Author: Venus Dhanda, Graphics: Anna Szymoniak
The BRB Bottomline: The Consumer Financial Protection Bureau (CFPB), established in 2010, has worked to regulate U.S. markets for over a decade, protecting consumers from risky and predatory lending practices. The Community Financial Association (CFSA), fighting for forms of financial regulation, has taken issue with the CFPB and its place in the economic landscape of the country. Mutual animosity has left the two organizations in front of the Supreme Court with the verdict determining the constitutionality of the CFPB’s structure. Who will SCOTUS side with: corporations or the people?
As the watchdog of the financial world, the Consumer Financial Protection Bureau (CFPB) stands driven by a singular purpose – to safeguard consumers from the deceptive services and unscrupulous tactics of financial tycoons that once ran rampant. Through methodic market regulation practices, the CFPB promises a brighter and fairer future for the working class.
Born from the economic turmoil and growing distrust of the U.S. government after the Great Recession of 2008, the CFPB was developed by President Barack Obama to protect consumers from unfair, deceptive, and/or abusive financial practices and to enforce federal consumer financial law and transparency within markets.
However, the CFPB has also managed to make enemies as private agencies and corporations seeking to boost profits, often at the expense of consumers, are obstructed from blatantly exploitative practices. The Community Financial Services Association of America (CFSA) took the CFPB to court to challenge an act issued by the CFPB in 2017 that intended to protect consumers from predatory lending practices by restricting lenders’ access to borrowers’ accounts. Since then, the case has traveled through both a Texas district court and the U.S. Court of Appeals before finally reaching the Supreme Court this past October. Although still pending, this case has the power to drastically change the economic landscape of America as it unfolds right before our eyes.
The Two Sides
Obama and the CFPB
By July of 2008, the Great Recession had begun. While many believe federally insured loans given by the Federal Housing Administration to be the foundation of the 2008 recession, the root cause was actually a combination of predatory private mortgage lending and unregulated markets.
During the early 2000s, mortgage lending surged dramatically as Wall Street demanded more mortgages, regardless of their quality. Many of these mortgages were subprime predatory loans, often to low-income borrowers who lenders knew could not make all the payments, resulting in excessive fines for the borrowers. This unregulated mortgage lending led to an endless cycle of late payments, increasing debt, and a decline in the value of mortgage-backed securities. These exploitative practices ran rampant through a market with minimal government oversight, and the Great Recession followed.
In July 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) into law as a response to these devious tactics and lack of government presence in the economic landscape of America. Dodd-Frank was a monumental change to past federal policy (or lack thereof) relating to government regulation of the economic marketplace. In this act, President Obama created the CFPB to “[look] out for people – not big banks, not lenders, not investment houses – looking out for people as they interact with the financial system,” a move initially met with opposition by neoliberal opponents seeking a more decentralized government and a freer market. Over the years, the CFPB has imposed civil money penalties on companies and individuals that violate the law and has put money back in the pockets of Americans via monetary compensation, principal reductions, and canceled debts, proving its worth as a guardian of citizens.
Who is CFSA?
The CFSA is a trade association representing major national and international corporations and independent lenders. Their mission is “to promote laws and regulations that protect consumers while preserving access to credit options and to support and encourage responsible practices within the short-term loan industry” for a less regulated marketplace that should focus on supporting the liberties of both individual lenders and consumers. The CFSA advocates for policies at the state and federal levels that promote expanding the freedoms and rights of their member companies and their customers. This includes lobbying efforts for the regulation of payday and small-credit loans, to maintain or expand the legal framework for smaller lending, and for legal representation for lending companies facing regulatory challenges or legal issues. The association also sponsors and conducts research studies to provide data and information supporting the lending industry, particularly small-dollar loans and lenders.
Breaking Down the Case
As a representative of lenders, the CFSA’s desire for less government intervention in the economy goes against the mission of the CFPB to regulate the market to protect consumers.
The long history between the CFSA and the CFPB is the fuel behind the CFSA’s aggression in this case. CFSA board member companies and their affiliated subsidiaries have paid over $204 million in fines and restitution to federal and state regulators and at least $3.4 million in settlements from class action lawsuits against them.
People vs. Corporations
In late 2017, the CFPB adopted a rule that banned lenders from making more than two attempts to withdraw funds from a borrower’s bank account if there were insufficient funds. Before the implementation of this rule, some lenders would continuously attempt to get their money back by making multiple withdrawals from a borrower’s bank account, even after encountering insufficient funds in the borrower’s account. This led to additional fees, penalties, and even account closure for the borrowers. The CFPB describes how “many people who take out these loans end up repeatedly paying expensive charges to roll over or refinance the same debt,” beginning a horrific cycle of taking on increasing amounts of debt for borrowers, many of whom are low-income and unable to pay the loan off itself. This rule aligned directly with the CFPB’s mission of protecting consumers from predatory financial practices and institutions, which, in this case, were the predatory lending practices that specifically targeted low-income borrowers whom lenders knew would not be able to make sufficient payments.
The CFSA was fervently against this ruling, claiming that the Bureau’s rule failed to properly prove the danger of small-dollar loans and relied on flawed information while ignoring unbiased data that demonstrated the benefit of small-credit lending practices. But, most importantly, the CFSA feared that the ruling gave too much power to the CFPB at the expense of the liberties of independent lenders, harmed the lower-class Americans, and opened the door to over-involvement in the economy by the government, calling the CFPB’s power “a legitimate threat to liberty.”
