US Supreme Court Upholds CFPB Funding: Key Consequences

In a landmark ruling, the US Supreme Court upheld the legal foundation and funding of the Consumer Financial Protection Bureau (CFPB). It was a decisive moment for regulatory oversight in the financial sector. The decision shapes the immediate regulatory landscape.

It also sets a precedent for the independence and authority of similar federal agencies. Against a backdrop of small businesses, enforcement, and shifting priorities, the ruling stands out. It confirms the CFPB's role in enforcing compliance and shaping financial practices that protect consumers.

Since the ruling, the CFPB has launched a wave of industry-wide changes. As it rolls out these initiatives, staying current is essential.

Background: The Supreme Court Decision

The Supreme Court's review began with a challenge by two industry groups against the CFPB's payday lending rule, issued in 2017. The case addressed that specific rule. It also questioned the constitutionality of the CFPB's funding structure.

That structure is designed to foster independence, but the challengers argued it was inconsistent with the Constitution's Appropriations Clause.

The U.S. Court of Appeals for the 5th Circuit initially found that the CFPB's funding mechanism violated the Appropriations Clause. That decision contradicted the U.S. District Court in the Western District of Texas, which had upheld the funding mechanism.

Justice Clarence Thomas wrote for the majority. He based the decision on historical practice and the text of the Constitution. He affirmed that the funding mechanism falls within Congress's right to appropriate funds. Most of the justices agreed, viewing the CFPB's funding structure as a legitimate appropriation by Congress.

Immediate Effects on CFPB's Enforcement and Rulemaking

Stays Pending the Supreme Court's Decision

The constitutional challenge raised doubts about all CFPB rulemaking and enforcement. Many courts paused proceedings until the Supreme Court ruled. The challenge delayed several significant rules, including those on credit card penalties and small business lending.

Those rules are now moving forward. Lifting the stays lets them take effect. They may still face legal challenges on grounds other than the CFPB's funding.

Payday Lending Rule
The Supreme Court overturned a Fifth Circuit decision that had nullified the CFPB's Payday Lending Rule. This paves the way for the rule to take effect, though the timing is still uncertain. The rule aims to regulate payday, vehicle title, and other small-dollar consumer loans.

The CFPB has scaled it back. It now focuses mainly on requiring notice and consent before lenders can withdraw payments from consumers' bank accounts. The main goal is to prevent practices that lead to "cycles of debt," a key concern for the CFPB.

Small Business Rule
Under the Dodd-Frank Act, the Small Business Rule requires certain lenders to track and report various data points from small business applicants. The rule was put on hold nationwide pending the Supreme Court's decision on funding.

After the ruling, these stays will be lifted, though challenges on other grounds will continue. The CFPB has extended compliance deadlines. The new compliance date is July 18, 2025, for Tier 1 institutions, with initial filings required by June 1, 2026.

Credit Card Penalty Fees Rule
The Credit Card Penalty Fees Rule amends Regulation Z to limit late fees. It aims to keep those fees reasonable. Like the Small Business Rule, it was blocked nationwide pending the funding decision.

With the ruling in place, the stay will be lifted, and litigation on other grounds will continue. The effective date was originally set for May 14, 2024, so its implementation timeline remains uncertain.

Increased CFPB Enforcement

The CFPB is set to step up enforcement, as shown by its recent hiring of enforcement staff. This prepares the bureau for an expected rise in litigation and enforcement actions, especially around consumer financial products and services.

CFPB Announces "Repeat Offender" Registry

One of the CFPB's first steps was a "repeat offender" registry. It requires nonbank companies to self-report final agency and court orders and judgments issued under consumer financial protection laws. The database will track companies and people who repeatedly break local, state, and federal consumer protection laws and who are subject to court orders.

Effective September 16, 2024, covered nonbanks with enforcement orders for alleged violations of consumer financial services laws must register and submit information to the CFPB about the entity and the covered order. That includes identifying corporate and affiliate information, a copy of the covered order, and details about the issuing agency, effective date, expiration date, covered laws, and case information.

Larger covered nonbanks under CFPB supervision must also file an annual written statement. In it, a designated senior executive describes the firm's ongoing compliance with the order's terms.

Nonbanks with qualifying annual receipts over $5 million are subject to this requirement. Nonbanks may avoid the extra registration and the annual written statement if their orders are published in the Nationwide Multistate Licensing System (NMLS) Registry.

