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By Omar Mohammed
Reporter, Economy & Finance
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The U.S. Supreme Court on Tuesday balked at the assertion that the Consumer Financial Protection Bureau's (CFPB) funding mechanism was unconstitutional. Oral arguments commenced in a case that experts have said could upend key U.S. financial regulations instituted in the wake of the 2008 economic crisis, a former member of CFPB's consumer advisory board told Newsweek.
A group of lenders challenged CFPB's rule on payday lending, a regulation that prohibited banks from trying to withdraw funds from borrowers when they miss two consecutive payments. As part of the case, Consumer Financial Protection Bureau v. Community Financial Services Association, the group also included a procedural argument that suggested the way the agency was funded was unconstitutional.
Last year, the Fifth Circuit Court of Appeals agreed and ruled that since the budget for the CFPB passes through the Federal Reserve and is not appropriated directly from Congress, its funding mechanism was unconstitutional. CFPB disputed the characterization and called the ruling an error. In November, it asked the Supreme Court to adjudicate the case.
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Analysts said that should the justices decide the CFDB's funding is unconstitutional, it could lead to chaos in the mortgage and financial services industry.
The agency, which counts Senator Elizabeth Warren as one its biggest advocates, was formed in response to the housing and financial crisis of 2008. It has become a key cog in the regulation of the $19 trillion American mortgage sector. Its mission was to "promote the financial stability of the United States," according to the Dodd-Frank Act which established it.
Not buying the argument
Justices on Tuesday seemed skeptical that the funding violated the appropriations clause, experts said.
"The first thing that really jumped out at me is how the majority of the justices were not buying the respondent's argument," said Joann Needleman, a senior director at Clark Hill Public Strategies and a former member of CFPB's consumer advisory board. "I was very, very surprised that the conservatives did not jump into the CFPB to say why this was wrong."
Noel J. Francisco, the attorney representing the CFSA, argued that a lack of limits on the duration of the funding of about $600 million that the CFDB receives from the Fed (subject to inflation adjustments) and delegating authority to the executive branch agency to appropriate the funding was particularly problematic.
"If you can do that here, you can go agency by agency by agency and simply say, 'Spend whatever you think reasonably appropriate, as long as you don't hit $10 billion'," Francisco told the court.
The statement elicited frustration from Justice Sonia Sotomayor.
"I'm sorry. I'm trying to understand your argument, and I'm at a total loss," she said.
Congress at times has given agencies non-fixed amounts of cash to run their operations "including, from the very beginning in 1789, the Customs Service," added the justice, who was appointed by President Barack Obama. "So, I don't understand what you're saying."
Later in the hearing, Justice Clarence Thomas gave Francisco a chance to clarify.
"Mr. Francisco, just briefly, I'd like you to complete this sentence. Funding of the CFPB is—violates the Appropriations Clause because...?" Thomas asked.
"Because Congress has not determined the amount that this agency should be spending," Francisco responded. "Instead, it has delegated to the director the authority to pick his own appropriation, subject only to an upper limit that's so...high it's rarely meaningful."
Justice Brett M. Kavanaugh, an appointee of former President Donald Trump, seemed to suggest that Congress could intervene and amend how the agency operated whenever it saw fit, after Francisco suggested it was difficult to claw back power granted to the executive by Congress.
"Well, if a group ... if a member or a House of Congress tomorrow, if a majority of a House of Congress said we're not going to fund—pick your agency—unless we change the CFPB funding structure, they could do that," Kavanaugh said.
Solicitor General Elizabeth Prelogar said the CFDB's position is that there's historical precedent for the way in which the agency was funded. It was how regulators such as the Fed and the Federal Deposit Insurance Corp. receive their budgets, she argued.
"The CFPB's appropriation fits squarely within this unbroken line of historical practice," Prelogar told the court. "In fact, Congress exercised significantly more discretion and control over the bureau's funding by capping its annual appropriation in an amount that is far lower than many other agencies' budgets."
Needleman suggested that by laying out what the appropriations clause said and what Congress did, Prelogar illustrated why the body had the authority to structure CFDB's funding.
"You may not like it, but that might not be enough to overturn it unless there has been some gross separation of powers which respondents failed to prove," Prelogar told Newsweek, referring to Francisco.
Other legal experts said the CFSA struggled to make its case.
"It was a very bad day," for the CSFA, Elyse Hicks of the Americans for Financial Reform told reporters in a briefing after the hearing.
The justices are expected to rule on the case by spring of 2024.
"If you look at the law, the history and the facts, I think there should be a solid majority to uphold over 200 years of precedents," Christopher Peterson, the John J. Flynn Endowed professor of law at University of Utah, told reporters.
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