Supreme Court poised to uphold CFPB's funding structure – analysts

The US Supreme Court seems poised to side with the Consumer Financial Protection Bureau in a case that stands to shake up the agency's existence.

On Oct. 3, the highest court heard oral arguments for the case, which the CFPB appealed after a lower court ruled that its funding mechanism does not pass muster under the Fourth Amendment because its money comes from the Federal Reserve rather than directly from Congress. The Supreme Court is not expected to issue its ruling until next year, but analysts said the majority of the justices seemed skeptical of arguments against the bank watchdog's funding structure.

"The tone and tenor throughout the 90 minutes of oral arguments ... suggested that justices from across the ideological spectrum were wholly unconvinced by the industry's arguments," BTIG analyst Isaac Boltansky wrote in an Oct. 3 note. "Divining the outcome of a Supreme Court (SCOTUS) case based solely on the oral arguments can prove foolhardy, but … we view the oral arguments as positive for the CFPB."

Multiple analysts noted that several Republican justices seemed to side with the liberal justices in criticizing the argument that the agency's funding structure is unconstitutional. Specifically, three conservative justices expressed skepticism, according to Boltansky's note.

"A majority of the Supreme Court (SCOTUS) justices appeared skeptical of a case challenging the constitutionality of the [CFPB's] funding structure during oral arguments on Tuesday," Raymond James analyst Ed Mills wrote in a note. "While the court's most conservative justices (Thomas, Alito and Roberts) appeared to be receptive to some of the [Community Financial Services Association of America's] arguments on Tuesday, skepticism voiced by Justices Kavanaugh, Gorsuch and Barrett combined with forceful questioning from the court's liberal justices could see the final ruling in favor of the CFPB."

Jefferies analysts John Hecht and Kyle Joseph drew a similar conclusion.

"Judges appeared hesitant to upend the agency's funding structure as there are other government agencies throughout history that have used similar structures," they wrote.

Other financial regulators in jeopardy?

The Supreme Court is not expected to make its final decision until early next year, and it could come as late as June 2024, Raymond James' Mills wrote. While the justices seemed likely to side with the CFPB during oral arguments, it is not off the table that the court could invalidate the agency's funding mechanism, which could have ripple effects on other banking regulatory agencies.

Agencies such as the Fed, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., National Credit Union Administration and Federal Housing Finance Agency "also possess 'a degree of budgetary autonomy,' as they are funded through dedicated fees/assessments," BTIG's Boltansky wrote. "There is an argument to be made that their funding structures are also unconstitutional."

While other agencies have similar funding structures, the CFPB was likely a target because "the unholy war that has waged since the CFPB's creation makes it more of a target than the banking regulators," according to Boltansky's Oct. 3 note.

Still, if the Supreme Court rules against the CFPB, that could open the door for suits against other agencies.

"The funding structure of other financial regulatory agencies (including the Fed, FDIC, and [Office of the Comptroller of the Currency]) could additionally be challenged, elevating uncertainty around future regulatory actions," Mills wrote.

Industry implications

A ruling against the CFPB would be "undeniably positive" for financial institutions as the CFPB has cracked down on them since its creation in 2010, Boltansky wrote in a Sept. 30 note. Such a ruling would be particularly positive for institutions currently facing CFPB consent orders and those expected to be impacted by rulemaking, such as the credit card late fee rule and Section 1071.

There was speculation at the time this suit was brought that a ruling against the bank watchdog would nullify its prior guidance and enforcement actions, but that is unlikely to be the case, wrote Brian Gardner, Stifel's financial chief Washington policy strategist. The Supreme Court would view such action as "too chaotic" and would instead want Congress to step in and fund the agency. Congressional funding would be viewed as a positive by investors as Congress would have "more oversight and influence over the CFPB," Gardner wrote.

Conversely, a ruling in the CFPB's favor would serve as "tailwinds for [Director Rohit] Chopra's aggressive agenda" on overdraft, credit card late fees and more, Mills wrote.

In the meantime, Chopra's aggressive agenda is mostly on pause because until the high court hands down a decision, there "will continue to be an overhang for ongoing rulemaking until the decision is issued," Mills added.