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When the Supreme Court ruled against the federal agency that protects consumers from financial scams in 2020, it let the agency keep operating, opting for “a scalpel rather than a bulldozer in curing the constitutional defect.”
The question now is whether the justices are ready to employ the bulldozer as part of the conservative supermajority’s drive to limit regulatory power.
In recent years, the Supreme Court has moved aggressively against the executive branch, invalidating rules for power-plant carbon emissions, Covid-19 precautions and student loan forgiveness. The court has agreed to hear a series of new cases in the 2023-24 term that could reinforce its anti-regulatory direction.
Tuesday’s case tested the funding structure of the Consumer Financial Protection Bureau, which Congress established in the wake of the 2008 financial crisis to oversee laws that target predatory lending and other financial abuse. Millions of Americans lost their homes, jobs or savings in that Great Recession.
A ruling against the CFPB this time has the potential to unravel more than a decade of actions by the agency. The decision could also open the door to challenges to other agencies, such as the Federal Reserve, that received separately authorized funding, rather than traditional annual appropriations from Congress.
During contentious oral arguments on Tuesday some conservative justices, notably Clarence Thomas and Samuel Alito, expressed skepticism for the CFPB funding structure. But most justices, across the ideological divide, openly struggled with limits the court might put on Congress as it creates and funds independent agencies.
At bottom, a majority appeared to resist the core of the challengers’ attack on the consumer-protection agency – which might, when the justices ultimately rule, once again spare it.
Additional regulatory cases will be heard in the new 2023-24 session. They cover when judges must defer to agency interpretations of their statutory power (a theory of deference arising from the 1984 case of Chevron v. Natural Resources Defense Council) and whether the Securities and Exchange Commission can use in-house administrative law judges to resolve civil-penalty disputes without violating the constitutional right to a jury trial.
As conservative justices warn of an expanding bureaucracy overtaking businesses and individual lives, liberal justices highlight agency expertise to address societal concerns including the environment, public health and consumer choices.
Writing for the majority in the first CFPB case, Chief Justice John Roberts derided the bureaucracy with a line he’d first expressed in a 2010 controversy over regulatory authority: “One can have a government that functions without being ruled by functionaries, and a government that benefits from expertise without being ruled by experts.”
Dissenting Justice Elena Kagan countered by referring to the “financial chicanery” the CFPB was intended to address, saying, “Diverse problems of government demand diverse solutions. They call for varied measures and mixtures of democratic accountability and technical expertise, energy and efficiency.”
That 2020 case tested the CFPB leadership structure. Tuesday’s dispute could more fundamentally unsettle CFPB operations because it challenges the bureau’s overall funding and every decision made under that funding system.
Rather than finance the CFPB through annual appropriations, Congress, as a way to safeguard the bureau’s independence, specified that it receive funding from the combined earnings of the Federal Reserve System each year, up to a statutory cap of about $600 million, adjusted for inflation.
RELATED: CFPB: What it does and why its future is in question
Groups representing payday lenders targeted that funding arrangement as they sued over a CFPB rule that would limit a lender’s ability to obtain loan repayment through preauthorized account access.
The challengers cited the Constitution’s appropriations clause, which says, “no Money shall be drawn from the Treasury, but in Consequence of Appropriations made by law.” The 5th US Circuit of Appeals, in the decision now before the justices, agreed with the challengers. The 5th Circuit ruled that the Constitution gives Congress “exclusive power over the federal purse” and that Congress cannot cede that power.
US Solicitor General Elizabeth Prelogar, representing the CFPB, stressed Tuesday that no other court has limited Congress’ appropriation power in that manner, nor imposed such retrospective relief, which would call into question virtually every action the CFPB has taken in the 12 years since it was established.
She said the text and history of the appropriations clause leaves it to Congress to determine the source of appropriations once spending authority is designated. Congress has provided such lump-sum appropriations to numerous agencies, she said, including the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.
