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Supreme Court May Defund Consumer Financial Protection Bureau—Why Experts Warn Of ‘Chaos’ If That Happens




The Supreme Court heard oral arguments Tuesday in a case concerning the constitutionality of the Consumer Financial Protection Bureau (CFPB)—which groups have warned could have devastating impacts on the economy and consumers, particularly the mortgage market, if the high court rules in challengers’ favor.

Key Facts

The CFPB was established in 2010 through the Dodd-Frank Act after the 2008 financial crisis and is funded through the Federal Reserve, and its function as an agency is to protect consumers and regulate financial products and services to prevent any “unlawful, unfair, deceptive, or abusive acts or practices,” according to the law.

In the case before the court, CFPB v. Community Financial Services Association of America, industry groups representing payday lenders are taking aim at the agency, arguing that it’s unconstitutionally funded because the funding comes from the Federal Reserve and is not appropriated annually via Congress.


If the Supreme Court rules CFPB’s funding structure is unconstitutional and issues a broad ruling that defunds the agency and revokes its powers as a result, it could have wide-reaching economic consequences, groups have warned in amicus briefs filed with the court.

Groups representing mortgage bankers, home builders and realtors argued “the housing market could descend into chaos” if lenders and borrowers are left without the guidance CFPB has typically provided, with the uncertainty and a likely flood of litigation leading to “severe instability, liquidity issues, and operational problems in the mortgage market”—and those issues could extend to other sectors of the housing market, which the groups note collectively make up 17% of the U.S.’s gross domestic product.

Financial scholars from Georgetown Law and Boston College wrote defunding CFPB would cause “regulatory chaos [that]

would stifle credit markets, destabilize banks, and likely throw the economy into recession,” as lenders would likely restrict who they issue loans to in the wake of losing protections afforded by the CFPB, which would also hurt secondary credit markets.

A group of community development credit unions and financial institutions warned a ruling against CFPB “would have far-reaching effects,” hurting small financial institutions by letting bigger financial institutions operate without the oversight CFPB provided and affecting consumers by shutting down a complaint system that received 900,000 complaints in 2022 alone.



Not all parties have been so pessimistic about the impacts of a ruling against the CFPB. Attorneys general from 27 states, led by West Virginia, argued even if the court rules against the agency, “If the CFPB is as critical to the financial system as its supporters suggest, then Congress can restore its funding quickly.” The states also downplayed the financial impact such a ruling could have, arguing “states and other federal financial regulators have experience protecting consumers in financial markets” and “can stand in the breach” to prevent financial chaos until a different plan to fund the agency passes. The U.S. Chamber of Commerce also argued against the agency’s funding structure, but said the court should issue “targeted but meaningful relief”—rather than a sweeping ruling that could destabilize financial systems—which it believes would not harm the economy or have broader impacts on its regulations, but would “ultimately leave the CFPB better than this Court found it.”

What To Watch For

Oral arguments took place in the case Tuesday, but it’s still unclear when the court will issue its ruling. It will likely take at least a few months for the court to decide the case, and any opinions will be issued before the court’s term wraps up in June 2024.


In addition to its potential economic impacts, the federal government has also warned a ruling against the CFPB could threaten the funding of other federal agencies that are also not funded through traditional annual appropriations by Congress, such as the U.S. Postal Service, Social Security, Federal Reserve and U.S. Citizenship and Immigration Services. “The CFPB’s funding mechanism is entirely consistent with the text of the Appropriations Clause [of the Constitution], with longstanding practice, and with this Court’s precedent,” the Biden Administration argued in its petition to the court. Challengers have argued that the CFPB is unique in how it’s funded by the Federal Reserve, so they don’t believe a ruling against the CFPB should threaten other agencies.

Surprising Fact

Military and veterans groups argued to the court that a ruling against CFPB would also have an impact on military readiness, as members of the military and their families are often subject to deceptive or unfair lending practices that the agency is meant to combat. Defunding CFPB and undermining protections for servicemembers could “increase distractions for troops on the battlefield and diminish morale,” the groups argued, and it could “[exacerbate] financial problems that lead to the revocation or denial of security clearances.”

Key Background

Groups representing payday lenders first went to court against the CFPB in 2018, taking aim primarily against a regulation the agency enacted that imposed certain restrictions on payday lending companies. The rule barred companies from issuing loans “without reasonably determining that the borrowers will have the ability to repay the loans according to their terms,” and prohibited them from repeatedly trying to draw funds from borrowers’ bank accounts if their initial requests got rejected due to lack of funds. A district court then shot down their argument and ruled in favor of the CFPB. The challengers went to federal appeals court, which ruled in October 2022 that the payday lending rule was constitutional, but struck down the CFPB’s funding more broadly, which was a side argument in the groups’ case. The 5th Circuit Court of Appeals, known for its conservative tilt, found the CFPB’s funding violated the Appropriations Clause of the Constitution, which states, “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” Congress just ceding authority to the Federal Reserve to fund the CFPB, rather than funding it itself through appropriations bills, violates that clause, the 5th Circuit ruled, leading the Biden Administration to take the case to the Supreme Court to overturn the ruling. The case is not the first time the high court has heard a challenge to the CFPB’s power, coming after justices ruled in 2020 that restrictions that prevented the removal of the agency’s director were unconstitutional.

Further Reading

Consumer watchdog is in the crosshairs as Supreme Court weighs legal challenge (NBC News)


Consumer watchdog funding fight goes before justices (SCOTUSblog)

Consumer Financial Protection Bureau on trial (Harvard Law Today)

Source: Fox Business

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