The CFPB Goes to Court Tuesday. What's at Risk?

The Consumer Financial Protection Bureau (CFPB) and its opponents will make their oral arguments before the U.S. Supreme Court Tuesday in a case that credit unions said is a mere rearranging of its funding.

However, consumer advocates said a court ruling supporting the payday lenders who brought the suit will not only undercut the CFPB, but expose a wide swath of other agencies to similar attacks, including the NCUA.

Anyone listening to arguments Tuesday at 10 a.m. EST might want to pay special attention to how justices respond to arguments about “double insulation,” whether Congress violated the Constitution’s Appropriations Clause when it created the CFPB in 2010, and whether the Supreme Court would be violating the separation of powers by telling Congress how it must appropriate.

More on those issues below. First, some history.

Payday lenders filed the original case in 2018 challenging a CFPB rule. Some issues were later rendered moot and a director appointed by then-President Trump vacated some of the rule.

Also, the Supreme Court in another case (Seila Law) upheld one of the payday lenders’ arguments regarding the director’s insulation from being fired. After for-cause protection was removed, payday lenders filed an amended complaint in August 2020 that included an argument the CFPB was unconstitutional because it was not funded by an annual appropriation by Congress.

A district court dismissed the payday lenders’ suit, and they appealed to the U.S. Fifth Circuit, which has historically had a reputation as being among the most conservative in the nation. The Fifth Circuit, in part, reversed the lower court in October 2022. The CFPB asked the U.S. Supreme Court to review the case, and it agreed in February.

Congress created the CFPB though the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in the wake of the financial crisis and ensuing Great Recession triggered by the collapse of the securities backed by mortgages with lax underwriting.

Congress ordered that the CFPB be funded by a capped amount of the Federal Reserve System’s annual funds in a way that gave the Fed no control over its disbursement. In fiscal year 2022, the CFPB received $641.5 million of the $734 million allowed by the cap.

The Fed, like the NCUA and FDIC, is not funded through annual appropriations. Instead, Congress ordered the CFPB to be funded by fees and other revenues it collects.

Enter the Exposure of Credit Unions

Credit unions have long been critical of actions of the CFPB. CUNA and NAFCU chose to side with payday lenders and banks by filing a brief July 10 with the Supreme Court in support of the payday lenders’ case.

In doing so, they went further than the Mortgage Bankers Association (MBA), the National Association of Realtors and the National Association of Home Builders of the United States. Those groups filed a joint brief in May supporting neither side, but asking the court to keep the CFPB’s current rules intact. They wrote that questioning the validity of those rules might have “potentially catastrophic consequences.”

NAFCU and CUNA have also supported a bill in Congress that would require direct appropriations for the CFPB and make other changes to eliminate its independence.

At the same time, credit unions and their trade groups talk about “the credit union difference” with banks and other for-profit financial operators.

In an Aug. 28 call with reporters, Greg Mesack, NAFCU’s SVP of government affairs, mentioned the pattern of banks closing branches, while credit unions are expanding them, and Bank of America being ordered to repay customers $100 million for allegedly illegal junk fees, withholding credit card rewards and opening fake accounts.

“We are not-for-profit cooperatives and that’s why we’re tax exempt, because we’re focused on taking care of our members, not squeezing them for every penny possible,” Mesack said.

Those actions against Bank of America were taken by the CFPB in July.

CU Times asked Mesack about the irony of citing the Bank of America action after siding with payday lenders and banks in the case against the CFPB that might “undercut and defund the police so to speak.”

“If you read our brief, we don’t say we should get rid of the CFPB, we just say it should be structured in a constitutional manner,” Mesack said. “Nothing in our brief says the CFPB should go away. Nothing says it should be abolished. We just say it needs to be operated in a manner where there are appropriate checks and balances the constitution envisions for all members of government.”

CU Times asked: “Do you realistically expect you could have meaningful regulation in the current Congress without having some kind of independence from direct appropriations?”

Mesack: “The vast majority of government agencies are directly appropriated and they all write rules. The FTC, the EPA. There are tons of agencies out there with rule-making authority that are appropriated, and they’re doing their jobs. So we do believe with appropriate checks and balances the CFPB can be an effective way to protect consumers without creating unnecessary burdens for those who provide financial services, like credit unions.”

The Self-Help credit unions based in Durham, N.C., were the only credit unions to file a brief in support of the CFPB. The credit unions and their sister group, the Center for Responsible Lending, have argued that a ruling in support of the payday lenders would eviscerate the agency.

And consumer groups supporting the CFPB said the threat is broader and includes the NCUA.

Mesack said the number of agencies funded through direct appropriations is more than half, but more than half of federal spending dollars come from agencies Congress set up to operate outside of annual direct appropriations. Besides the Fed, the FDIC and NCUA, this would include Social Security and Medicare.

Payday lenders argued that their case only applies to the CFPB because its violation of the Appropriations Clause stems from its unique “double insulation” from congressional funding through its funding through the Fed, which is also not subject to direct annual appropriations.

Aziz Z. Huq, a law professor at the University of Chicago, said the “double insulation” concept comes from hiring schemes in which the president can’t fire someone directly. Instead that person can only be fired by another person, like their direct boss. If the boss is unwilling to fire that person, the president would have to fire the boss and hire a new boss willing to fire the subordinate.

Huq, in an interview with CU Times Wednesday, said the way payday lenders and the Fifth Circuit are using the “double insulation” concept is wrong for several reasons:

• The courts have ruled that “double insulation” is meaningless as a standard in firing and it has never before been used in the context of funding.
• Even if the concept were a standard, the CFPB facts don’t fit because the Fed is a mere “bank” used by Congress to park money that Congress said must be spent on the CFPB. There is no double.
• And if there’s no double, the CFPB is no different than the Fed or others funded by means other than a direct annual appropriation.

Huq said if the Supreme Court rules the CFPB’s funding is invalid, anything that’s not directly appropriated by Congress is invalid.

“If you strike down the CFPB, you’ve struck down the Federal Reserve funding,” he said. “The NCUA will be pocket change after that.”

“This is an interest group that wants a particular policy outcome that they cannot get through the democratic process. They are trying to use the courts to do it, and if they blow up the financial system, ‘Oh well, that’s just the cost of doing business,’” Huq said.

Robert S. Peck, president of the Center for Constitutional Litigation, said Sept. 15 he thinks the CFPB decision will be “very close.”

“I’m not willing to make a prediction because there is hostility on the court towards the CFPB, and at the same time there is a recognition that some of this kind of funding is necessary in some instances,” Peck said during a panel discussion at the Antonin Scalia Law School George Mason University.

FOR MORE: Link to the U.S. Supreme Court’s livestream of oral arguments.