Prelogar rejected concerns that Congress had ceded appropriations authority to the executive branch. “The court is looking at a statute,” she told the justices, “that Congress itself enacted that set up this funding mechanism for the CFPB, which is similar in kind to the way that Congress has funded other financial regulatory agencies.”
Thomas responded, “You don’t think this kind of eviscerates the kind of exacting control that Congress usually exercises in the appropriations process?”
Prelogar said Congress has the latitude to decide whether funding is made annually or essentially indefinitely, until a future Congress decides otherwise.
“You have a very aggressive view of Congress’s authority under the appropriations clause,” Roberts said to the solicitor general. “And it struck me that the reason you would want to defend that is because it gives them more power to give away,” including to executive agencies.
Prelogar contended that CFPB’s funding is “actually far more constrained than many Congress has enacted throughout history,” because Congress set a cap on what the bureau could draw each year.
Alito questioned whether there were any limits to the government’s theory, asking Prelogar whether Congress could give any independent agency “up to $1 billion adjusted for inflation” to use as it wanted.
She brushed aside the billion-dollar figure as unlikely but said that, in fact, many agencies are funded with such standing appropriations, “particularly in the financial regulatory space.”
Noel Francisco, representing the payday lender associations, said that if Congress can authorize the CFPB to spend whatever it deems reasonably necessary, up to a designated cap, “then it can authorize the president to spend whatever he deems reasonably necessary as long as he doesn’t exceed $10 trillion.”
Francisco, formerly the Trump administration US solicitor general, represents the Community Financial Services Association of America, which objects to the CFPB rule regulating lenders’ attempts to withdraw loan repayments from bank accounts.
“At a bare minimum, the appropriations clause requires Congress to determine how much the government should be spending,” he said.
“Where do you get that from? … A fixed amount? It can’t do by a cap? It has to be a fixed amount?” asked Justice Ketanji Brown Jackson, saying the Constitution’s appropriations clause held no such requirement.
Kagan observed that Congress had throughout history varied funding methods, sometimes employing annual line-item appropriations, sometimes not. “So you’re just flying in the face of 250 years of history,” she told Francisco.
Such sharp comments from liberal justices might have been expected, but Justices Brett Kavanaugh and Amy Coney Barrett were also skeptical. Those conservatives often find themselves in the middle of the bench and could be critical votes in this case as well.
Kavanaugh homed in on Francisco’s argument that Congress had essentially granted “perpetual” financing to the consumer-protection agency.
“The word ‘perpetual,’” Kavanaugh said, “I’m having trouble with because it implies that it’s entrenched and that a future Congress couldn’t change it. But Congress could change it tomorrow and there’s nothing perpetual or permanent about this.”
A decision in the case of CFPB v. Community Financial Services Association of America is likely by June when the justices recess for the summer.
The payday lending groups first sued in 2018 over a 2017 rule that would prohibit attempts to withdraw payments from accounts after two consecutive tries have failed due to insufficient funds. (Repeated withdrawal attempts can subject borrowers to extra banking fees.)
A US district judge upheld that regulation and rejected the claim that the bureau’s funding mechanism impinged the Constitution’s appropriations clause. The judge said the statute authorizing the agency to receive certain funding met the constitutional demand.
When the 5th US Circuit of Appeals reversed and ruled against the CFPB, it said the Constitution gives Congress “exclusive power over the federal purse” and Congress cannot cede that power.
“The Appropriations Clause … does more than reinforce Congress’s power over fiscal matters,” the appellate panel wrote last year. “(I)t affirmatively obligates Congress to use that authority to maintain the boundaries between the branches and preserve individual liberty from the encroachments of executive power.”
The 5th Circuit, which also declared all prior CFPB rules invalid, has produced some of the most sweeping rulings against the Biden administration over the past three years.
But the circuit has also experienced reversals at the Supreme Court, and judging from Tuesday’s arguments, it may be that the high court finds the 5th Circuit has again gone too far.
This story has been updated with additional reporting.
