Supreme Court Skeptical in That Could Hobble Consumer Watchdog

A majority of the justices at a Supreme Court argument on Tuesday seemed ready to reject a challenge to the constitutionality of the Consumer Financial Protection Bureau, the agency set up during the Obama administration to crack down on abuses by banks and other financial services providers.

The justices appeared unpersuaded by the argument against the bureau’s constitutionality, instead signaling that they believed the way the bureau is funded is authorized by the Constitution and has deep historical roots.

At stake is not just the continued functioning of the agency, which has been the target of lawsuits from business groups since its establishment, but also every regulation and enforcement action it has taken in the dozen years of its existence.

There was little talk in the arguments of what would happen if the funding mechanism were to be rejected, which was an indication that it was likely to survive.

Noel J. Francisco, a lawyer for the challengers, faced a barrage of questions about the implications of his position.

“We’re all struggling to figure out what the standard is that you would use,” Justice Amy Coney Barrett said.

Justice Sonia Sotomayor said, “I’m trying to understand your argument, but I’m at a total loss.”

Justice Elena Kagan told Mr. Francisco that he was “just flying in the face of 250 years of history.”

The central question in the case is whether the way Congress chose to fund the agency violated the Appropriations Clause of the Constitution, which says that “no money shall be drawn from the Treasury, but in consequence of appropriations made by law.”

A unanimous three-judge panel of the U.S. Court of Appeals for the Fifth Circuit, in New Orleans, ruled last year that the bureau’s funding mechanism ran afoul of that clause.

“Wherever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it,” Judge Cory T. Wilson wrote in an opinion joined by Judges Don R. Willett and Kurt D. Engelhardt in the ruling. President Donald J. Trump appointed all three judges on the panel.

The bureau was created as part of the 2010 Dodd-Frank Act after the 2008 financial crisis and is funded by the Federal Reserve System, in an amount determined by the bureau so long as it does not exceed 12 percent of the system’s operating expenses. In the 2022 fiscal year, the agency requested and received $641.5 million of the $734 million available.

“This is a rounding error in the federal budget,” Justice Kagan said.

The Fifth Circuit’s decision was at odds with ones from other courts. In 2018, for instance, the District of Columbia Circuit said there was nothing unusual about the funding mechanism.

In a Supreme Court brief, Solicitor General Elizabeth B. Prelogar wrote that “no other court has ever held that Congress violated the Appropriations Clause by passing a statute authorizing spending.”

“Nor,” she added, “has a court previously approved a similarly sweeping theory of retrospective relief, which threatens profound disruption by calling into question virtually every action the C.F.P.B. has taken in the 12 years since its creation.”

A decision against the bureau could imperil other agencies and programs funded in broadly similar ways, including the Federal Reserve, the Federal Deposit Insurance Corporation, Medicare and Social Security. Indeed, prominent lawyers and the C.F.P.B.’s supporters have warned that such a ruling could force a reckoning over the Fed’s own setup.

The Fed does not receive an annual appropriation from Congress. It instead raises money from fees paid by banks and earnings on its security holdings. That structure is meant to make it more independent, since lawmakers cannot threaten to choke off its annual flow of cash because they do not like its regulatory or monetary policies.

Senator Elizabeth Warren, Democrat of Massachusetts, was a key architect of the C.F.P.B. when it was being set up. She warned in a speech last week that the Supreme Court decision could undermine the Fed’s funding system and cause its independence to “evaporate.”

Still, other lawyers have suggested that the Supreme Court could draw a distinction between the way the C.F.P.B. is funded — by requesting money from another agency that is also insulated from Congress — and the way the Fed raises money to pay for its operations. The Fifth Circuit suggested that the bureau’s “double insulation from Congress’s purse strings” was unique.

Mr. Francisco, the challengers’ lawyer, said the bureau was “the most independent agency in American history.”

That was no longer the case, Justice Brett M. Kavanaugh responded, referring to a 2020 Supreme Court decision. “Now it’s not independent at all,” he said.

In the 2020 ruling, the court ruled that a different part of the 2010 law creating the C.F.P.B. was unconstitutional, saying that Congress could not insulate the bureau’s director from presidential oversight given the scope of the job’s authority.

“The director has the sole responsibility to administer 19 separate consumer-protection statutes that cover everything from credit cards and car payments to mortgages and student loans,” Chief Justice John G. Roberts Jr. wrote for the majority.

He mentioned the bureau’s funding in passing, noting that its budget had exceeded half a billion dollars in recent years.

“Unlike most other agencies,” the chief justice wrote, “the C.F.P.B. does not rely on the annual appropriations process for funding. Instead, the C.F.P.B. receives funding directly from the Federal Reserve, which is itself funded outside the appropriations process through bank assessments.”

The case, Consumer Financial Protection Bureau v. Community Financial Services Association of America, No. 22-448, was brought by two trade groups representing payday lenders.

They challenged a regulation limiting the number of times lenders can try to withdraw funds from borrowers’ bank accounts. The Fifth Circuit struck down the regulation, saying it was “wholly drawn through the agency’s unconstitutional funding scheme.”

Ms. Prelogar said that was “profoundly disruptive.” She pointed to a brief filed on behalf of the Mortgage Bankers Association, for instance, that warned about what it called “the potentially catastrophic consequences” of a decision raising doubts about “current C.F.P.B. regulations, including those governing the real-estate financing industry, which could lead to immediate and intense disruption to the housing market, harming both consumers and the broader economy.”

Jeanna Smialek contributed reporting.