'Deceptive' Contracts

The CFPB has made clear that unlawful or unenforceable terms in consumer financial contracts can be a deceptive act or practice under the Consumer Financial Protection Act. When companies include provisions that purport to waive or limit consumer rights, but that are unenforceable under federal or state law, this is likely to mislead consumers and affect their willingness to use those rights.

The CFPB cited examples across mortgages, banking, remittance transfers, and auto loans. It warned that even if such unenforceable terms are common in the industry, their inclusion can still violate the ban on deceptive practices.

Continued War on Junk Fees

The CFPB has stayed focused on eliminating what it calls junk fees and on simplifying rules. The aim is to give clearer guidance and communicate its expectations plainly, rather than rely on complex regulations. This is meant to strengthen compliance across all market participants, not just larger players.

Beyond credit card late fees, overdraft fees, and fees for basic customer service, the CFPB has opened an inquiry into rising mortgage closing costs to understand their impact on borrowers and lenders. Its analysis found a substantial rise in median total loan costs for home mortgages between 2021 and 2023. That raised concerns about strain on household budgets and limits on lenders' ability to offer competitive mortgages.

The inquiry seeks public input on several points, including the extent of competition, how fees are set, and the impact of rising costs on housing affordability and access to homeownership. The findings will inform potential rulemaking, guidance, and policy on mortgage lending and real estate settlement.

Proposed Ban on Medical Debt Use

The CFPB has proposed to bar medical debts from consumers' credit reports. The rule would remove the exception that lets lenders obtain and use medical debt information for credit eligibility. It would also stop credit reporting companies from including medical debt on reports sent to creditors when creditors cannot consider it.

The proposal would also ban using medical devices as loan collateral. Lenders could not repossess medical devices, such as wheelchairs or prosthetic limbs, if a borrower cannot repay. The CFPB sought public comments on the proposed rule until August 12, 2024.

Scrutiny of Medical Financing Products

The CFPB has stepped up its review of medical financing products, such as medical credit cards and installment loans. The bureau has raised concerns about aggressive marketing, especially toward financially vulnerable consumers.

It has also flagged incentives paid to healthcare providers to enroll patients in financing products. It points to high interest rates and the often misunderstood "deferred interest" feature of medical credit cards. Its ongoing focus suggests a possible regulatory crackdown.

The CFPB is monitoring the incentives and marketing materials given to healthcare providers and is working with other federal agencies on these issues. Industry participants should prepare for possible new rules and closer oversight.

CFPB Regulatory Agenda

The CFPB has suggested that businesses revisit the Fall 2023 Regulatory Agenda for a list of key compliance areas. That agenda, along with ongoing rulemakings, highlights the bureau's priorities after the Supreme Court's ruling.

Beyond the regulatory agenda, make sure your business is compliant with all licensing requirements. That includes reviewing and renewing any permits, certifications, and licenses you need to operate in your industry.

Long-Term Consequences for CFPB and Governance

Enhanced Presidential Control Over CFPB

The Supreme Court's decisions have significantly increased presidential influence over the CFPB. The ruling lets the president remove the CFPB director without cause. That aligns the agency more closely with the executive branch and could change its operational independence.

Future Legal and Regulatory Challenges

The Supreme Court validated the CFPB's funding mechanism. Even so, the agency may still face legal challenges over its use of administrative law judges and its broad reading of its own authority. Future cases could test the limits of the CFPB's power and its compliance with the Administrative Procedures Act.

Impact on Congressional Oversight

The CFPB's unique funding structure, upheld by the Supreme Court, weakens Congress's traditional "power of the purse." This limits Congressional oversight. It reduces Congress's ability to shape the agency through annual appropriations and increases the president's role in setting the CFPB's direction and priorities.

Conclusion

With more regulatory scrutiny ahead, the Court's firm stance clears the way for the CFPB to pursue its goals with new energy. As financial services keep evolving, the CFPB's role grows more central. Stakeholders should consider revisiting the CFPB's Fall 2023 Regulatory Agenda to align with the agency's focus.

It is both a call to action and a guide, pointing the financial sector toward stronger compliance, transparency, and consumer protection. It marks a defining moment in financial regulation and oversight.

UPDATED 6/26/2024

Sources

https://www.dlapiper.com/en/insights/publications/2024/05/what-is-next-for-the-cfpb-after-the-supreme-courts-decision-affirming-its-constitutionality

https://www.mayerbrown.com/en/insights/publications/2024/05/the-consequences-of-the-us-supreme-courts-decision-upholding-the-cfpbs-funding-structure

CFPB Creates Registry to Detect Corporate Repeat Offenders | Consumer Financial Protection Bureau (consumerfinance.gov)