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Washington braces for consumer watchdog’s day in court

The Supreme Court will hear oral arguments today that could radically reshape the future of the Consumer Financial Protection Bureau. It may also shatter the existing legal landscape for many other federal agencies, depending on who you ask.

The CFPB has spent the last several years dancing around legal challenges, with the latest coming from the payday lending industry and its delicately-named trade association, the Community Financial Services Association of America.

Here’s what you need to know.

The case: At the heart of this Supreme Court hearing is whether the CFPB’s funding structure is constitutional. The consumer watchdog receives its annual budget through the Federal Reserve, which is itself outside the appropriations process.

That 13-year-old structure hasn’t mattered until recently. We’re here thanks to the U.S. Court of Appeals for the Fifth Circuit — the country’s most reliably conservative bench — which declared last fall that the CFPB’s funding was unconstitutional.

That decision rocked the legal-administrative world. The Congressional Research Service writes that it was “the first appellate decision — and perhaps the first court decision ever — to conclude that congressional action, as opposed to executive or judicial action, can violate the Appropriations Clause.”

There are huge questions hanging over this case. If the agency’s funding has been unconstitutional since its inception, what happens to the post-financial crisis rules that now undergird the entire U.S. mortgage market? The truth is, no one knows.

The stakes: We wrote back in May about how and why federal financial regulators have historically been funded outside the appropriations process. More broadly, less than half of congressional appropriations are funded annually.

So what advocates are ultimately concerned with is how the Supreme Court’s eventual ruling here could one day show up in future challenges to other regulators, whether that’s the Federal Reserve, Federal Deposit Insurance Corp., Federal Housing Finance Authority — the list goes on.

“If the Supreme Court opens the door, the independence of the Fed, the FDIC, and others that use a funding model like the CFPB will evaporate,” Sen. Elizabeth Warren (D-Mass.) said in a speech last week.

The coalition asking the Supreme Court not to strike down the CFPB’s funding is broad, including veterans welfare organizations, the AARP, the State of New York and just about every consumer advocacy organization we’ve ever heard of. Even former FDIC Chair Sheila Bair, a Bush-era appointee, warned that a decision against the CFPB could bring “potential chaos every time Congress engages in brinkmanship over funding.”

Congressional Republicans did not share those concerns when we asked recently, even as the government barreled toward a shutdown. The case brought by CFSA has broad backing from 132 congressional Republicans, several other financial trade associations, the Chamber of Commerce and conservative political groups, including Americans for Prosperity.

“We don’t want to shut down,” Rep. Andy Barr (R-Ky.) told us. “But if there was one, and there were a few days that the CFPB or any other federal regulatory agency couldn’t function, you know, I’m not worried about that.”

— Brendan Pedersen

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Editorial photos provided by Getty Images. Political ads courtesy of AdImpact.