Supreme Court Sides with CFPB, Overturning Fifth Circuit

The U.S. Supreme Court reached a decision in Consumer Financial Protection Bureau (CFPB) v. Community Financial Services Association of America last week, siding with the CFPB and overturning the Fifth Circuit Court of Appeals.

The CFPB was the brainchild of Sen. Elizabeth Warren (D-Mass.) in the wake of the 2008 financial crisis. Part of the broader Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, it serves as a consumer watchdog in the financial sector. The agency has been criticized over the years for excessive rulemaking and failure to consider the unintended consequences of overburdensome regulation. Under the leadership of current director Rohit Chopra, the agency has enacted many rules that free market advocates view as detrimental to competition and consumers. The R Street Institute has consistently argued that many of these rules ultimately harm those they purport to help—most often low-income individuals.

The case brought before the Fifth Circuit focused on the CFPB’s Payday Lending Rule. Ultimately, the court decided the rule should be struck down because it was passed by an agency with an unconstitutional funding structure. As a result, the case before the Supreme Court focused on the agency’s funding. The CFPB’s unique funding structure has been scrutinized since its inception, as it is essentially double insulated from congressional oversight via statute. The CFPB is funded through Federal Reserve combined earnings pursuant to 12 U.S.C. 5497 while the Federal Reserve itself, funded primarily through interest earned on securities, stands completely outside of congressional appropriations. The CFPB’s governing statute states that its funding is not “subject to review by the Committees on Appropriations of the House of Representatives and the Senate.” The Fifth Circuit ruled that this insulated funding mechanism violated Article 1, Section 9 of the Constitution, which gives the legislative branch the power of the purse through the appropriations clause.

The Supreme Court disagreed with these findings in a 7-2 vote, with Justices Neil Gorsuch and Samuel Alito voting against. Alito wrote in his dissent that the ruling “turns the Appropriations Clause into a minor vestige” and allows the CFPB to “bankroll its own agenda without any congressional control or oversight.” The ruling essentially allows an executive branch agency (the CFPB) to determine its own budget and funding through non-appropriated federally chartered corporations (the Federal Reserve), so long as the amount does not exceed 12 percent of its operating expenses. The CFPB can also roll over any unspent monies as opposed to other agencies, which are required to return them.

While the outcome is disappointing to lawmakers and advocates on the right, it is not particularly surprising (see this previous R Street piece). Legal battles are certain to continue with groups like the U.S. Chamber of Commerce indicating plans to take serious legal action against the CFPB and its many rules. Notably, the Chamber sued the agency over the Credit Card Late Fee rule, which has delayed its implementation for now.

At this juncture, Republicans in Congress should consider legislative action if they wish to rein in the CFPB. The CFPB Transparency and Accountability Reform Act sponsored by Rep. Andy Barr (R-Ky.) attempts to remedy many of the agency’s issues by changing its “structure, funding, and rulemaking procedures.” Specifically, the bill establishes a five-person commission as opposed to a single director, brings the CFPB under regular appropriations by removing it from being funded through the Federal Reserve, and requires the Bureau of Economic Analysis to review all CFPB rules and regulations.