Supreme Court skeptical of CFPB case, which could add 'chaos' to US economy

WASHINGTON − The Supreme Court signaled Tuesday that it is skeptical of an effort by the payday lending industry to undermine the Consumer Financial Protection Bureau, a contentious agency created in the wake of the housing market collapse more than a decade ago that has been the target of conservatives ever since.

In a case that could have sweeping implications for the mortgage industry and the wider U.S. economy, trade groups representing payday lenders are challenging the way Congress funded the bureau. Instead of subjecting it to annual budget fights on Capitol Hill like most of the federal government, the CFPB is funded through the Federal Reserve − an effort to shield it from political pressure.

The Supreme Court's decision, expected next year, could have an impact on any American who holds a car loan, a mortgage or a credit card. The Mortgage Bankers Association warned that a broad ruling from the high court could send the housing market "into chaos, to the detriment of all mortgage borrowers."

The justices appeared to be sensitive to that warning during about 90 minutes of at times spirited arguments. Even some of the Supreme Court's conservatives voiced concern about the argument raised by the lenders that the arrangement violates the Constitution because, in their view, it's similar to a perpetual blank check.

"There's nothing permanent or perpetual about this," said Justice Brett Kavanaugh, a conservative whose vote could be pivotal. "Congress could change it tomorrow."

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Arguing for the Biden administration, U.S. Solicitor General Elizabeth Prelogar said the government had long relied on similar funding for independent agencies, including back to its founding. A ruling against the bureau, supporters say, could have dramatic spillover effects on some of those agencies, including the Federal Reserve itself and the FDIC.

"You're just flying in the face of 250 years of history," Justice Elena Kagan told the attorney for the lender.

But some of the court's conservative justices, led by Justice Samuel Alito, appeared to have reservations with the funding arrangement. What would stop a future Congress from giving up the "power of the purse" and handing a federal agency wide latitude to set its own budget, they asked.

Congress created the bureau in 2010 in part to enforce lending regulations. The agency is funded by the Federal Reserve, which gets its money from banking fees and other sources.

"It's pretty unusual to have that agency...being able to request however much it wants," subject to a cap, Roberts said. If that arrangement removes Congress' power to spend, he said, "it significantly enhances the power of the executive."

That was the main argument pressed by the attorney for the groups, Noel Francisco.

Before the case reached the Supreme Court, a three-judge panel of the Louisiana-based U.S. Court of Appeals for the 5th Circuit ruled that the agency acted within its power to create the regulation. But the appeals court ruled that the way Congress set up the agency’s funding violated the constitutional principle that only Congress has the power to initiate spending.

That ruling threatened not only the bureau's payday lending rule, but also its ability to function at all.

The Supreme Court has struck at the agency’s independence once before: Three years ago – amid a controversy during the Trump administration – the court made it easier for the president to remove the agency’s director.

What is the Consumer Financial Protection Bureau?

The brainchild of Sen. Elizabeth Warren, D-Mass., the bureau was created to act as an advocate for consumers when dealing with banks. Here are some of the regulations the bureau enforces:

• Payday loans. At the center of the case is a payday lending rule the bureau issued in 2017. The rule bars lenders from withdrawing payments from borrowers' bank accounts after two failed attempts. The extra withdrawal attempts, the agency said, would likely not help lenders recoup any money but instead saddle borrowers with overdraft fees. Payday lending groups sued over the agency's funding method.

• Mortgages and debt collectors. The AARP told the Supreme Court that the bureau, since its creation, has fielded more than 100,000 complaints from older Americans who are sometimes targeted for scams and unfair lending. The group pointed to a bureau rule that requires lender to assess a potential borrower's ability to repay a loan before issuing it. The group also called attention to a rule that bars debt collectors from calling a consumer more than seven times in a week.

• Military lending. Several military groups told the Supreme Court the bureau plays a key role in enforcing the Military Lending Act, a 2006 law that sets interest rate caps and other protections for active duty servicemembers. The groups said that members of the military are "prime targets for scams and deceptive products," in part because nearly half of enlisted servicemembers are less than 25 years old.

“We are confident in the constitutionality of the statute that created the CFPB within the Federal Reserve System and provides its funding," CFPB spokesperson Sam Gilford said in a statement after the arguments. "We will continue to carry out the vital work Congress has charged us to perform.”

Francisco said in a statement after the arguments that “the CFPB’s unique funding mechanism lacks any contemporary or historical precedent" and argued that it "unconstitutionally strips Congress of its power of the purse."

The case is Consumer Financial Protection Bureau v. Community Financial Services Association of America.

This article originally appeared on USA TODAY: Supreme Court seems skeptical of efforts to undermine CFPB