Supreme Court Upholds Constitutionality Of CFPB Funding Mechanism

In this issue. The Supreme Court upholds the constitutionality of the Consumer Financial Protection Bureau (CFPB) funding mechanism; the Financial Crimes Enforcement Network (FinCEN) and the Securities and Exchange Commission (SEC) propose Customer Identification Program (CIP) requirements for registered investment advisers and exempt reporting advisers; the Board of Governors of the Federal Reserve System (Federal Reserve) and the CFPB announce inflation-adjusted dollar thresholds for Regulation CC funds availability; the Financial Stability Oversight Council (FSOC) releases a report on nonbank mortgage servicing; a CFPB report highlights consumer frustrations with credit card rewards programs; and the Federal Reserve releases a summary of the exploratory pilot Climate Scenario Analysis (CSA) exercise conducted with six of the nation's largest banks. These and other developments are discussed in more detail below.

Regulatory Developments

Supreme Court Upholds Constitutionality of CFPB Funding Mechanism

On May 16, in a 7-2 decision written by Justice Clarence Thomas, the US Supreme Court upheld the CFPB's funding mechanism as constitutional in Consumer Financial Protection Bureau v. Community Financial Services Association of America, reversing a 2022 unanimous decision from a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit in New Orleans. Justices Elena Kagan and Ketanji Brown Jackson wrote separate opinions as part of the majority. Justices Samuel Alito and Neil Gorsuch dissented.

"Under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes. The statute that provides the Bureau's funding meets these requirements. We therefore conclude that the Bureau's funding mechanism does not violate the Appropriations Clause."
— Clarence Thomas, Associate Justice, Supreme Court of the United States

FinCEN and SEC Propose CIP Requirements for Registered Investment Advisers and Exempt Reporting Advisers

On May 13, FinCEN and the SEC jointly proposed a new rule that would require SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to establish, document, and maintain a written CIP. Under the proposed rule, RIAs and ERAs would be required to implement "reasonable procedures" to identify and verify the identity of their customers and maintain a record of the information used to verify each customer's identity, among other requirements. The proposed rule seeks to prevent illicit finance activity involving customers of RIAs and ERAs and to strengthen the anti-money laundering/countering the financing of terrorism framework for the investment adviser sector. FinCEN and the SEC also released a fact sheet on the proposed rule. Comments on the proposed rule must be submitted within 60 days of publication in the Federal Register.

Federal Reserve and CFPB Announce Inflation-Adjusted Dollar Thresholds for Regulation CC Funds Availability

On May 13, the Federal Reserve and CFPB announced jointly-adjusted inflation dollar amounts relating to the availability of funds under Regulation CC. The adjustment is mandated by law to occur every five years and is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). As a result of the adjustment, the minimum amount of deposited funds that banks must make available for withdrawal by the opening of business on the next day for certain check deposits, as well as the amount of funds deposited by certain checks into a new account that are available the next day, will increase. Banks have until July 1, 2025 to comply with the adjusted requirements.

FSOC Releases Report on Nonbank Mortgage Servicing

On May 10, the FSOC released its Report on Nonbank Mortgage Servicing (the "Report"), highlighting the important role of nonbank mortgage companies and identifying key risks and vulnerabilities for nonbank mortgage companies, including economic shocks in the mortgage industry and liquidity risks in times of stress. To enhance industry resilience and help protect US financial stability, the Report also makes recommendations, including that:

• State regulators enhance prudential requirements for, and increase supervision on, nonbank mortgage companies;
• Congress grant the Federal Housing Finance Agency and Ginnie Mae additional authorities to establish appropriate safety and soundness standards for, and the ability to directly examine, nonbank mortgage companies;
• Congress grant Ginnie Mae the authority to expand the Pass-Through Assistance Program; and
• Congress establish a fund financed by nonbank mortgage companies to provide liquidity to failing nonbank mortgage companies, to help ensure the operational continuity of servicing, and to provide additional protection to the mortgage industry in times of economic stress.

CFPB Report Highlights Consumer Frustrations with Credit Card Rewards Programs

On May 9, the CFPB released a report and press release analyzing consumer complaints surrounding credit card rewards programs. Complaints about credit card rewards programs have increased over 70% since before the COVID-19 pandemic. The report outlines various consumer complaints, such as vague or hidden conditions that keep consumers from receiving rewards, devalued rewards, issues with redeeming earned benefits, and revoked rewards that consumers had earned.

Federal Reserve Releases Summary of Exploratory Pilot CSA Exercise Conducted with Six of the Largest US Banks

On May 9, the Federal Reserve released a summary of the CSA pilot exercise it conducted with Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo in 2023. The exercise considered how these banks utilize CSA to understand the resilience of their business models to climate-related financial risks, taking into account different physical and transition risk scenarios and exploring their vulnerabilities to such risks over shorter and longer time horizons. The exercise highlighted gaps in data and challenges in developing models to estimate the financial impacts of climate risks, with participants identifying a lack of "comprehensive and consistent data related to building characteristics, insurance coverage, and counterparties' plans to manage climate-related risks" and reliance on "external vendors to fill data and modeling gaps" and also reporting that "better understanding and monitoring of indirect impacts (e.g., disruptions to local economies) and chronic risks (e.g., sea level rise) are important for managing climate-related financial risks." The exercise does not have an impact on the participating institutions' capital requirements but was meant to assist the Federal Reserve as it continues to engage with banks in understating their ability to identify, estimate, monitor, and manage climate-related financial risks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.