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The Fate of the Consumer Financial Protection Bureau

Public Citizen News / May-June 2023

By Scott Nelson

This article appeared in the May/June 2023 edition of Public Citizen News. Download the full edition here.

In 2010, as the nation struggled to emerge from the Great Recession, Congress created a government agency dedicated to protecting ordinary consumers from the financial institutions whose predatory practices played a key role in causing the crisis. In the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress gave the Consumer Financial Protection Bureau (CFPB) broad powers to protect consumers. Congress also gave the agency an independent director and a secure, long-term source of funding. Ever since, the CFPB has been targeted by legal challenges from a financial industry that chafes at efforts to limit its power over consumers.

Now, the CFPB faces an existential threat: A federal court of appeals has held that the law Congress passed to provide funds for the agency is unconstitutional and that everything the agency has done since its creation is void. At the request of the CFPB and the U.S. Department of Justice, the Supreme Court has agreed to review that decision and will decide the CFPB’s fate in a case to be heard next fall and decided by June 2024.

The latest attack on the CFPB’s existence follows an earlier challenge that targeted the independence of the CFPB’s director. In that case, industry challengers succeeded in persuading the Supreme Court that a section of the Dodd-Frank law providing that the president could not fire the CFPB’s director without good cause violated constitutional separation-of-powers principles by interfering with the president’s oversight of an executive branch agency. Fortunately for consumers, however, that decision did not invalidate anything the CFPB had done up to that point, nor did it stop the agency from continuing to do its job. Instead, the Court simply declared that the president had the authority to fire the CFPB’s director at will. Although that power may eventually be used by an anti-consumer president to limit the agency’s effectiveness, so far its only effect has been the opposite: President Biden used his authority to remove the CFPB director installed by President Trump, Kathy Kraninger, and replace her with the much more pro-consumer Rohit Chopra.

Having failed in its first attempt to cripple the CFPB, the financial industry tried again. A trade group called the Consumer Financial Services Association of America filed a challenge in a Texas federal court to the CFPB’s Payday Lending Rule. That rule prevents a lender from gratuitously harming consumers by making repeated efforts to withdraw funds from their bank accounts when the lender knows that the accounts lack sufficient funds, leading to overdraft charges against the already cash-strapped borrowers. The industry association argued, among other things, that the rule was void because the law funding the agency violates the Constitution’s “Appropriations Clause,” which provides that the federal government may only spend money when Congress has passed a law “appropriating” funds for that purpose. According to the industry challengers, the Dodd-Frank law, which says the CFPB may fund its activities by requesting a transfer of funds from the Federal Reserve Board (subject to a cap set by the law), does not satisfy that requirement.

The case eventually made its way to the U.S. Court of Appeals for the Fifth Circuit, which is dominated by conservative Republican appointees. The Fifth Circuit began its ruling in the case by rejecting all of the industry association’s other challenges to the Payday Lending Rule. The court held that the rule was authorized by Dodd-Frank’s provisions giving the CFPB power to prevent “unfair” lending practices, and that the agency had thoroughly explained the need for the rule and supported its conclusions with data and studies. And the court rejected arguments that it is unconstitutional for Congress to delegate power to an agency to issue such rules. But after explaining that there was nothing wrong with the rule, the court abruptly concluded that there is something wrong with how Congress funded the agency: According to the court of appeals, a law that allows an agency to draw its funding from the monies held by the Federal Reserve is not a valid “appropriation” under the Constitution because it is “self-actualizing” and “perpetual” and frees the agency from having to rely on annual appropriations bills passed by Congress. What’s more, the court held that the funding problem affects everything the agency has done—including its promulgation of the Payday Lending Rule—and requires that those actions be set aside. Thus, unlike the Supreme Court’s ruling about the president’s authority to fire the agency’s director, the Fifth Circuit’s ruling, if adopted by courts nationwide, would threaten to unwind everything the agency has done and stop it in its tracks until Congress provides a new source of funds.

The Supreme Court granted the federal government’s request that it take up the case, which it almost always does when a lower court holds a federal statute unconstitutional, especially when the decision would have far-reaching consequences. And as the government explained when asking the Court to take the case, the consequences of the Fifth Circuit’s ruling in this case are far-reaching indeed. Until now, the Appropriations Clause has been interpreted to mean just that Congress must by law designate a source of funds and authorize them to be spent for a given purpose. The Dodd-Frank Act’s funding provisions satisfy those requirements. Moreover, most federal expenditures are not the result of annual appropriations, and many agencies and federal programs, including Social Security, have permanent appropriations. The Fifth Circuit’s ruling, if left standing, would not only cripple the CFPB, but also threaten a host of other agencies and spending programs.

Public Citizen will be filing a friend-of-the-court brief this spring, on behalf of itself and other consumer organizations, helping the government defend the CFPB against this unprecedented challenge. ”At stake,” said Public Citizen President Robert Weissman, “is the survival of the CFPB, a crucial consumer protection agency, and the functioning of vast swaths of the federal government.”

The case will be argued when the Supreme Court convenes in October. The decision will most likely not come down until later in the court’s term, which will conclude at the end of June 2024.