Believe it or not, a Supreme Court challenge that will determine whether violent domestic abusers have a constitutional right to possess guns may not be the most potentially disastrous case of the new term that begins next week. That distinction may go to a constitutional challenge that could, depending on how the court rules, wreck the American economy, particularly for those who have the hardest time getting a foothold within it.
Since its inception in 2011, the Consumer Financial Protection Bureau has served as a piñata for Republicans, the big business lobby, and just about anyone who hates Senator Elizabeth Warren, the bureau’s architect.
It’s the agency that has given enforcement teeth to laws barring banks from piling extortionate overdraft charges, depositor penalties, and other junk fees on consumers who can afford them the least. CFPB regulations have prevented predatory auto lenders from targeting military service members and imperiling their security clearances. In short, it protects consumers by making lenders and other financial institutions play by the rules set by Congress.
Unsurprisingly, payday lenders aren’t fond of the agency, and they are behind the latest Supreme Court challenge to its constitutionality. That’s right, it’s not the first one — a 2020 ruling by the court resulted in a change to the agency’s leadership structure, but the bureau itself survived.
This time, it might not be so lucky. And that is bad news for anyone who doesn’t want a repeat of the 2007 housing crash and the resulting financial crisis, or even something worse.
The challenger to the bureau’s payday lender rules claim the CFPB itself is unconstitutional because it is not funded through the congressional appropriations process. Instead, in the Dodd-Frank Act, Congress decided to fund the agency directly through the Federal Reserve. It was not a novel idea: Other agencies, including the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency are also funded outside the appropriations process.
The CFPB is the cop on the beat of predatory lending. So, of course, payday lenders want to defund it. They claim the agency is too far outside Congress’s power of the purse to be accountable to the people.
But it’s clear to see the real reason why payday lenders have the CFPB in their crosshairs, and aren’t too concerned about the potential collateral damage. They survive by targeting hard-working Americans whose paychecks often don’t stretch far enough to meet the next. These workers often don’t have access to credit cards and bank loans with annual percentage rates between 10 and 30 percent. So these loan sharks offer a lifeline: cash to pay urgent bills, but at a potentially extortionate cost. A borrower who can’t repay the full loan within weeks will get hit with fees that quickly add up, often causing the borrower to seek more short-term cash. In no time, a $200 loan could cost thousands to repay.
As Warren told me, there are many good reasons why the agency tasked with enforcing financial rules is funded the way it is — and one of those reasons will probably be an elephant in the courtroom during Tuesday’s oral arguments.
“A government shutdown should not mean all the financial regulators go home,” Warren told me in an interview.
Warren notes that there is support from within the banking and lending industry for the bureau and its rules, pointing to a friend-of-the-court brief filed on behalf of the Mortgage Banking Association and other housing trade groups.
If the court invalidates the CPFB and its rulemaking, the brief states, “it could set off a wave of challenges and the housing market could descend into chaos, to the detriment of all mortgage borrowers.”
“Lenders, servicers, and consumers have operated by the CFPB’s guideposts for more than ten years, and without those rules substantial uncertainty would arise as to how to undertake mortgage transactions in accordance with federal law,” the brief states.
In other words, without CFPB rules prohibiting the very kind of predatory practices subprime lenders used to wreck the economy in 2007, the playing field will become very rocky for reputable lenders who need to court the investors they require to offer loans that are fair and affordable.
“The CFPB is very valuable for businesses that don’t want to have to compete with cheaters,” Warren told me.
A ruling against the bureau could also mean other agencies that guard against bank fraud, predatory lending, and other threats to the economy will be next. Surely that would be a bridge too far even for a court that has been willing to crush student loan relief and grant corporations the constitutional right to pour limitless cash into political campaigns. Or would it?