Supreme Court to decide constitutionality of federal consumer watchdog agency

The Supreme Court is set to review whether an entire federal agency is unconstitutional. This week, it announced it would take up another challenge to the Consumer Financial Protection Bureau after the U.S. Court of Appeals for the Fifth Circuit determined its funding structure violated the constitution.

The Biden administration asked the Supreme Court to expedite the review but the court decided against fast-tracking it, so a decision won’t come for about another year.

What is the CFPB?

The CFPB was born out of the 2008 financial crisis. It is the brainchild of then-future Sen. Elizabeth Warren, D-Mass. In 2010, Congress and then-President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the bureau. It consolidated consumer financial protection authority from seven different agencies under one roof.

Some of the bureau’s wins include:

• Exposing the Wells Fargo fake accounts scheme and other violations, forcing the bank to pay billions in fines.
• Cracking down on risky mortgage lending, the catalyst of the financial crash.
• Recovering $16 billion for customers since its inception.

CFPB criticism

Critics of the bureau have long argued it is too powerful, unaccountable and burdensome, levying too many financial regulations. A particular point of attack is the way the bureau was structured from the beginning.

Democrats intended to protect the bureau from political pressure in two ways: one, the sole agency director could only be fired for cause; and two, the agency would be funded through the Federal Reserve, not congressional appropriations.

The first point was already challenged in a 2020 Supreme Court ruling. The court determined the director’s removal protections were unconstitutional, but instead of shuttering the bureau, they changed the rules so the bureau director now serves at the pleasure of the president and can be fired at will.

The second point is at the heart of the case the Supreme Court has just decided to review.

Community Financial Services Association of America v. CFPB

In October, a trio of Trump-appointed judges from the Fifth Circuit ruled in October that CFPB funding is unconstitutional because it bypasses Congress, violating separation of powers. The case stemmed from a lawsuit by the payday lending industry, which was challenging a CFPB rule that would have restricted their access to customer bank accounts.

The court ruled against the bureau not because of a lack of authority in making the rule, but because it financed its rulemaking via unconstitutional funding.

“Without its unconstitutional funding, the Bureau lacked any other means to promulgate the rule,” the decision read.

If the decision is upheld by the Supreme Court, it could throw into question every rule the agency has made in its 12-year history.