US Supreme Court appears wary in case targeting consumer financial watchdog

By John Kruzel and Andrew Chung

WASHINGTON (Reuters) -U.S. Supreme Court justices on Tuesday appeared skeptical of the payday lending industry’s challenge to the Consumer Financial Protection Bureau’s funding structure in a case that President Joe Biden’s administration has said imperils an agency set up to curb predatory lending after the 2008 global financial crisis.

The justices heard arguments in the administration’s appeal of a lower court’s ruling that the CFPB’s funding mechanism established when Congress passed Democratic-backed legislation in 2010 creating the agency violated a constitutional provision giving lawmakers the power of the purse. The agency, which enforces consumer financial laws, draws money each year from the U.S. Federal Reserve rather than budgets passed by Congress.

It was the first of several cases the justices are tackling during their new nine-month term, which began on Monday, that could curb the power of federal agencies.

Questions posed by the court’s three liberal justices and at least two of the six conservative justices – Brett Kavanaugh and Amy Coney Barrett – signaled doubt over the argument made by the challengers that the CFPB’s funding design is unconstitutional.

Kavanaugh pushed back against the assertion that the structure unlawfully lets the agency determine its own funding without a meaningful limit set by Congress.

“Congress could change it tomorrow. And there’s nothing perpetual or permanent or about this,” Kavanaugh said.

The court’s conservative majority has rolled back the power of federal agencies including the Environmental Protection Agency in important rulings in recent years. And some of the conservative justices on Tuesday echoed the industry concerns that the CFPB’s funding mechanism violated the U.S. Constitution’s “appropriations clause,” which vests spending authority in Congress.

Conservative Justice Clarence Thomas asked whether the agency’s setup “eviscerates the kind of exacting control that Congress usually exercises in the appropriations process.”

U.S. Solicitor General Elizabeth Prelogar, who argued on behalf of Biden’s administration, said the CFPB’s funding mechanism is lawful, just as Congress has used a “materially identical” structure for other financial regulators, including the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.

The liberal justices pressed the challengers – two payday lending trade groups – on the repercussions of deeming the CFPB’s funding structure unconstitutional.

“It sure seems that on your view, the Federal Reserve would also be unconstitutional,” liberal Justice Elena Kagan said.

The CFPB was established by legislation signed by Democratic former President Barack Obama to curb the type of predatory lending that contributed to the financial crisis. The agency has delivered $16 billion of relief to American consumers as a result of the agency’s 300-plus enforcement actions from 2012-22 including a $3.7 billion settlement last year with Wells Fargo.

The New Orleans-based 5th U.S. Circuit Court of Appeals last year ruled that the CFPB’s funding structure violated the “appropriations clause.” The 5th Circuit also invalidated a CFPB regulation opposed by payday lenders that stops lenders from trying to charge a borrower’s bank account after two unsuccessful attempts due to insufficient funds.

Many conservatives and their Republican allies have long opposed the CFPB, which critics see as part of an unwieldy “administrative state,” the network of administrative agencies responsible for the array of federal regulations that affect businesses and individuals.

The agency’s supporters have urged the justices to uphold the CFPB’s funding mechanism, saying that a ruling against the agency would leave consumers vulnerable to deceptive and abusive practices, and could place its existing rules on shaky legal ground.

A ruling is expected by the end of June.

(Reporting by John Kruzel and Andrew Chung; Editing by Will Dunham)