A majority of the justices at a Supreme Court argument on Tuesday seemed ready to reject a challenge to the constitutionality of the Consumer Financial Protection Bureau, the agency set up during the Obama administration to crack down on abuses by banks and other financial services providers.
The justices appeared unpersuaded by the argument that the way Congress had funded the bureau had crossed a constitutional line. Instead, they signaled that they believed it was authorized by the plain words of the Constitution and had deep historical roots.
At stake is not just the continued functioning of the agency, which has been the target of lawsuits from business groups since its establishment, but also every regulation and enforcement action it has taken in the dozen years of its existence.
There was little talk in the arguments of what would happen if the funding mechanism were to be rejected, which was an indication that it was likely to survive.
Noel J. Francisco, a lawyer for the challengers, faced a barrage of questions about the implications of his position.
“We’re all struggling to figure out then what’s the standard that you would use,” Justice Amy Coney Barrett said.
Justice Sonia Sotomayor said, “I’m trying to understand your argument, and I’m at a total loss.”
Justice Elena Kagan told Mr. Francisco that he was “just flying in the face of 250 years of history.”
The central question in the case is whether the way Congress chose to fund the agency violated the Appropriations Clause of the Constitution, which says that “no money shall be drawn from the Treasury, but in consequence of appropriations made by law.”
The bureau was created as part of the 2010 Dodd-Frank Act after the 2008 financial crisis in response to calls to rein in the excesses of banks, mortgage lenders and other institutions. It is funded by the Federal Reserve System, in an amount determined by the bureau so long as it does not exceed 12 percent of the system’s operating expenses. In the 2022 fiscal year, the agency requested and received $641.5 million of the $734 million available.
“This is a rounding error in the federal budget,” Justice Kagan said. (Federal outlays for the just-completed fiscal year are projected to have been $6.4 trillion.)
But Mr. Francisco said the funding mechanism was novel and dangerous. “Congress has never authorized an agency to pick its own perpetual appropriation,” he said, “and if it can do that for the C.F.P.B., it can do it for every other agency, too.”
Justice Brett M. Kavanaugh disputed the statement’s premise. “The word ‘perpetual’ I’m having trouble with,” he said, “because it implies that it’s entrenched and that a future Congress couldn’t change it. But Congress could change it tomorrow.”
Justice Clarence Thomas said the mechanism’s novelty was not by itself suspect.
“I get your point that this is different, that it’s unique, that it’s odd, that they’ve never gone this far,” he told Mr. Francisco. But Justice Thomas added that “not having gone this far is not a constitutional problem.”
A unanimous three-judge panel of the U.S. Court of Appeals for the Fifth Circuit, in New Orleans, ruled last year that the bureau’s funding mechanism ran afoul of the Appropriations Clause.
“Wherever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it,” Judge Cory T. Wilson wrote in an opinion joined by Judges Don R. Willett and Kurt D. Engelhardt in the ruling. President Donald J. Trump appointed all three judges on the panel.
Justice Barrett seemed to disagree on Tuesday. “There’s nothing in the Appropriations Clause itself or in the word ‘appropriations’ that imposes the limits that you’re talking about,” she told Mr. Francisco.
Justice Ketanji Brown Jackson said it was not the court’s role to tell Congress how to spend money. “I’m a little worried, I think,” she said, “about the separation-of-powers problem that may occur if the judiciary gets involved with telling Congress when and under what circumstances it can exercise its own prerogatives concerning funding.”
The Fifth Circuit’s decision was at odds with ones from other courts. In 2018, for instance, the District of Columbia Circuit said there was nothing unusual about the funding mechanism.
A decision against the bureau could imperil other agencies and programs funded in broadly similar ways, including the Federal Reserve, the Federal Deposit Insurance Corporation, Medicare and Social Security. Indeed, prominent lawyers and the bureau’s supporters have warned that such a ruling could force a reckoning over the Fed’s own setup.
Justice Kagan agreed. “It sure seems,” she told Mr. Francisco, “that, on your view, the Federal Reserve would also be unconstitutional.”
The Fed does not receive an annual appropriation from Congress. It instead raises money from fees paid by banks and earnings on its security holdings. That structure is meant to make it more independent, since lawmakers cannot threaten to choke off its annual flow of cash because they do not like its regulatory or monetary policies.
Senator Elizabeth Warren, Democrat of Massachusetts, was a key architect of the bureau when it was being set up. She warned in a speech last week that the Supreme Court decision could undermine the Fed’s funding system and cause its independence to “evaporate.”
Still, other lawyers have suggested that the Supreme Court could draw a distinction between the way the bureau is funded — by requesting money from another agency that is also insulated from Congress — and the way the Fed raises money to pay for its operations. The Fifth Circuit suggested that the bureau’s “double insulation from Congress’s purse strings” was unique.
Mr. Francisco, the challengers’ lawyer, said the bureau was “the most independent agency in American history.”
That was no longer the case, Justice Kavanaugh responded, referring to a 2020 Supreme Court decision. “Now it’s not independent at all,” he said.
In the 2020 ruling, the court held that a different part of the 2010 law creating the bureau was unconstitutional, saying that Congress could not insulate the agency’s director from presidential oversight given the scope of the job’s authority.
The case argued on Tuesday, Consumer Financial Protection Bureau v. Community Financial Services Association of America, No. 22-448, was brought by two trade groups representing payday lenders.
They challenged a regulation limiting the number of times lenders can try to withdraw funds from borrowers’ bank accounts. The Fifth Circuit struck down the regulation, saying it was “wholly drawn through the agency’s unconstitutional funding scheme.”
Solicitor General Elizabeth B. Prelogar, representing the bureau, said that “the retrospective remedy that the court adopted is sweeping in implications and would be profoundly disruptive.”
She pointed to a brief filed on behalf of the Mortgage Bankers Association that warned about what it called “the potentially catastrophic consequences” of a decision raising doubts about “current C.F.P.B. regulations, including those governing the real-estate financing industry, which could lead to immediate and intense disruption to the housing market, harming both consumers and the broader economy.”
Jeanna Smialek contributed reporting.