Payday lenders are getting their asses kicked in Supreme Court battles against the CFPB

The case, which sought to defund the Consumer Financial Protection Bureau and invalidate all of its regulatory decisions, finally made its way to the Supreme Court for trial on Tuesday. And things didn’t go well for the payday lenders who filed the lawsuit.

Since its founding in 2010, the financial industry in general and payday lenders in particular have sought to destroy the agency tasked with protecting consumers from predatory financial practices. In Community Financial Services Association of America v. CFPB, short-term lenders focused on the agency’s funding mechanism as a means to overturn agency decisions that negatively impact the short-term lending industry.

The payday lenders filed this case in response to a CFPB Regulation prohibiting illegal withdrawals from bank accounts. But the ultimate goal is to defund the agency and repeal its regulatory actions, including billions of dollars in fines levied against payday lenders and other financial companies since its inception.

Payday lenders have already tried this in the case of 2020 Seila Law v. CFPB, as they questioned the constitutionality of the provision protecting the agency’s director from removal by the president. In that case, the court agreed by a 5-4 vote that isolating the director before firing him for cause was unconstitutional, but declined to invalidate all of the agency’s previous lawsuits. Now they are back again with a different constitutional argument to achieve the same goal.

When Congress created the CFPB, it subordinated it to the Federal Reserve and stated that it could draw funds of up to $600 million (subject to inflation adjustments) from the Federal Reserve’s Treasury, raised from payments from regional reserve banks . In this week’s case, payday lenders argue that Congress’s decision to fund the agency with non-annual funds from the Federal Reserve is unconstitutional under the Appropriations Clause of the Constitution and violates the separation of powers. The case went to trial after the Fifth Circuit Court of Appeals ruled that the agency’s funding was unconstitutional and all of its regulatory actions were invalid.

The problem, as the government and numerous justices have argued, is that this argument is at odds with Congress. History of funding agencies in a similar veinthe text of the Budget Clause of the Constitution and prior court precedents.

Payday lenders are hoping to overthrow the Consumer Financial Protection Bureau and overturn its regulations in Community Financial Services Association of America v. CFPB.
Payday lenders are hoping to overthrow the Consumer Financial Protection Bureau and overturn its regulations in Community Financial Services Association of America v. CFPB.

Bill Clark via Getty Images

When the nation was founded, Congress created agencies such as the Customs Service, the Post Office and Treasury that were funded through nonannual, permanent appropriations, much like the CFPB, Attorney General Elizabeth Prelogar, who represented the agency, argued in her defense report. Since then, she added, Congress has approved such funding arrangements hundreds of times, including for the entire federal financial regulatory system.

“The CFPB appropriations fit squarely into this unbroken line of congressional practice,” Prelogar said.

This history of congressional practice is because the Appropriations Clause does not state that Congress may fund agencies only through annual appropriations or with funding limited to certain levels. On the other hand, the constitution does To provide such direction for funding the Army and to note that the absence of a specific limit in the Appropriations Clause is intended to allow Congress to exercise its own judgment as to how funds should be appropriated.

Noel Francisco, the former attorney general under President Donald Trump and an attorney for payday lenders, disagreed, offering a shifting and convoluted argument claiming that the Appropriations Clause contained a hidden requirement that Congress not appropriate powers related to funding the executive must delegate – which would be a violation of the separation of powers doctrine. This purported requirement would prohibit Congress from providing an executive agency with unspecified amounts of “perpetual funding.”

But as the three liberal justices and even conservatives Brett Kavanaugh and Amy Coney Barrett pointed out: The Middle Clause contains no hidden language about separation of powers.

“They contradict 250 years of history,” said Justice Elena Kagan.

“I am completely at a loss,” Justice Sonia Sotomayor said, noting that Congress has always provided some agencies with permanent, non-annual funding. She added exasperatedly, “I don’t know what you want.”

Kagan noted that the argument that the Appropriations Clause limits Congress’ approval of permanent appropriations would have implications for many other existing and fairly important federal agencies.

“It certainly seems like the Federal Reserve would also be unconstitutional in your opinion,” Kagan said.

Judge Ketanji Brown Jackson repeatedly tried to get Francisco to clarify his argument and explain that the Appropriations Clause prohibits Congress from authorizing an agency with perpetual funding and setting a maximum amount because it violates the separation of powers.

“I understood that the purpose of the appropriations clause was to prevent the executive branch from taking money without the consent of the legislature,” Jackson said. Adding: “Is there something about the Appropriations Clause that directs Congress to check the executive branch? Don’t you have to have that?”

Francisco responded with a hypothesis he kept returning to: What if Congress authorized the executive branch to spend an unlimited amount on an agency? The appropriations clause couldn’t possibly authorize this?

But the clause contains no such restriction and this hypothetical case is not in court anyway, Jackson countered. She gave two scenarios as examples. First, the Constitution gives Congress power over the budget and requires it to set a fixed amount of appropriations, and second, the Constitution gives Congress the power “to decide how to finance departments of government.” The U.S. Constitution is represented in the second scenario, Jackson said.

“What’s the problem? It’s in the Constitution,” Jackson said.

Conservative Justice Amy Coney Barrett and liberal Justice Ketanji Brown Jackson both questioned payday lenders' argument that the CFPB's funding was unconstitutional.
Conservative Justice Amy Coney Barrett and liberal Justice Ketanji Brown Jackson both questioned payday lenders’ argument that the CFPB’s funding was unconstitutional.

Tom Williams via Getty Images

While the liberal justices destroyed Francisco’s arguments, his real problem lay with the conservative justices, who command a supermajority of six votes on the nine-member court. And at least two of them, Kavanaugh and Barrett, did not seem to accept his arguments.

During her questioning, Barrett adopted a similar tone to Jackson, noting that she was unable to reconcile Francisco’s argument with the text of the Constitution.

“There is nothing in the budget clause that dictates the limits you mentioned,” Barrett said.

Kavanaugh, meanwhile, adopted Francisco’s argument that Congress had abdicated its role in distributing money by providing permanent funding to the CFPB outside of the annual appropriations process.

“The word eternal I have trouble with,” Kavanaugh said. “It means it’s firmly anchored.”

But “Congress could change it tomorrow,” he added, noting that Congress always has the ability to pass a new law that changes the level of funding or the funding mechanism for the CFPB.

Meanwhile, Kavanaugh asked Prelogar whether she believed Congress could pass a bill to fund an agency and declare that no future Congress could change that agency’s funding.

“Yes, I agree with that understanding,” Prelogar replied. “It is wrong to describe current funds as eternal.”

“Congress could change it tomorrow?” Kavanaugh responded.

“Of course,” Prelogar said.

Conservative Justices Samuel Alito and Clarence Thomas both appeared most amenable to payday lenders’ arguments, as Alito tried to save Francisco when he lashed out at one point. The other two justices, Chief Justice John Roberts and Justice Neil Gorsuch, were less involved in the arguments and did not pressure either side to show how they might vote.

Related Articles

Back to top button