CFPB Supreme Court Case Draws Greater Attention as Threat to Federal Reserve
Other agencies, from FDIC to U.S. Postal Service also implicated

By Dustin Duong

The gravity of what will be a landmark Supreme Court case involving the funding of independent agencies has become increasingly apparent to observers of the judiciary. Numerous media reports have highlighted how the case, aimed at the Consumer Financial Protection Bureau, threatens to upend the funding for many federal agencies, above all the Federal Reserve.

“The Supreme Court agreed on Monday to take up a case that could threaten the existence of the Consumer Financial Protection Bureau and potentially the status of numerous other federal agencies, including the Federal Reserve,” wrote Nina Totenberg, the longtime Supreme Court reporter at NPR.

Included among them, Totenberg pointed out: the Federal Deposit Insurance Corp (FDIC), the U.S. Mint, which controls the production of coinage, and even the U.S. Postal Service. Indeed, the staid FDIC, guarantor of bank deposits, has chimed in with worries the ruling would undermine its work.

“The case poses a threat to an array of independent agencies, including potentially the Federal Reserve,” the Los Angeles Times observed.

CFPB v. CFSA

On Feb. 27, the Supreme Court agreed to hear CFPB v. CFSA, a case which has the potential to pull the rug out from under the CFPB, an agency devoted to fighting for consumers in the financial services marketplace. Affirming the decision would effectively kneecap the CFPB’s capacity to police the market and keep its largest offenders, including big banks who repeatedly break the law, in check. Since its inception, the agency has won $13.5 billion in relief for about 175 million consumers and dealt $1.8 billion in civil penalties.

Originally brought by the Community Financial Services Association (CFSA) of America, the suit attacks the independent funding of the CFPB. Last year the Fifth Circuit Court of Appeals declared the agency’s funding mechanism unconstitutional.

Funding of the CFPB, like other banking regulators, occurs outside of the annual congressional appropriations process, an approach that lawmakers have embraced for over a century. The CFPB instead draws a portion of the Federal Reserve’s funding, which is collected from member banks.

Playing Jenga

By agreeing to hear the Biden administration’s appeal of the  Fifth Circuit’s decision, the Supreme Court has accepted a “Challenge to Play Jenga with the Federal Budget,” to borrow from a headline in Esquire magazine.

Still, the threat to the CFPB is no small matter in itself. The Fifth Circuit ruling calls into question “every single rule, guidance and order that the CFPB has issued,” according to one prominent law firm. “The agency would be unable to do anything if the funding is invalidated. And prior rules could be challenged as the agency did not have a legal funding source that it could use to write those rules,” Cowen Washington Research Group analyst Jaret Seiberg wrote in a note to clients.

“The housing finance market is a delicate mechanism that requires certainty under the law to function properly,” said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School. “Court rulings that throw legal uncertainty into the mix endanger that mechanism.”

Indeed, the Mortgage Bankers Association warned in an earlier case involving the CFPB at the Supreme Court that a whiff of uncertainty about CFPB rules would “destabilize critical segments of the national economy,” especially housing finance. Its lobbyists have privately warned congressional offices in this case, with an eye toward Congress stepping in if the Supreme Court affirms the Fifth Circuit.

Even if the Supreme Court were to leave in place what the CFPB has already done – and it did a lot after the 2008 finance crisis to write sensible rules for mortgage lending – consumers will still face trouble, according to Manisha Padi, a professor of law at the University of California-Berkeley.

“Leaving regulations in place won’t matter much without a cop on the beat, as the CFPB has been dubbed,” Padi said. “You need an effective enforcer to ensure that the regulations are not mere suggestions but are implemented to the benefit of consumers.”

Attack on the Fed

Jordan Weissman, a journalist with Semafor tweeted the obvious on the day the Supreme Court agreed to take the case. “Question: If the way the CFPB is funded is potentially unconstitutional, why isn’t the way the Federal Reserve System funds itself unconstitutional?” An attack on the CFPB’s funding, in short, also represents an attack on the Federal Reserve and other regulatory bodies.

The Fed and the CFPB have funding streams outside the annual congressional appropriations process, a structure designed to give a measure of insulation from the politics of the moment, intended to allow them to make decisions in the broader public interest.

“If the CFPB’s budgetary autonomy falls, then the Fed’s should fall immediately thereafter and that would be catastrophic,” said Peter Conti-Brown, a noted expert on the Federal Reserve at the University of Pennsylvania’s Wharton School. “That would be the end of Fed independence because then anyone in the House of Representatives or the US Senate could hold the Fed hostage for any purpose or no purpose every single year.”

Congress Raising Alarm

Contrary to the Fifth Circuit ruling, the courts have long accepted that the Appropriations Clause of the Constitution gives Congress wide latitude on how it allocates funds. The Fifth Circuit, the most right-wing in the nation, created a legal theory designed to distinguish the CFPB from the Fed, an argument Conti-Brown called “incoherent.”

Members of Congress have also raised the alarm about the wider effects of the Fifth Circuit’s reasoning.

Sen. Elizabeth Warren, released a statement on the day that the Supreme Court took the case, stating: “If the Supreme Court follows more than a century of law and historical precedent, it will strike down the Fifth Circuit’s decision before it throws our financial markets and economy into chaos.”

Senator Mark Warner, a Democrat from Virginia and Chair of the Senate Select Committee on Intelligence, tweeted that the Fifth Circuit’s ruling could have disastrous consequences, saying “there will be financial chaos” and that transactions otherwise subject to CFPB “could grind to a halt.”

Closer on the heels of the Fifth Circuit’s ruling in October, Senator Jack Reed of Rhode Island warned that the decision might put the CFPB in the crosshairs, but just as soon catch the Fed in the crossfire.

As the fight churns on in a slow, but critical, burn ahead of the Supreme Court hearing the case in the fall, proponents of the CFPB continue to work to defend the agency from a wide corps of detractors and opponents. A decision will come in early 2024.