Loans

By John Kruzel and Andrew Chung

WASHINGTON, Oct 3 (Reuters) – U.S. Supreme Court justices on Tuesday appeared skeptical of the payday lending industry’s challenge to the Consumer Financial Protection Bureau’s funding structure in a case that President Joe Biden’s administration has said imperils an agency set up to curb predatory lending after the 2008 global financial crisis.

The justices heard arguments in the administration’s appeal of a lower court’s ruling that the CFPB’s funding mechanism, established when Congress passed Democratic-backed legislation in 2010 creating the agency, violated a constitutional provision giving lawmakers the power of the purse. The agency, which enforces consumer financial laws, draws money each year from the U.S. Federal Reserve rather than budgets passed by Congress.

It was the first of several cases the justices are tackling during their new nine-month term, which began on Monday, that could curb the power of federal agencies.

Questions posed by the court’s three liberal justices and at least two of the six conservative justices – Brett Kavanaugh and Amy Coney Barrett – signaled doubt over the argument by the challengers that the CFPB’s funding design violates the U.S. Constitution’s “appropriations clause,” which vests spending authority in Congress.

Kavanaugh pushed back against the assertion that the structure unlawfully lets the agency determine its own funding without a meaningful limit set by Congress.

“Congress could change it tomorrow. And there’s nothing perpetual or permanent or about this,” Kavanaugh said.

Barrett expressed reservations about how the challengers – two payday lending trade groups – would rectify the funding issue.

“I think we’re all struggling to figure out, then, what’s the standard that you would use,” Barrett told Noel Francisco, who argued for the challengers, adding: “How do you decide how much is too much or how specific is specific enough?”

U.S. Solicitor General Elizabeth Prelogar, arguing for Biden’s administration, called the funding mechanism lawful and said Congress has used a “materially identical” structure for other financial regulators including the Federal Reserve Board, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation.

‘EXACTING CONTROL’

The court’s conservative majority has rolled back the power of U.S. agencies including the Environmental Protection Agency in recent years. Some of the conservative justices on Tuesday echoed the industry concerns about the CFPB.

Conservative Justice Clarence Thomas asked whether the agency’s setup “eviscerates the kind of exacting control that Congress usually exercises in the appropriations process.”

Conservative Chief Justice John Roberts called Prelogar’s view of congressional appropriations power “aggressive,” and said such a stance could undermine the constitutional separation of powers between the legislative and executive branches of government when both are controlled by the same party.

“In that situation, you can see Congress empowering the president in a way that might seem unusual to the framers” of the Constitution, Roberts added.

The liberal justices pressed the challengers on the repercussions of deeming the CFPB’s funding structure unconstitutional.

“It sure seems that on your view, the Federal Reserve would also be unconstitutional,” liberal Justice Elena Kagan said.

Payday loans are short-term and high-interest loans typically due on the borrower’s next payday after the loan is made, with the annual percentage rate usually steep – 390% or more, according to the U.S. Federal Trade Commission.

The CFPB was established by legislation signed by Democratic former President Barack Obama to curb the type of predatory lending that contributed to the financial crisis. The agency has delivered $16 billion of relief to consumers as a result of its 300-plus enforcement actions from 2012-22 including a $3.7 billion settlement last year with Wells Fargo.

The New Orleans-based 5th U.S. Circuit Court of Appeals last year ruled that the CFPB’s funding structure violated the appropriations clause. The 5th Circuit also invalidated a CFPB regulation opposed by payday lenders that stops them from trying to charge a borrower’s bank account after two unsuccessful attempts due to insufficient funds.

Many conservatives and their Republican allies see the CFPB as part of an unwieldy “administrative state,” the network of agencies responsible for the array of federal regulations affecting businesses and individuals.

Its supporters have urged the justices to uphold the CFPB’s funding mechanism, saying that a ruling against the agency would leave consumers vulnerable to deceptive and abusive practices, and could place its existing rules on shaky legal ground.

A ruling is expected by the end of June.

(Reporting by John Kruzel and Andrew Chung; Editing by Will Dunham)

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