WASHINGTON, May 16 (Reuters) - The U.S. Supreme Court on Thursday upheld the Consumer Financial Protection Bureau's funding mechanism in a challenge brought by the payday loan industry, handing a victory to President Joe Biden's administration and a setback to the agency's conservative critics.

The 7-2 decision reversed a lower court's ruling that the CFPB's funding design - drawing money each year from the Federal Reserve instead of from budgets passed by lawmakers - violated a provision of the U.S. Constitution giving Congress the power of the purse.

The CFPB was established under a law signed by Democratic former President Barack Obama in 2010 to curb the kind of predatory lending that contributed to the 2007–2009 financial crisis. The agency has delivered $19 billion of relief to consumers including a $3.7 billion settlement in 2022 with Wells Fargo.

Many conservatives and their Republican allies have portrayed the CFPB as part of an overbearing "administrative state," the network of agencies responsible for the array of federal regulations affecting businesses and individuals.

Republican lawmakers overwhelmingly opposed the CFPB from the start, contending it wields too much power and burdens banks and other lenders with unnecessary red tape. Prominent pro-business groups including the Chamber of Commerce filed briefs in support of the payday lenders in this case.

Payday loans are short-term and high-interest loans typically due on the borrower's next payday after the loan is made, with the annual percentage rate usually steep - 390% or more, according to the U.S. Federal Trade Commission.

In 2018, the Community Financial Services Association of America and the Consumer Service Alliance of Texas, trade groups representing the payday loan industry, sued the agency, taking aim at a 2017 regulation designed to curb "unfair" and "abusive" practices by certain high-interest lenders. The regulation stops lenders from trying to charge a borrower's bank account after two unsuccessful attempts in a row.

The lawsuit challenged the agency's funding design as a violation of the Constitution's "appropriations clause," which vests spending authority in Congress.

The Supreme Court, with its 6-3 conservative majority, has taken a dim view of expansive authority for federal agencies including the Environmental Protection Agency in important rulings in recent years.

A federal judge in 2021 sided with the CFPB. But the New Orleans-based 5th U.S. Circuit Court of Appeals in 2022 ruled that the funding structure violated the appropriations clause in a decision that also invalidated the regulation at issue. The decision was made by a panel of three judges who had been appointed by Republican former President Donald Trump.

Biden's administration had told the Supreme Court that invalidating the CFPB's funding arrangement could endanger similarly structured agencies including the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and the Federal Reserve Board.

Supporters of the agency also had said a ruling against the CFPB would leave consumers vulnerable to deceptive and abusive practices, and could place the CFPB's existing regulations on shaky legal ground.

The Supreme Court heard arguments in the case in October. (Reporting by John Kruzel; Editing by Will Dunham)