The US Supreme Court ruled in favor of the Consumer Financial Protection Bureau (CFPB) on Thursday, maintaining its current funding method. This decision is a win for President Joe Biden’s administration and a setback for the agency's conservative critics.
Court Decision
The 7-2 decision overturned a previous court ruling that said the CFPB’s funding method, which involves drawing money from the Federal Reserve instead of annual congressional budgets, violated the US Constitution’s rule that Congress controls government spending.
Justice Clarence Thomas explained that the CFPB’s funding method follows the Constitution because it is authorized by law to use public money for specific purposes.
Background of the CFPB
The CFPB was created in 2010 under President Barack Obama to combat predatory lending practices that contributed to the 2007-2009 financial crisis. Since its inception, the agency has provided $19 billion in relief to consumers, including a $3.7 billion settlement with Wells Fargo in 2022.
Reactions to the Ruling
President Biden praised the decision, calling it a clear win for American consumers. He emphasized that despite attacks from some Republicans and special interest groups, the Supreme Court confirmed that the CFPB’s funding is constitutional and that its consumer protection efforts will continue.
Conservatives and many Republicans have criticized the CFPB, claiming it has too much power and imposes unnecessary regulations on banks and lenders. Business groups like the Chamber of Commerce supported the payday lenders in this case.
The Lawsuit
Payday loans are short-term, high-interest loans usually due on the borrower’s next payday, often with an annual percentage rate of 390% or more (Source: Badger Loans).
The rates are high, but lenders often argue that the high costs are designed to cover the percentage of customers that do not repay their loans (around 30%) whilst offering a fast and unsecured product with no assets or collateral.
The payday loans industry is regulated, with legalized activity in 37 states. In 2018, payday loan industry groups sued the CFPB over a 2017 rule aimed at stopping lenders from repeatedly trying to withdraw payments from a borrower’s bank account after two failed attempts.
The lawsuit argued that the CFPB’s funding method was unconstitutional. While a federal judge initially sided with the CFPB, the Fifth Circuit Court of Appeals ruled in 2022 that the funding structure violated the appropriations clause. This ruling invalidated the 2017 regulation.
Implications
The Supreme Court’s conservative majority has often limited federal agencies’ powers in recent decisions. However, Biden’s administration warned that striking down the CFPB’s funding method could jeopardize other agencies with similar funding structures, like the Federal Deposit Insurance Corporation and the Federal Reserve Board.
Supporters of the CFPB argued that a ruling against the agency would expose consumers to harmful practices and undermine the agency’s existing regulations. The Supreme Court’s decision ensures that the CFPB can continue its mission to protect consumers without legal uncertainty.
