Supreme Court to weigh future of Consumer Financial Protection Bureau

Elizabeth Warren’s first claim to fame was devising the Consumer Financial Protection Bureau, a Wall Street regulator that she envisioned as being immune to political pressure by setting its budget and having its director insulated from meddling from an antagonistic president.

Her idea has not fared very well in the courts, where some judges say she’s created an unconstitutional mess.

The Supreme Court previously ruled that having a CFPB director insulated from firing by a president violated the Founders’ ideas about accountability.

And the justices will soon take up another case that strikes at the heart of the agency’s budget-setting powers.

“It is not too late to put the CFPB genie back in the bottle, and the Supreme Court should do so,” said Mark Chenoweth, president of the New Civil Liberties Alliance, who has filed briefs in both CFPB cases.

The latest case is a landmark legal battle over the separation of powers that legal experts said could have implications far beyond the CFPB, potentially even touching the Federal Reserve, the nation’s independent central banking system.

The question before the justices is whether Congress can relinquish its power of the purse to another branch of government.

The Community Financial Services Association of America Ltd. and the Consumer Service Alliance of Texas, which brought the challenge, said empowering the CFPB to set its budget undercuts the political accountability the Constitution requires.

The groups were specifically challenging the CFPB’s Payday Lending Rule, which restricted lenders’ ability to provide consumers with overly burdensome loans, and restricted lenders’ access to borrowers’ accounts to demand repayment.

The 5th U.S. Circuit Court of Appeals last year ruled against the CFPB, reasoning that Congress illegally surrendered to the CFPB its power to appropriate funds.

“Congress ran afoul of the separation of powers embodied in the Appropriations Clause,” wrote Judge Cory T. Wilson, a Trump appointee, for the 5th Circuit.

The court said the payday rule must be vacated because it can be traced back to the CFPB’s unconstitutional funding structure.

That decision stood in contrast with those of other federal appeals courts that have upheld the CFPB’s arrangement. Those courts noted that other federal agencies, such as the Federal Reserve and the Federal Housing Finance Agency, also have budget autonomy.

But the 5th Circuit said the CFPB is unique in that its budget authority is “double-insulated” from Congress. And the regulatory power wielded by the CFPB is far greater than the other agencies, Judge Wilson wrote.

Ms. Warren, now a U.S. senator from Massachusetts, pushed the idea of an independent Wall Street regulator when she was a Harvard University law professor. The idea gained traction during the 2008 Wall Street turmoil, and was enshrined in the Dodd-Frank legislation Democrats powered through Congress and to President Barack Obama’s desk in 2010.

Speaking a year later, Ms. Warren said the independent funding was a critical element in making the CFPB “insulated from the political process.”

“Not one other banking regulator — not one — is subject to the yearly appropriations process,” she said. “The real-world risk of breaking from this historical practice is that the consumer agency could be forced to kowtow in the face of powerful banking opposition — in other words, to become less accountable to the American people.”

Ms. Warren had figured to be the CFPB’s first director, but it became clear the Senate would struggle to confirm her. She instead mounted a Democratic bid for the Senate, winning in 2012 and holding the seat today.

The Biden administration has channeled Ms. Warren in its own legal arguments, telling the justices that there’s nothing unusual about trying to protect financial regulators from political meddling.

“No other court has ever held that Congress violated the Appropriations Clause by passing a statute authorizing spending. Nor has a court previously approved a similarly sweeping theory of retrospective relief, which threatens profound disruption by calling into question virtually every action the CFPB has taken in the 12 years since its creation,” Solicitor General Elizabeth Prelogar wrote.

The last time the high court tackled the CFPB was in 2020, when the majority ruled that having a single director protected from a presidential firing was unconstitutional.

Chief Justice John G. Roberts Jr., writing the key opinion, said the director had to be treated as an at-will position, like most other executive branch posts.

In the latest case, former Rep. Mick Mulvaney filed a brief with the high court saying the agency is constitutionally flawed. He should know: Mr. Mulvaney served as its acting director in the Trump administration, after having served as a congressman.

“The separation of powers embodied in the Constitution requires Congress, not the executive, to determine funding levels that are ‘reasonably necessary to carry out ‘the core functions of government,’” Mr. Mulvaney argued.

But Joseph “Joe” Lynyak III, a lawyer at Dorsey & Whitney who specializes in Dodd-Frank litigation, said CFPB’s opponents are asking for “a historically narrow reading” of Congress’ power of the purse.

He said a ruling against the bureau “would immediately throw the financial system into disarray.”

“The court would have an extraordinarily difficult time distinguishing the CFPB’s funding from the same funding scheme employed for other similar agencies,” Mr. Lynyak said.

Chief among those is the Federal Reserve, which is run by a seven-member board, sets its budget and controls trillions of dollars on behalf of the American public.

Under the arrangement created by the law, CFPB gets its funding directly from the Fed.

Saikrishna Prakash, a law professor at the University of Virginia, said the justices may find a way to differentiate the agency from the Fed and other agencies.

Either way, there are policy questions surrounding the notion of these independent agencies that can be created by the majority of one political party, he said.

“Both sides can play this game of trying to insulate their favorite agencies and it is not obvious to me that this is a good game to be playing, but that is public policy — not constitutional,” Mr. Prakash said.