Rohit Chopra, Director of the Consumer Financial Protection Bureau (CFPB). Photographer: Ting … [+]
The Supreme Court heard oral arguments Tuesday in a case threatening to disrupt the work of the 13-year-old Consumer Financial Protection Bureau by arguing that its funding source is unconstitutional.
The CFPB receives funding from the Federal Reserve. The CFPB director requests the amount of money he deems reasonably necessary to carry out his operations and is capped at 12 percent of the Fed’s reported operating expenses in 2009, or about $600 million. The percentage cap is adjusted annually for inflation. The payday lenders filing suit argue that the bureau’s financing structure violates the Constitution’s Appropriations Clause, which states that “no money shall be drawn from the Treasury, but shall be made in accordance with appropriations made by law.”
Supported by Senator Elizabeth Warren (D-Mass.) in 2007, the CFPB was created as part of a radical overhaul of the U.S. financial system aimed at preventing a repeat of the high-risk environment that led to the crisis financial year 2007. -2009. To protect the agency from political pressure, the CFPB is not subject to annual appropriations from Congress unless its funding request exceeds the cap.
“Its birth happened when it was very clear to everyone that we needed to rewrite the rules of consumer credit,” says Amias Gerety, a partner at fintech venture capitalist QED Investors and former deputy Treasury secretary per interim for financial institutions.
In his argument against the CFPB’s funding structure, Noel Francisco, who served as U.S. solicitor general from 2017 to mid-2020 under President Donald Trump, said that by foregoing an annual allocation for the CFPB, the Congress had given up its “power of the purse.” » to the executive power.
The court’s judges greeted Francisco’s argument with skepticism. When Francisco said the CFPB is capable of self-funding “in perpetuity,” Justice Brett Kavanaugh responded: “Congress could change it tomorrow, there’s nothing perpetual or permanent about it.” »
Justice Sonia Sotomayor cited Customs and Border Protection as an example of an agency with a permanent, uncapped funding source. The difference is that customs does not act as a regulator and is financed mainly from the revenue it generates. Yet Sotomayor said more than 60 percent of Congressional appropriations are not allocated on an annual basis. “I’m trying to understand your point and I’m totally lost,” she said.
Francisco argued that the CFPB’s funding cap is so high that it is meaningless, pointing to the fact that it has not reached that limit as evidence. In fiscal year 2022, board transfers were capped at $734 million and the CFPB spent $622 million. “The CFPB does not waste, it uses what it thinks it should use and does not generously say the rest,” retorted Justice Elena Kagan. “Maybe this is good evidence that the CFPB should do more.”
This case comes after a Fifth Circuit appeals court governed that the CFPB’s funding structure is unconstitutional following a challenge to the bureau’s rule on payday lending. This is the latest in a series of challenges to the CFPB’s existence. In 2020, the Supreme Court ruled that a limitation on the president’s ability to remove the CFPB’s sole director violated the U.S. Constitution’s separation of powers. Both the isolation of the annual appropriations process and the limitation that the bureau director could only be removed by the president “for cause” were intended to protect the agency from political pressure.
Dodd-Frank gave the CFPB the authority to create regulations allowing financial institutions to comply with laws such as the Truth in Lending Act, a 1968 law designed to ensure fair consumer credit products. TILA reforms after 2008 depend largely on the authority of the CFPB. These amendments included the definition of a new category more expensive mortgages, including most subprime loans secured by the borrower’s primary residence. The CFPB adopted new appraisal requirements for higher-priced mortgages, expanded requirements for mortgage servicers, and new origination rules. If the agency’s funding structure is found unconstitutional by the Supreme Court, it could call into question every rule created by the CFPB.
“Even taking the CARD Act, which is the 2009 law that was passed right before Dodd-Frank and that enshrined this idea of a simple credit card disclosure, as soon as Dodd-Frank passed the responsibility to finalize and implement the CARD Act, it was turned over to the CFPB,” Gerety said.
Since its creation, the agency has imposed $3.7 billion in enforcement sanctions and obtained 16 billion dollars in the relief of consumers, either through direct compensation or through the cancellation or reduction of debt. Real estate industry groups rallied en masse to the CFPB’s defense ahead of the case, warning that if past rules and the agency’s rules were called into question, it could wreak havoc on the mortgage market.
“This Court should be careful not to call into question current CFPB regulations, including those governing the real estate financing industry, which could result in immediate and intense disruption to the real estate market, harming both consumers and the economy as a whole,” mortgage bankers said. Association, the National Association of Home Builders and the National Association of Realtors wrote in a amicus brief to the court.