The Supreme Court is set to hear oral arguments on Tuesday in a landmark case that could invalidate the most powerful federal administrative agency ever established.
The case, Consumer Financial Protection Bureau v. Community Financial Services Association of America, is an appeal of the Fifth Circuit’s unanimous ruling, which found that the CFPB’s use of the Federal Reserve System to fund its operations violates the Constitution’s separation of powers.
In its opinion, the Fifth Circuit declared that the agency’s “perpetual insulation from Congress’ appropriation power, including the express exemption from congressional review of its funding, renders” it unaccountable “to Congress and, ultimately, to the people.”
Enacted as part of the 2010 Dodd-Frank Act, the bureau assumed control of 18 existing federal statutes and was granted unprecedented regulatory enforcement powers. These powers include the authority to conduct investigations, initiate administrative proceedings, and litigate civil actions in its own name, with the potential for civil penalties reaching $1 million per day of violation.
The bureau’s director, appointed by the president, can only be removed for cause, and the Federal Reserve must provide funding that the director deems “reasonably necessary to carry out” the bureau’s responsibilities, up to 12% of the Fed’s operating expenses.
Ever since its establishment, the CFPB and its broad powers have been a source of controversy. To date, the agency has taken more than 300 actions against American companies, many of which have negatively impacted consumers. It has also made it difficult for individuals to obtain small short-term loans and has attempted to ban arbitration agreements, despite the Treasury Department’s warning that doing so would impose significant costs.
The CFPB has even extended the anti-discrimination provisions of the Equal Credit Opportunity Act to companies that do not provide credit, expanding its reach beyond its intended scope.
In 2020, Chief Justice John Roberts, writing for a 5-4 majority in Seila Law v. CFPB, declared the director’s insulated tenure unconstitutional and imposed an “at will” standard, allowing the president to dismiss the agency’s chief. Though the issue of funding was not addressed in that case, Roberts highlighted the CFPB’s role as a “mini legislature, prosecutor, and court,” emphasizing its lack of historical basis and constitutional structure.
Justices Clarence Thomas and Neil Gorsuch expressed concerns about independent agencies and their potential threat to individual liberty and the separation of powers. Since their dissent, Justice Amy Coney Barrett has joined the court, potentially leading to a stricter opinion in the upcoming case.
The Supreme Court agreed to hear the CFPB’s appeal in February, but in March, the Second Circuit issued its own unanimous ruling affirming the bureau’s funding mechanism. The panel deemed that Congress’ inclusion of the funding mechanism in Dodd-Frank satisfied the Constitution’s requirement for appropriations. However, the precedent set by granting such extensive enforcement authority to an independent agency funded outside of the appropriations process warrants reconsideration.
The timing of the oral arguments is significant, suggesting that the court may reach a decision quickly. Typically, the court votes on the Wednesday or Friday following oral arguments, potentially issuing a final opinion before the end of the year. If the court declares the funding mechanism unconstitutional, it could also delay the imposition of the ruling, giving Congress time until 2024 to develop an alternative solution.
Addressing the issue is necessary, as the CFPB wields more power than any other agency in the history of the United States, with significant potential for abuse of authority.
Thomas M. Boyd, appointed by President Ronald Reagan, is a former assistant attorney general.
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