Supreme Court Considers Sound Governance

The Supreme Court is reviewing sound governance practices again as it relates to the Consumer Financial Protection Bureau’s status as an independent agency.  Previously in 2020, the Supreme court ruled that the CFPB’s structure violated the separation of powers doctrine of the United States and was therefore unconstitutional, and the Supreme Court gave the President of the United State authority to fire the Director at will.

Now the issue remains on whether the CFPB’s protection from the purse strings of Congress is sound business practice and good corporate governance to protect consumers or whether its funding sources violate the Constitution.

As a regulator, the CFPB (under the leadership of Elizabeth Warren) became known for its fight against the largest consumer lenders of all stripes, including the “too big to fail” banks.  Upon its formation in 2010 (following the collapse of the mortgage market), CFPB issued new consumer protection regulations and enacted enforcement actions against the largest lenders and those conducting the most egregious lending practices. CFPB quickly became a force to be reckoned with. CFPB’s oversight and enforcement caused changes to lenders traditional business practices and reduced their earnings (or cost them money outright through fines and penalties). As an “independent agency”, CFPB set the tone for what constituted permissible lending programs, and lenders have responded by falling in line.

Senator Warren’s vision was that CFPB would be insulated from politicians (and the voting  public they represent), so the CFPB was originally established by statute with two unique qualities that no other agency enjoyed:

  1. The President had no authority to appoint or fire, the Director of the CFPB (in violation of the separation of powers).
  2. Congress has no control over the budget of the CFPB, possibly in violation of the Appropriations Clause of the Constitution.

This unprecedented autonomy gives the CFPB significant power against banks and others in the consumer lending space.

Understandably, the lending industry (including traditional bankers, credit unions, fintech’s and alternative lenders) does not take kindly to the government interference in their business practices and have been looking for any legal footing to reduce or minimize the CFPB’s influence. So far, except for the Supreme court’s decision in 2020 granting the President power to hire/fire the director of the agency at will, not much has worked against the CFPB, and the agency marches on.

What happens now if the Supreme Court imposes limits on CFPB’s budget accountability?

Although many bankers can hope – if the CFPB’s opponents prevail in the Supreme Court, it’s improbable that the CFPB will vanish or be dismantled. Instead, a more plausible scenario is that its funding might face delays or reductions until Congress intervenes to approve and finance the CFPB’s operations moving forward.