Student-loan borrowers' biggest defender in the government is in jeopardy

• Lending groups filed a lawsuit against the CFPB, challenging its funding structure.
• They argue the agency should have to receive funding from Congress, rather than the Fed.

The nation's highest court will soon hear arguments on a case that challenges the structure of a federal consumer watchdog. The ruling could have significant implications for student-loan borrowers — and consumers nationwide.

The Supreme Court announced in February that it would be taking on the case Consumer Financial Protection Bureau v. Community Financial Services Association of America Ltd., which challenges the funding structure of the Consumer Financial Protection Bureau. Since the CFPB was formally established in 2011, the Federal Reserve has funded the agency rather than relying on annual funding approval from Congress. While some experts and lawmakers have argued that the agency's funding structure is crucial for it to maintain independence and best serve consumers, the Fifth Circuit ruled in October the structure was unconstitutional.

"Congress did not merely cede direct control over the Bureau's budget by insulating it from annual or other time limited appropriations," the Trump-appointed Fifth Circuit judges wrote in their ruling. "It also ceded indirect control by providing that the Bureau's self-determined funding be drawn from a source that is itself outside the appropriations process — a double insulation from Congress's purse strings that is 'unprecedented' across the government."

The purpose of the CFPB is in its name: protecting consumers. But support for the agency has been largely partisan, with many conservatives taking issue with the agency's regulatory actions — for example, the Fifth Circuit's decision also overturned the CFPB's regulation on payday lenders that would have imposed stricter standards on the industry.

Beyond payday lenders, the CFPB has taken several actions over the past decade to better protect student-loan borrowers from predatory lending behavior. As federal borrowers have been gearing up for the return to loan repayment in October, the agency cracked down on companies that it accused of illegally charging borrowers for normally free debt-relief services. In June, for example, the CFPB returned $3.5 million to over 7,000 borrowers who fell victim to one of those scams.

Additionally, the CFPB has scrutinized how student-loan servicers treat borrowers, and it found earlier this year that some servicers were continuing to collect on debt that was discharged in bankruptcy. Should the Supreme Court decide the agency's funding structure is unconstitutional — and leave its funding at the will of Congress — it's unclear whether the CFPB would continue to get resources to enforce consumer protections.

"Despite years of desperate attacks from Republicans and corporate lobbyists, the constitutionality of the CFPB and its funding structure have been upheld time and time again," Sen. Elizabeth Warren of Massachusetts, who helped create the CFPB, said in February. "If the Supreme Court follows more than a century of law and historical precedent, it will strike down the 5th Circuit's decision before it throws our financial markets and economy into chaos."

The case against the CFPB's structure

The group that brought the case against the CFPB — Community Financial Services Association of America — represents nonbank lenders that offer credit products and other financial services to consumers. Shahid Naeem, a senior policy analyst at the nonprofit American Economic Liberties Project, coauthored a brief on the lawsuit and told Insider that the case was "a campaign against what the government should be doing, which should be working for the people that it represents."

Naeem added: "If you look at the parties involved in this case, you have a payday-lending lobby and then you have the CFPB, which was birthed out of the 2008 financial crisis by Congress as a way of protecting Americans from the kind of predatory and exploitative financial-services practices that got us into 2008 and various other crises as well."

In 2010, via the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress ensured that the CFPB would not have to rely on the annual appropriations process for funding and instead could request funding from the Federal Reserve so long as its request did not exceed $597 million, adjusted for inflation. Placing a cap on spending requests ensured the CFPB would not have limitless funding, while allowing it to sidestep political debate over receiving more money.

The lenders that brought the lawsuit wrote in their legal filing: "The Appropriations Clause vests the power of the purse in Congress, enabling the most politically accountable branch to both protect the federal fisc and check the exercise of executive power."

They added: "The 2010 Congress, however, deliberately circumvented that safeguard by vesting the CFPB with discretionary authority to fund its operations by taking as much as hundreds of millions of dollars directly from the Federal Reserve each year forever.

"The Bureau's defenses of Congress's unprecedented abdication of its fiscal oversight all fail. And the Bureau's contention that the Rule should be upheld regardless fares no better."

The CFPB wrote in its response that its funding mechanisms were "far from novel." It said that other agencies, such as the Federal Reserve and Federal Deposit Insurance Corp., had uncapped funding and larger budgets, while holding significant regulatory authority.

The Supreme Court is hearing oral arguments on the case on October 3.

What's at stake for Americans

If the Supreme Court rules the CFPB's funding structure unconstitutional, "we're opening the floodgates to see a storm of challenges to any source of congressionally authorized appropriated funding that does not fall in the annual process," Naeem said.

It's something a conservative witness at a House committee hearing suggested in March. Devin Watkins, an attorney at the libertarian think tank Competitive Enterprise Institute, told lawmakers: "There are other agencies out there that do have nonappropriated funds, and Congress should review those as well and think about how to return those agencies to congressionally funded appropriations process as well."

While it's unclear how broadly the Supreme Court will rule, or whether it will strike down the CFPB's funding structure entirely, an adverse ruling could mean that consumers lose a host of protections the agency offers. For example, the American Association of Retired Persons filed an amicus brief to the Supreme Court expressing its support for the CFPB's continued funding structure, saying: "Older adults are among the consumers who depend heavily on the CFPB's protections."

It added: "Corrupt actors seek to defraud student loan borrowers with promises of debt relief because they know that student loans can be a financial strain, especially when the borrowers are paying student loans in retirement.

"But those fraudulent schemes end up leaving borrowers in a worse financial condition. The CFPB's enforcement actions against this type of illegal conduct are important to protecting borrowers' financial security and obtaining their money back."

The CFPB also wrote in its brief that the lenders' argument would "call into questions" appropriations for programs such as Social Security and unemployment assistance because they're not reliant on the annual congressional-funding process.

"Part of the stability and independence of our financial regulators is that they aren't beholden to the annual appropriations process," Naeem said.

Now consumers will have to wait and see how the Supreme Court views a top federal consumer watchdog's constitutionality.