Federal Reserve, CFPB, FDIC Threatened by Supreme Court Case

The Fifth Circuit Court of Appeals ruled against the CFPB last October.

In late February, the Supreme Court agreed to hear a case which could have sweeping effects on the personal finances of millions of Americans. The case challenges the constitutionality of the way a variety of governmental agencies are funded, including some of the biggest regulators in the financial services industry.

What agencies could be affected?

A variety of different government agencies may be implicated by the case. The list is broad, but represents bulwarks of the American banking and lending industry.

If the ruling holds, it will be a blow against the Federal Reserve and the agencies which the Federal Reserve funds, including the Consumer Financial Protection Bureau (CFPB). Other key players in domestic financial markets, including the U.S. Mint and Federal Deposit Insurance Corporation (FDIC), would also be affected. The ruling would extend beyond financial services, and would also include the U.S. Postal Service.

The common thread between each of these organizations is how they are funded. While most governmental organizations are funded directly by Congress, those listed above are funded through different measures. For example, the Federal Reserve is not funded by Congressional appropriations, but by bank fees. The case against the CFPB questions whether this arrangement, and the agencies that are funded in such a way, are constitutional.

What does the case argue?

The case, originally brought against the Consumer Financial Protection Bureau by a group of lenders in Texas, challenges how the agency is funded, and by extension its power to regulate the financial services industry. A ruling in favor of the lenders, however, would have wide-reaching implications for a handful of government agencies.

The crux of the case is this: according to the separation of powers doctrine outlined in the Constitution, Congress has the sole power to fund governmental agencies. The Consumer Financial Protection Bureau is funded by the Federal Reserve, which is itself funded by bank fees, not direct appropriations by Congress. Therefore, argue the plaintiffs, the CFPB and its regulations, are unconstitutional.

The Fifth Circuit judges ultimately ruled in favor of the plaintiffs. The ruling of the judges found that, despite being authorized by and submitting to annual audits by Congress, the CFPB was operating in a way that conflicted with the Constitution. The upcoming Supreme Court ruling is the result of an appeal by the CFPB.

What will happen if the case succeeds?

The Supreme Court case is tied to larger political undercurrents. The opportunity to curb some of the powers afforded to the Executive Branch, such as creating and funding agencies, may be a tempting offer for political conservatives. The Fifth Circuit ruling was delivered by three Trump-appointed judges, and the conservative-leaning Supreme Court will have the final say.

What will happen should the Supreme Court rule against the CFPB is difficult to predict. A restructuring of the methods of funding the Fed, CFPB, and FDIC will likely put the future of these organizations in the politically volatile hands of Congress. In the case of the CFPB, it is a near certainty that lobbying groups will court lawmakers in exchange for less-stringent consumer finance regulations. The mission of the CFPB to "protect consumers from unfair, deceptive, or abusive practices" would then be in jeopardy.

How the case will proceed, and the lasting consequences of a verdict against the CFPB, are uncertain. The Supreme Court will likely not reach a verdict until 2024, leaving many Americans to wonder about the future of consumer-protection regulation.