On May 16, 2024, the Supreme Court affirmed the constitutionality of
the Consumer Financial Protection Bureau (CFPB), holding that the
funding mechanism of the CFPB satisfied the Appropriations Clause
of the U.S. Constitution. The much-anticipated ruling has broad
implications for the rulemaking, supervision, and enforcement
agendas of the CFPB, which, according to CFPB Director Rohit
Chopra, will be "firing on all cylinders" in light of the
Court's decision.
This Advisory summarizes the Supreme Court's ruling in CFPB
v. Community Financial Services Association of America and
outlines expectations for the CFPB's upcoming agenda.
Additionally, on July 24, 2024, Arnold & Porter will host a
webinar on the CFPB's regulatory and enforcement priorities
following the Supreme Court's ruling. This informative session
will feature attorneys from our Financial Services and White Collar
Defense and Investigations practice groups, who will cover a range
of topics related to expected rulemaking, enforcement, and
supervisory trends by the CFPB. Additional details will be provided
in the weeks ahead. Please click here to register.
CFPB v. Community Financial Services Association of America
In April 2018, two trade associations representing payday
lenders and credit-access businesses filed suit against the CFPB
following an agency rulemaking that, among other things, restricted
lenders' ability to obtain loan payments through preauthorized
account access (the Payday Lending Rule). The Payday Lending Rule
also imposed various requirements on the extension and collection
of certain payday loans, vehicle-title loans, and longer-term loans
with balloon payments, requiring lenders to assess a consumer's
ability to repay before making certain "covered
loans."
The trade associations argued that the CFPB's funding mechanism
violated the Constitution's Appropriations Clause and
separation-of-powers principles because the CFPB is funded through
a percentage of fees collected by the Federal Reserve rather than
annual congressional appropriations. According to the trade
associations, if the CFPB's funding mechanism violated the
Constitution, then the CFPB lacked authority to promulgate and
enforce any regulations, including the Payday Lending Rule. The
case also cast doubt upon the validity of every other action taken
by the agency since its inception.
After a federal district court ruled in favor of the CFPB, the U.S.
Court of Appeals for the Fifth Circuit reversed. Eighteen months
later, the Supreme Court, in an opinion by Justice Thomas, held
that the CFPB's funding mechanism is constitutional because the
Appropriations Clause only requires Congress to identify a source
of public funds and authorize the expenditure of those funds for
designated purposes. Justice Thomas found many examples of
"open-ended, discretionary appropriations" dating from
the English middle ages through the founding of our nation. In a
concurrence joined by three other justices, Justice Kagan noted
that the Court's interpretation of the Appropriations Clause
was also consistent with the way the federal government actually
works, and that a more restrictive rule would make many federal
agencies, including the Federal Reserve itself, constitutionally
infirm.
The resolution of CFPB v. Community Financial Services
Association of America lifts the uncertainty regarding the
viability of the CFPB and clears the way for the agency to pursue
certain initiatives that have been slowed, or altogether halted, by
the litigation. Below is a summary of notable expectations for CFPB
enforcement, rulemaking, and supervision activities in the weeks
and months ahead.
Expected Enforcement Priorities
In recent months, the CFPB has substantially ramped up its enforcement efforts against a variety of entities engaged in financial services. Echoing the agency's increased enforcement efforts, CFPB Director Chopra has promised to "forge ahead" with enforcement work and has emphasized that the agency has "increased the ranks" within the Office of Enforcement as a deterrent to entities under the purview of the CFPB. In addition to enhancing its scrutiny of "repeat offenders," the CFPB is expected to continue its investigative and enforcement efforts in the following areas:
- Debt Collection. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the CFPB has increased enforcement efforts to take action against nonbank financial institutions for violations of the Fair Credit Reporting Act and Fair Debt Collection Practices Act. More specifically, the CFPB has taken several actions related to medical debts, which the agency claims "raise significant concerns." In June 2023, the CFPB, U.S. Department of Health and Human Services, and U.S. Department of Treasury launched an inquiry into credit cards and loans offered to patients to pay for health care costs.
