

“You’re flying in the face of 250 years of history,” Justice Elena Kagan said.

This opposition proved too much for the payday lenders in their effort to gut the CFPB. While the agency continues on, this is not the last legal challenge it will face from determined industry foes.

In his dissent Thursday, Alito wrote: “Unfortunately, today’s decision turns the Appropriations Clause into a minor vestige. The Court upholds a novel statutory scheme under which the powerful Consumer Financial Protection Bureau (CFPB) may bankroll its own agenda without any congressional control or oversight.”