Supreme Court sounds skeptical of lenders’ challenge to Consumer Financial Protection Bureau

The Supreme Court gave a skeptical hearing Tuesday to payday lenders who are challenging the constitutionality of the Consumer Financial Protection Bureau.

Most of the justices — conservatives as well as liberals — suggested they were not ready to strike down the bureau, created during the Obama administration, simply because it is funded with fees from the Federal Reserve rather than an annual appropriation.

U.S. Solicitor Gen. Elizabeth Prelogar in effect used an “originalist” argument based on the history and text of the Constitution.

From the nation’s founding, she said, Congress created agencies such as the Customs Service, the National Mint, the Post Office and the Patent Office that were funded by fees — not an annual appropriation.

In 2010, when Congress created the consumer agency to protect borrowers from deceptive loans, it decided to fund the agency through fees collected by the Federal Reserve.

“The CFPB’s appropriation fits squarely within this unbroken line of historical practice,” she told the court.

Earlier this year, however, the conservative 5th Circuit Court of Appeals ruled the agency was unconstitutional because Congress had failed to set an appropriation.

But Prelogar argued this has never been a constitutional rule, and most of the justices agreed.

Justice Elena Kagan said the 5th Circuit’s argument “has been decisively rejected by history. ... You are flying in the face of 250 years of history,” she told Washington attorney Noel Francisco who represented the payday lenders.

The justices also rejected Francisco’s claim that the bureau’s funding is “perpetual” and unchecked by Congress.

“Congress could change this tomorrow. There’s nothing perpetual or permanent about this,” said Justice Brett M. Kavanaugh.

During the two hours of argument, only Justices Samuel A. Alito Jr. and Neil M. Gorsuch sounded as though they may vote to strike down the agency.

In recent weeks, progressives and liberals had sounded an alarm and voiced concern that the conservative Supreme Court was poised to abolish an agency that protected ordinary Americans and their finances. But that threat quickly faded.

“Today was a bad day for predatory payday lenders and the Wall Street lobby groups that lent their names to some very ridiculous claims,” said Elyse Hicks, consumer policy counsel at Americans for Financial Reform. “None of their legal arguments passed the red-face test, and even the questions from the conservative justices reflected that reality.”

The case heard Tuesday involves both a high-level dispute over the Constitution’s separation of powers and a practical and political divide over the agency.

The brainchild of Sen. Elizabeth Warren (D-Mass.) when she was a law professor, the bureau was the centerpiece of the 2010 Dodd-Frank overhaul of financial regulations and the first new federal agency since the early 1970s that was focused specifically on American consumers.

Its mission was to protect borrowers and consumers from deceptive and unfair practices by banks and mortgage lenders. It has returned more than $17.5 billion to wronged customers.

But it has been steadily opposed by much of the lending industry and by many Republicans who say the agency has too much unchecked power.

While Democrats tried to shield the agency from the politics of Washington, that shield caused problems in the courts.

Under the 2010 legislation, the bureau’s director could not be removed by the president for political reasons, and the bureau’s budget was off-limits to Congress’ annual process of appropriations. Instead, its funding comes from the Federal Reserve, which earns fees from lending. The bureau used $641 million of that money last year.

The Supreme Court’s conservatives had cast a skeptical eye on the bureau. Three years ago, the justices in a 5-4 decision rejected the independent status of the director and ruled that that person could be removed by the president for any reason, including political differences .

The current dispute began as a challenge to a proposed regulation of payday lenders.

In ruling for the lenders, the three judges of the 5th Circuit, all appointees of President Trump, said it violated the Constitution to shield the bureau from an annual fight over its appropriation.

Judge Cory Wilson said the “bureau’s perpetual insulation from Congress’ appropriations power, including the express exemption from congressional review of its funding, renders it ... no longer accountable to Congress and, ultimately, to the people.”

The 5th Circuit ruling, however, did not immediately affect the bureau’s funding or operations as the parties continue their legal fight.