Supreme Court rebuffs challenge to consumer protection agency

WASHINGTON — The Supreme Court on Thursday rejected a business-backed challenge that could have scuttled the federal agency set up to protect consumers from shady financial services practices.

The court in a 7-2 vote ruled that the funding structure of the Consumer Financial Protection Bureau (CFPB), which allows the agency to be funded directly by the Federal Reserve, is constitutionally sound.

In doing so, the court rejected claims brought by two trade groups representing lenders, which argued that the agency had to be funded by annual appropriations approved by Congress.

President Joe Biden hailed the ruling, saying in a statement that it marked "an unmistakeable win for American consumers."

Sen. Elizabeth Warren, D-Mass., who proposed that the bureau be created and helped set it up, welcomed the decision in a celebratory appearance outside the Supreme Court building.

"This news is fabulous," she said. "When you have an agency that is this good at doing its job to protect consumers, then a lot of banks, a lot of payday lenders, a lot of Republicans, come after it and try to shut it down."

Conservative Justice Clarence Thomas authored the majority opinion, while fellow conservatives Justice Samuel Alito and Justice Neil Gorsuch dissented.

The court ruled that the funding structure, in which Congress does not directly appropriate funding, does not run afoul of the Constitution’s appropriations clause, which requires that “no money shall be drawn from the Treasury” without congressional approval.

“Although there may be other constitutional checks on Congress’ authority to create and fund an administrative agency, specifying the source and purpose is all the control the Appropriations Clause requires,” Thomas wrote.

The case is one of several on the docket in which the Supreme Court, often skeptical of broad federal agency power, could hobble government regulators. On this occasion, the court, which has a 6-3 conservative majority, held fire.

In dissent, Alito said the court had affirmed a novel funding structure that allows the agency to “bankroll its own agenda without any congressional control or oversight.”

More broadly, the ruling means that “there is apparently nothing wrong” with laws that allow executive branch agencies to be funded independently and with no expiration date, he added.

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

A federal judge ruled in favor of the bureau after it modified a regulation barring lenders from repeatedly seeking to withdraw loan repayments from consumers’ bank accounts if there are insufficient funds. The new rule has yet to take effect.

But the legal question before the Supreme Court rested on a subsequent decision by the New Orleans-based 5th U.S. Circuit Court of Appeals, which ruled in October 2022 that the bureau’s funding mechanism was unlawful.

That ruling by what is one of the most conservative appeals courts in the nation was an outlier that even the conservative-majority Supreme Court viewed as a step too far.

Chris Vergonis, a lawyer for the challengers, said the underlying regulation at issue is “legally flawed” and harms consumers who rely on short-term loans.

Beth Milito, executive director of the National Federation for Independent Business, a group representing small business-owners that backed the legal challenge, said the failure to weaken the agency “will ultimately leave small businesses with expensive penalties and burdensome inspections at the hands of the CFPB.”

Consumer advocates and financial services industry critics expressed relief about Thursday’s ruling.

“This decision removes a major threat to the agency’s work and reaffirms the independence that allows it to continue standing up for the public interest against abusive financial practices,” said Lisa Donner, executive director of Americans for Financial Reform Education Fund.

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 Biden administration argued that Congress “enacted a statute specifically organizing the CFPB to use a specified amount of funds from a specified source for a specified purpose,” which was sufficient to pass constitutional muster.

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

This article was originally published on NBCNews.com