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Consumer watchdog is in the crosshairs as Supreme Court weighs legal challenge

WASHINGTON — The Supreme Court on Tuesday weighs the fate of the federal agency set up to protect consumers from predatory lenders and other unlawful financial services practices as the justices consider a constitutional challenge backed by business groups.

The Biden administration appealed after a lower court ruling last year said the mechanism allowing the Consumer Financial Protection Bureau to be funded directly by the Federal Reserve is unconstitutional.

The challengers, two trade groups representing lenders, argue that the agency must be funded with annual appropriations approved by Congress.

In response, the government has argued that Congress often uses a similar approach to fund large spending programs such as Social Security.

A ruling against the CFPB would, the government argues, cast legal doubt on the funding of other government entities, including the Federal Reserve itself and the Federal Deposit Insurance Corp., which provides insurance that protects consumers when banks fail.

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The Supreme Court’s conservative majority is often skeptical of broad federal agency authority without specific congressional authorization. The case is one of several on the docket this term in which the justices could hobble government regulators.

Community Financial Services Association of America and the Consumer Service Alliance of Texas sued the CFPB in 2018 seeking to throw out a regulation cracking down on payday loans.

In that case, a federal judge ruled in favor of the bureau after it modified a regulation barring lenders from repeatedly seeking to withdraw loan repayments from a consumer’s bank account if there are insufficient funds. The new rule has yet to take effect.

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But the legal question before the Supreme Court on Tuesday rests squarely on the conclusion reached by the New Orleans-based 5th U.S. Circuit Court of Appeals, which ruled in October of last year that the bureau’s funding mechanism was unlawful.

The court concluded that the funding structure, whereby Congress does not directly appropriate funding, runs afoul of the Constitution’s directive requiring it to do so. That is despite the fact that Congress itself set up the CFPB and approved the current funding structure when it passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010.

The law states that the CFPB receives funding determined by its director to be “reasonably necessary to carry out the authorities of the bureau” as long as it is under the cap of 12% of the operating expenses of the Federal Reserve. In the 2022 fiscal year, the agency received $641 million.

The funding mechanism “accords with Congress’s longstanding practice of authorizing agencies to spend money indefinitely from sources other than annual appropriations statutes,” Solicitor General Elizabeth Prelogar wrote in court papers.

The challengers argued in court filings that the funding scheme is unlawful under the Constitution’s Appropriations Clause, which states: “No money shall be drawn from the treasury, but in consequence of appropriations made by law.”

They cite the fact that the CFPB director gets to determine the amount of funding and that there is no expiration date, meaning the agency is funded in perpetuity.

When Congress created the CFPB, its intent was to allow the agency “to operate free of any political accountability, including fiscal oversight,” wrote Noel Francisco, who was solicitor general during the Trump administration and is now representing the plaintiffs.

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“This case is about checks and balances,” he added.

The CFPB has faced various legal challenges in the past, with the Supreme Court ruling in 2020 that a separate provision that protected the agency’s single director from removal by the president at any time during the five-year term of office was unconstitutional.

Lawrence Hurley

Lawrence Hurley covers the Supreme Court for NBC News.