The case was originally heard in a Texas district court after being filed in 2018 by the CFSA, and the court sided with the CFPB, claiming their structure was an exception to the Appropriations Clause. The CFSA then appealed to the higher courts, and, in October 2022, the famously conservative Fifth Circuit Court of Appeals sided with the CFSA. However, Judge Cory Wilson, who authored the Fifth Circuit decision on this case that ruled against the CFPB, took at least $10,500 in campaign contributions from banks regulated by the CFPB during his time as a Republican member of the Mississippi State House, leading many to distrust the Fifth Circuit Court’s ruling. The CFPB appealed the Fifth Circuit’s ruling in November 2022 with a writ of certiorari to the Supreme Court, and, in February 2023, the Supreme Court agreed to hear the appeal. Oral arguments were heard on Tuesday, October 3rd, 2023, and we await the decision of the Supreme Court of the United States.
The Question
The case hinges on the constitutionality of the CFPB’s funding structure by the Constitution’s Appropriation Clause, and ultimately, the constitutionality of the bureau itself.
The case presented to the Supreme Court, put forward by the CFPB, questions whether the Court of Appeals for the Fifth Circuit erred in holding that the statute providing funding to the Consumer Financial Protection Bureau (CFPB) violates the Appropriations Clause, U.S. Const. Art. I,§ 9, Cl. 7.
Congress has been given the power of the purse by the Constitution, giving it primary authority to appropriate funds for government agencies and programs. Traditionally, Congress pulls money from the Federal Reserve that was set aside by the national budget, and they allocate funding for various government operations through a process known as the congressional appropriations process. The Appropriations Clause reads, “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time,” establishing that no government agency or program can withdraw funds directly from the Treasury unless specifically passed in law. The purpose of this clause was to ensure that no government agencies gained too much control over the Treasury, strengthening the system of checks and balances in the federal government.
The CFPB primarily gets its funding from the Federal Reserve System, not directly from congressional appropriations. The funding is a fixed percentage of the Federal Reserve System’s annual operating budget, which is determined by law. This setup allows the CFPB to have a degree of financial independence and insulation from the regular congressional appropriations process to safeguard the CFPB’s ability to carry out its consumer protection mandate without being subject to potential political pressures that might arise from the standard congressional budgetary process.
However, the CFSA argues that the CFPB’s funding structure “subverts the Appropriations Clause’s text and structure, has no basis in history or tradition, and is not susceptible to any limiting principle,” something they have been fighting to assert for years. They claim the CFPB’s funding structure is unconstitutional because it does not receive its funding through a congressional appropriation, violating the Appropriations Clause. They argue that, for the CFPB’s funding structure to be constitutional, Congress must set the actual amount of an agency’s appropriation and that appropriation must have a set duration. Therefore, in the eyes of the CFSA, the CFPB and its rulings are unconstitutional and invalid.
What this means for America
The Supreme Court siding with the CFPB and validating their funding structure would be a win for the people of the U.S. The CFPB is organized around protecting the people of America against money-hungry financial institutions and their predatory lending practices that seek to profit at the expense of these people, many of whom are low-income and lack financial literacy. The government has failed over and over again in providing the public with adequate economic resources and aid, and this case is their opportunity to reverse that history. Siding with a government agency dedicated to protecting the people against the interests of wealthy corporations would uphold the work they’ve completed in protecting consumers and prove that the government works in the interests of the people.
If the Supreme Court sides with the CFSA and reduces the power of the CFPB, this conservative decision will impede government regulation and intervention in the economic marketplace and leave the public defenseless and vulnerable to abuse. Reducing the scope of the CFPB in this manner puts consumers in danger as they are left vulnerable to the tricky practices of exploitative lenders and corporations without the government to aid them.
Prioritizing the needs of the wealthy and powerful is nothing new to the U.S. government. Recent scandals related to wealthy benefactors swaying the opinions of Supreme Court justices with undisclosed donations and luxury trips have forced the Court to introduce an ethics code to regulate the behavior of these justices and ensure fair rulings. For example, Justice Clarence Thomas had twice attended an event for donors organized by a wealthy conservative political network, causing many to question his impartiality in case rulings. Striking down the CFPB and letting lenders continue scamming consumers in this way only serves to widen the divide between the wealthy and the poor and sets up already disadvantaged populations for failure.
As we await the Supreme Court’s decision on the case of Consumer Financial Protection Bureau v. Community Financial Services Association of America, let us question who the government truly works for: the people of America or the money?
Take-Home Points
- The Consumer Financial Protection Bureau (CFPB) was established post-2008 recession to protect consumers from financial exploitation, aiming to enforce federal consumer financial laws and ensure transparent markets, challenging exploitative practices.
- The Community Financial Services Association of America (CFSA), representing lenders, opposed the CFPB’s regulations in a 2017 act restricting the actions of lenders, leading to a pending Supreme Court case.
- The pending Supreme Court case questions the CFPB’s funding structure’s constitutionality under the Appropriations Clause, pivoting on whether the CFPB’s funding independence violates Congress’s power to appropriate funds.
- A Supreme Court decision favoring the CFPB would reinforce consumer protection efforts, while a ruling in favor of the CFSA could limit government regulation in the financial sector, exposing consumers to exploitative lending practices.