The U.S. Supreme Court will hear arguments Tuesday in a case from Texas that observers warn could have wide-ranging consequences for consumers and the companies that provide them financial services, and could throw whole sectors of the economy into chaos.
It’s the latest assault on the Consumer Financial Protection Bureau, which was created in the wake of the Great Recession to protect Americans from financial abuses and target unfair, deceptive and abusive practices by banks, lenders and other financial institutions.
In this case, the high court will decide whether the Fifth Circuit Court of Appeals ruled correctly when it sided with trade groups representing payday lenders who argued that the Consumer Financial Protection Bureau’s funding structure is unconstitutional.
“What we are seeing now is an ideologically driven challenge that is funded by the payday loan industry…that is seeking to have the United States Supreme Court adopt a legal theory that has never been adopted by any court in the land except for the Fifth Circuit in this case,” said Ted Mermin, executive director of the UC Berkeley Center for Consumer Law and Economic Justice.
The CFPB’s budget comes from the Federal Reserve, which in turn gets its funding mostly through the bonds and other securities it buys and sells. It isn’t funded like other government agencies through the Congressional budget process.
This “double insulation” from Congress’ ability to pull its purse strings violated the constitution, according to a three-judge panel of the Fifth Circuit. All three of the judges were appointed by Donald Trump.
“Congress’s decision to abdicate its appropriations power under the Constitution, i.e., to cede its power of the purse to the Bureau, violates the Constitution’s structural separation of powers,” they ruled.
Texas roots
In 2018, the Community Financial Services of America and the Consumer Services Alliance of Texas filed a lawsuit in an Austin federal court challenging a 2017 CFPB rule regulating payday and other lenders.
The rule required lenders to take steps to ensure consumers could actually afford to repay the loan before giving it, and blocked lenders from making endless attempts to withdraw payments from a borrower’s bank account after two failed collection attempts. Each failed attempt could add overdraft fees that leave cash-strapped borrowers further in the hole.
The payday lenders said the CFPB didn’t follow the rules when it came up with the new regulation. But they also went a step further, arguing that the CFPB’s funding structure is unconstitutional, and so its payday lending rule was unenforceable.
The district court rejected those arguments and ruled against the payday lender groups, who appealed to the Fifth Circuit.
Jeff Sovern, who teaches consumer law at the University of Maryland’s Carey School of Law, says that’s likely where payday lenders were aiming when they filed their lawsuit in Texas.
“When you have a rule like this, those who want to challenge it have fairly broad discretion to sue in a place where they're more likely to win. And Texas is in the Fifth Circuit, which is probably the most conservative circuit, and so most likely to give the industry the outcome it wants,” Sovern said.
KERA News tried to get comment from the groups that brought the case, the Community Financial Services Association of America and the Consumer Services Alliance of Texas. A CSAT representative said the group was funneling press inquiries to the CFSA.
Emails to the CFSA’s media contact were not returned. Nor was an email to the Jessica Rustin, who serves as CEO of the company that operates Advance America payday lending storefronts, and is listed as CFSA’s president on the latest tax forms that are publicly available.
Built for independence
The CFPB was borne out of the Great Recession, when millions of Americans lost their homes and suffered financial calamity.
“A lot of what drove this crisis was a lack of effectively enforced financial protections for consumers in the home mortgage lending market,” said Ann Baddour, who directs the Fair Financial Services Project at the social justice group Texas Appleseed. “Out of the ashes of this crisis, the CFPB grew.”
In the dozen years since it opened its doors, the CFPB has become the nation’s “premier” consumer watchdog, taking the lead on enforcing consumer finance laws and drafting regulations intended to make it easier for regular people to navigate financial services and avoid scams and exploitation.
“Think about all of the financial transactions in your life, as a consumer. Almost every one of them has been touched by the CFPB and made better in the last decade," Mermin said.
The bureau crafted rules to block debt collectors from calling in the middle of the night or threatening jail for failing to pay. It set mortgage standards that block the kinds of predatory mortgages that left borrowers underwater during the Great Recession.
The bureau went after Wells Fargo for mismanaging loans and accounts, forcing the nation’s fourth-largest bank to pay $2 billion in restitution to affected customers. It forced TitleMax to pay $15 million for breaking laws meant to shield military families from predatory lenders.
The CFPB also plays a key role in financial education.
From the beginning, though, the bureau has drawn the ire of Republican leaders, industry lobbies and right-wing legal groups who’ve deemed it too powerful and not adequately accountable.
President Donald Trump named Mick Mulvaney director of the CFPB, a man who had previously called the agency a “sick, sad” joke and said he’d “like to get rid of it.” Mulvaney filed a brief to the Supreme Court this year saying he thinks the agency he used to lead is unconstitutional and abusive.
A 2020 Supreme Court decision in a case brought by a debt collection law firm made it easier for a president to fire the CFPB’s director.
The CFPB’s champions have argued that the CFPB needed to be structured in a way that prevents industry capture and undue political influence. Indeed, the very funding structure now in question was meant to shield the agency from Congressional manipulation.
“A ruling against the agency would also leave it vulnerable to big money lobbyists representing businesses that violate consumer protection laws,” Baddour said.
Major consequences
A ruling that leaves the CFPB defunct or inoperable would also open regular people up to exploitation and abuse, said Mary Spector, a professor who teaches consumer law at the Southern Methodist University Dedman School of Law.
“Its absence would really create a gap — a tremendous gap — in protections for consumers in the kind of day-to-day transactions that we all engage in: Using our credit card, buying a home, transferring money to loved ones through a remittance, being protected from unscrupulous debt collectors,” Spector said.
If the Supreme Court takes the payday lenders’ argument to its logical extreme, it could raise constitutional questions about any government entity not funded through direct Congressional appropriation unconstitutional, with potentially devastating consequences.
“If the court rules that the only way the government can spend money is if Congress appropriates it, that would wreak chaos,” Sovern said.
It could crash a host of government agencies, including the U.S. Postal Service, which relies on selling stamps and other services. Medicare and Social Security, funded from an array of sources, could become inoperable. The Federal Reserve, the Office of the Comptroller of the Currency, and other agencies undergirding the economy’s basic operations could also be at risk.
“We have a history from the earliest days of our republic of agencies getting money from outside of the appropriations process, but I don’t know what the court will do,” Sovern said.
But even a more moderate ruling from the court siding with the payday lenders could still cause major damage by calling into question the legitimacy of existing CFPB regulations and policy.
Take the real estate market.
The Mortgage Bankers Association, the National Association of Home Builders and the National Association of Realtors wrote in an amicus brief that they have worked with the CFPB to craft workable rules of the road for the real-estate lending industry and poured “billions of dollars” into compliance.
If the court’s decision casts doubt on CFPB regulations and policies, “it could set off a wave of challenges and the housing market could descend into chaos, to the detriment of all mortgage borrowers,” they argued.
It’ll take a while before the court announces the fate of the CFPB. The justices have until the end of June to deliver their decision.
Got a tip? Christopher Connelly is KERA's One Crisis Away Reporter, exploring life on the financial edge. Email Christopher atcconnelly@kera.org.You can follow Christopher on Twitter @hithisischris.
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