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Supreme Court sounds skeptical of lenders’ challenge to Obama-era consumer protection bureau

Sen. Elizabeth Warren (D-MA) talks to reporters following the closed-door "AI Insight Forum" outside the Kennedy Caucus Room in the Russell Senate Office Building on Capitol Hill on Sept. 13, 2023, in Washington, DC.    (Chip Somodevilla/Getty Images North America/TNS)
By David G. Savage Los Angeles Times

The Supreme Court gave a mostly skeptical hearing Tuesday to payday lenders who are challenging the constitutionality of the Obama-era consumer protection agency.

Most of the justices suggested they were not ready to strike down the Consumer Financial Protection Bureau simply because it is funded with fees from the Federal Reserve rather than an annual appropriation.

Citing early American history, U.S. Solicitor Gen. Elizabeth Prelogar said that from the nation’s beginning, Congress created agencies like the Custom Service and Postal Service that were funded by fees — not an annual appropriation.

In 2010, when Congress adopted the consumer agency to protect borrowers from deceptive loans, it decided to fund the agency through fees collected by the Federal Reserve.

Earlier this year, the conservative 5th Circuit Court of Appeals ruled the agency was unconstitutional because Congress failed to set an appropriation.

But Prelogar argued this has never been a constitutional rule, and most of the justices agreed.

Justice Elena Kagan said the 5th Circuit’s argument “has been decisively rejected by history. You are flying in the face of 250 years of history,” she told the attorney, Noel Francisco, representing the payday lenders.

Several justices pointed out Congress chose this funding formula for the agency and could revise it.

“Congress could change this tomorrow. It is not perpetual or permanent,” said Justice Brett M. Kavanaugh.

During the two hours of argument, only Justice Samuel A. Alito Jr. and Neil M. Gorsuch sounded as though they may vote to strike down the agency.

The case heard Tuesday involves both a high-level dispute over the Constitution’s separation of powers and a practical and political divide over the agency.

The brainchild of Sen. Elizabeth Warren, D-Mass., when she was a law professor, the bureau was the centerpiece of the 2010 Dodd-Frank overhaul of financial regulations and the first new federal agency since the early 1970s that was focused specifically on American consumers.

Its mission was to protect borrowers and consumers from deceptive and unfair practices by banks and mortgage lenders. It has returned more than $17.5 billion to wronged customers.

But it has been steadily opposed by much of the lending industry and by many Republicans who say the agency has too much unchecked power.

While Democrats tried to shield the agency from the politics of Washington, that shield is now endangering its future before the high court.

Under the 2010 legislation, the bureau’s director could not be removed by the president for political reasons, and the bureau’s budget was off-limits to Congress’ annual process of appropriations. Instead, its funding comes from the Federal Reserve, which earns fees from lending.

The bureau used $641 million of that money last year.

The Supreme Court’s conservatives have cast a skeptical eye on the bureau. Three years ago, the justices in a 5-4 decision rejected the independent status of the director and ruled that person could be removed by the president for any reason, including political differences.

The current dispute began as a challenge to a proposed regulation of payday lenders. In ruling for the lenders, the three judges of the 5th Circuit, all appointees of President Donald Trump, said it violated the Constitution to shield the bureau from an annual fight over its appropriation.

Judge Cory Wilson said the “bureau’s perpetual insulation from Congress’ appropriations power, including the express exemption from congressional review of its funding, renders it … no longer accountable to Congress and, ultimately, to the people.”

The 5th Circuit ruling, however, did not immediately affect the bureau’s funding or operations as the parties continue their legal fight.