In a landmark US Supreme Court ruling, the legal foundation and operational funding of the Consumer Financial Protection Bureau (CFPB) were unequivocally upheld, marking a decisive moment for regulatory oversight in the financial sector. This decision not only impacts the immediate regulatory landscape but also sets a precedent for the autonomy and authority of similar federal agencies. Amidst the complex interplay of small businesses, regulatory enforcement, and shifting regulatory priorities, the ruling emerges as a pivotal point of reference. It crystallizes the CFPB’s role in enforcing compliance and shaping financial practices to protect consumer interests. Since the ruling, the CFPB has instituted a wave of industry-wide changes, and as the CFPB continues to implement these sweeping initiatives, staying current and informed is essential.
Background: The Supreme Court Decision
The Supreme Court’s review originated from a challenge by two industry groups against the CFPB’s payday lending rule issued in 2017. This case not only addressed the specific rule but also questioned the constitutionality of the CFPB’s funding structure, which is designed to foster independence but was argued to be inconsistent with the Constitution’s Appropriations Clause.
Initially, the U.S. Court of Appeals for the 5th Circuit found the CFPB’s funding mechanism violated the Appropriations Clause, a decision that contradicted the ruling of the U.S. District Court in the Western District of Texas, which had upheld the funding mechanism.
Justice Clarence Thomas, writing for the majority, based the decision on historical practices and the text of the Constitution, affirming that the funding mechanism falls within congressional rights to appropriate funds. This interpretation was supported by the majority of the justices, who viewed 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 the validity of all CFPB rulemaking and enforcement activities, leading many courts to pause proceedings until the Supreme Court made its decision. The challenge delayed the implementation of several significant rules, including those concerning credit card penalties and small business lending, which are now moving forward. The lifting of stays will allow these rules to be implemented, although they may still face legal challenges on grounds other than the constitutionality of the CFPB’s funding.
Payday Lending Rule
The Supreme Court recently overturned a Fifth Circuit decision that had nullified the CFPB’s Payday Lending Rule. This paves the way for the rule’s eventual implementation, though the exact timing is still uncertain. The Payday Lending Rule aims to regulate payday, vehicle title, and other small-dollar consumer loans. The CFPB has scaled back the rule, focusing primarily on requiring notice and consent before lenders can withdraw payments from consumers’ bank accounts. The rule’s 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 mandates that certain lenders track and report various data points from small business applicants. The rule was put on hold nationwide pending the Supreme Court’s decision on the CFPB’s funding. Following the Supreme Court’s ruling, these stays will be lifted, though challenges to the rule on other grounds will continue. The CFPB has extended compliance deadlines, setting a new compliance date of 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, which amends Regulation Z to limit late fees, aims to ensure that these fees are reasonable. Similar to the Small Business Rule, this rule was blocked nationwide pending the Supreme Court’s decision on the CFPB’s funding. With the ruling now in place, the stay will be lifted, and litigation challenging the rule on other grounds will continue. The effective date for this rule was originally set for May 14, 2024, which means its implementation timeline remains uncertain.
Increased CFPB Enforcement
The CFPB is set to intensify its enforcement efforts, as indicated by the recent recruitment of enforcement personnel. This move prepares the bureau to handle an expected increase in litigation and enforcement actions, particularly targeting consumer financial products and services.
CFPB Announces “Repeat Offender” Registry
One of the first orders of business for the CFPB was introducing a “repeat offender” registry requiring nonbank companies to self-report final agency and court orders and judgments issued under consumer financial protection laws. This database will serve to 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. This includes providing 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 subject to CFPB supervision are also required to file an annual written statement, in which a designated senior executive describes the firm’s ongoing compliance with the order’s terms.
Nonbanks with qualifying annual receipts of over $5 million are subject to this requirement. Additionally, nonbanks may avoid additional registration and the annual written statement requirement if their order(s) are published in the Nationwide Multistate Licensing System (NMLS) Registry.
‘Deceptive’ Contracts
The CFPB has made clear that the inclusion of unlawful or unenforceable terms in consumer financial contracts can constitute a deceptive act or practice in violation of the Consumer Financial Protection Act. The CFPB explained that when companies include contractual provisions that purport to waive or limit consumer rights, but are unenforceable under federal or state law, this is likely to mislead consumers and affect their willingness to exercise those rights. The CFPB cited examples across various industries, including mortgages, banking, remittance transfers, and auto loans, where companies have included similar terms. The CFPB warned that even if such unenforceable terms are common in the industry, their inclusion can still violate the prohibition on deceptive practices.
