The fate of this consumer watchdog is in the hands of the Supreme Court

By Elisabeth Buchwald, CNN

New York (CNN) — On Tuesday, the Supreme Court began hearing oral arguments in a case that will determine the fate of the Consumer Financial Protection Bureau.

The case was brought on by the Community Financial Services Association of America, a trade group representing payday lenders.

The group scored a victory last year in a case it brought before the US Court of Appeals for the Fifth Circuit, in New Orleans. The three-judge panel ruled the CFPB’s funding violates the Constitution’s Appropriations Clause and separation of powers. The Supreme Court will have the final say on that, however.

What is the CFPB, exactly?

The consumer watchdog agency was created after the 2008 financial crisis by way of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The agency was the brainchild of Democratic Sen. Elizabeth Warren. She began advocating for it in 2007 when she was a Harvard Law School professor.

The broad purpose of the CFPB is to protect consumers from financial abuses and to serve as the central agency for consumer financial protection authorities.

Prior to the CFPB’s formation, “[c]onsumer financial protection had not been the primary focus of any federal agency, and no agency had effective tools to set the rules for and oversee the whole market,” the agency said on its site.

The CFPB is funded by the Federal Reserve in an effort to keep the agency independent from political pressure. It also means that the agency doesn’t depend on Congressional appropriations funds.

What has the agency done for consumers?

While there are critics of the agency’s current structure and funding, it has saved consumers money, made it easier for them to seek redress and to get better clarity and more tailored responses from companies when they have a problem with their accounts, loans or credit reports.

“Today virtually all financial transactions for residential real estate in the United States depend upon compliance with the CFPB’s rules, and consumers rely on the rights and protections provided by those rules,” the Mortgage Bankers Association, the National Association of Homebuilders and the National Association of Realtors said in an amicus brief to the Supreme Court.

For instance, the CFPB recently ordered Bank of America to pay $100 million to customers and $90 million in penalties saying that the nation’s second-largest bank harmed consumers by double-dipping on fees, withholding credit card rewards and opening fake accounts.

The CFPB also took action against Wells Fargo after the agency found the bank had been engaging in multiple abusive and unlawful consumer practices across several financial products between 2011 and 2022 — from auto loans to mortgage loans to bank accounts.

The agency ordered the bank to pay a $1.7 billion civil penalty in addition to more than $2 billion to compensate consumers.

What are the implications of the Court’s decision?

The Supreme Court’s decision, which likely won’t be announced until the spring of 2024, has far-reaching implications.

If the Supreme Court finds the CFPB’s funding structure unconstitutional, it could shutter the agency and invalidate all of its prior rulings.

“Without those rules substantial uncertainty would arise as to how to undertake mortgage transactions in accordance with federal law,” the associations said in their joint brief. “The housing market could descend into chaos, to the detriment of all mortgage borrowers,” they added.

It could also call into question the constitutionality of other government agencies like the Federal Reserve and the Federal Deposit Insurance Corporation that also aren’t funded by Congressional appropriations.

“We are confident in the constitutionality of the statute that created the CFPB within the Federal Reserve System and provides its funding,” Sam Gilford, a spokesperson for the CFPB, told CNN in a statement. “We will continue to carry out the vital work Congress has charged us to perform.”

There’s also a way for the Supreme Court to change the CFPB’s funding structure in a way that wouldn’t invalidate prior rulings, said Joseph Lynyak III, a partner at the law firm of Dorsey & Whitney and a regulatory reform expert.

“This result would be far more probable rather than voiding the last decade of the CFPB’s activity,” he added.

What’s the most likely outcome of the case?

From listening to the case on Tuesday, though, Lynyak believes the Supreme Court will rule that the CFPB’s funding structure is constitutional.

“As we have argued from the outset, the CFPB’s unique funding mechanism lacks any contemporary or historical precedent,” said Noel Francisco, a lawyer arguing on behalf of those challenging the constitutionality of the CFPB’s funding structure.

He added that it “improperly shields the agency from congressional oversight and accountability, and unconstitutionally strips Congress of its power of the purse under the Appropriations Clause of the Constitution.

But both Republican and Democratic-appointed justices told Francisco on Tuesday they could not understand the crux of his argument.

“I’m at a total loss,” said Justice Sonia Sotomayor. Echoing her remarks, Justice Amy Coney Barrett said, “we’re all struggling to figure out what’s the standard that you would use.”

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