US Supreme Court Upholds CFPB Funding: Key Consequences

June 4, 2024
By Cornerstone Staff

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.

 

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. Senior executives must also provide attestations confirming the company’s compliance with these orders. The registration requirements will be rolled out starting in September.

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 on issues like overdraft fees and digital payment systems, highlights 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.
References

 

 

 

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)

Author

Cornerstone Staff

Staff
| Cornerstone
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