Continued War on Junk Fees
The CFPB has continued to be focused on eliminating purported junk fees and simplifying rules to reduce complexities. The aim is to provide more guidance and straightforward communication of its expectations, rather than relying on complex regulations. This approach is intended to strengthen compliance across all market participants, not just larger players. In addition to targeting credit card late fees, overdraft fees and fees for basic customer service, the CFPB has initiated an inquiry into increasing mortgage closing costs to understand their impact on borrowers and lenders. The CFPB’s analysis revealed a substantial rise in median total loan costs for home mortgages between 2021 and 2023, raising concerns about the strain on household budgets and the potential limitations on lenders to offer competitive mortgages. The inquiry seeks public input on various aspects, including the extent of competition, fee setting, and the impact of rising costs on housing affordability and access to homeownership. These findings will inform potential rulemaking, guidance, and policy initiatives related to mortgage lending and real estate settlement.
Proposed Ban on Medical Debt Use
The CFPB has announced a proposal to prohibit medical debts from appearing on consumers’ credit reports. The rule would remove the exception that permits lenders to obtain and use information about medical debt for credit eligibility determinations and prohibit credit reporting companies from including medical debt on credit reports sent to creditors when creditors are prohibited from considering it. Additionally, the proposed rule would ban the repossession of medical devices as collateral for a loan and prohibit lenders from repossessing medical devices, such as wheelchairs or prosthetic limbs, if individuals are unable to repay the loan. The CFPB is seeking public comments on this proposed rule until August 12, 2024.
Scrutiny of Medical Financing Products
The Consumer Financial Protection Bureau (CFPB) has intensified its examination of medical financing products, such as medical credit cards and installment loans. The Bureau has raised concerns about aggressive marketing practices, particularly targeting financially vulnerable consumers, and incentives provided to healthcare providers to enroll patients in financing products. Highlighting high-interest rates and the often misunderstood “deferred interest” feature of medical credit cards, the CFPB’s ongoing discourse suggests a potential imminent regulatory crackdown. It is closely monitoring the incentives and marketing materials provided to healthcare providers and collaborating with other federal agencies to address these issues. Industry participants should prepare for potential new regulations and increased oversight in response to the CFPB’s persistent focus on medical financing products.
CFPB Regulatory Agenda
The CFPB has suggested that businesses revisit the Fall 2023 Regulatory Agenda for a list of key compliance areas to focus on. This agenda, along with ongoing rulemakings highlight the bureau’s strategic priorities in the wake of the Supreme Court’s ruling.
In addition to the regulatory agenda, it is important to ensure your business is compliant with all licensing requirements. This includes reviewing and renewing any necessary permits, certifications, and licenses to operate within 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 allows the president to remove the CFPB director without cause, thus aligning the agency more closely with the executive branch’s directives and potentially altering its operational independence.
Future Legal and Regulatory Challenges
Despite the Supreme Court’s validation of the CFPB’s funding mechanism, the agency may still face legal challenges concerning its use of administrative law judges and the broad interpretation of its regulatory authority. Future litigations could focus on the boundaries of the CFPB’s power and its compliance with the Administrative Procedures Act.
Impact on Congressional Oversight
The unique funding structure of the CFPB, upheld by the Supreme Court, diminishes Congress’s traditional “power of the purse.” This arrangement limits Congressional oversight, reducing its ability to influence the agency’s operations through annual appropriations and increasing the president’s role in shaping the CFPB’s direction and priorities.
Conclusion
With enhanced regulatory scrutiny on the horizon, the Court’s resolute stance also paves the way for the CFPB to pursue its stated objectives with renewed vigor. As the landscape of financial services continues to evolve, the CFPB’s role in shaping this domain grows increasingly pivotal. Stakeholders are advised to consider revisiting the CFPB’s Fall 2023 Regulatory Agenda to align with the agency’s regulatory focus. This directive serves not only as a call to action but as a beacon guiding the financial sector towards heightened compliance, transparency, and consumer protection, marking a definitive moment in the trajectory of 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)