- "Junk" Fees. The CFPB recently has focused its enforcement efforts on several types of fees imposed by supervised institutions, including banks, auto loan services, and remittance providers. As discussed in our October 2023 Advisory, the CFPB's recent actions come as part of the Biden-Harris Administration's overall so-called "junk fee" initiative, launched in January 2022. The CFPB has since published an Advisory Opinion and Supervisory Highlights on the topic. In April, the CFPB extended its focus on "junk fees" to fees charged by mortgage servicers, including property inspection fees.
- Student Lending. The CFPB recently has taken action against several providers engaged in student lending activities for fees, misrepresentations, and "income share" agreement contracts. In each of these enforcement actions, the CFPB has either permanently banned an entity from all consumer-lending activities or mandated that an entity cease operations altogether.
- Credit Reporting. Following the Supreme Court's ruling, CFPB Director Chopra announced that the public "should expect to see more work when it comes to credit reports and credit scores." Increasingly, the CFPB has prioritized examinations of consumer reporting companies and furnishers, including banks, loan servicers, and others that furnish information to consumer reporting agencies for inclusion in consumer reports. Examiners continue to find "deficiencies in furnishers' compliance with the accuracy and dispute investigations requirements of the [Fair Credit Reporting Act] and Regulation V," according to the agency.
In the next few weeks, several federal district courts are expected to revive more than 10 enforcement actions that were previously stayed in federal court pending a ruling by the Supreme Court in CFPB v. Community Financial Services Association of America.
Expected Rulemaking Priorities
In the weeks ahead, federal district courts are expected to lift stays on two CFPB rulemakings regarding (1) the collection of small business lending data under Section 1071 of the Dodd-Frank Act and (2) an amendment to Regulation Z that prohibits larger credit card issuers from charging a fee of more than $8 for, among other things, late payments.
- As discussed in our April 2023 Advisory, the CFPB has issued a long-awaited final rule amending the Equal Credit Opportunity Act to implement the small business lending data collection requirements of the Dodd-Frank Act. The final rule requires banks, credit unions, and nonbank lenders to collect and report data about covered loan applications from small businesses, including women-owned and minority-owned small businesses, and allows for the creation of the first comprehensive public database that covers small business lending practices. Pursuant to the final rule, financial institutions must begin collecting data and otherwise complying with the rule by July 18, 2025 if an institution has originated at least 2,500 "covered originations" in both 2022 and 2023. Financial institutions that originated fewer covered originations in both 2022 and 2023 are subject to compliance dates in 2026.
- In March 2024, the CFPB issued a final rule to amend Regulation Z, as well as associated commentary, related to credit card penalty fees. At the time, Regulation Z permitted larger card issuers — institutions with more than 1 million open accounts — to charge $30 for penalty fees generally, including fees associated with late payments, and $41 for each subsequent violation of the same type of activity that occurs in certain circumstances. The CFPB's final rule reduced the maximum amount larger card issuers may charge per penalty to $8 and eliminated increased fees for subsequent violations of the same type. In March, the U.S. Chamber of Commerce, among others, challenged the CFPB's final rule in federal court, alleging that it violated the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, which governs terms and conditions associated with credit cards, such as penalty fees. As a result of this ongoing litigation, the CFPB, at least temporarily, is enjoined from implementing the final rule. The effect on these proceedings of the Supreme Court's decision in CFPB v. Community Financial Services Association of America is not yet clear.
The CFPB has also issued several recent notices of proposed rulemakings, including rules related to non-sufficient fund (NSF) fees; overdraft fees imposed by very large financial institutions; supervision of larger participants in the market for general-use digital consumer payment applications; and open banking and personal financial data rights. The comment period has since closed for each of these notices of proposed rulemaking, which means that the proposed rules will likely issue in the coming months. Additionally, on May 22, 2024, the CFPB issued an interpretive rule applying Regulation Z's requirements for open-end credit to lenders that market "buy now, pay later" loans.
In consideration of the Supreme Court's action, as well as other factors including the election-year calendar, the CFPB can be expected to continue aggressively pursuing its rulemaking agenda and its defense of rules that are the subject of ongoing litigation.
Expected Supervision Priorities
The CFPB is expected to continue to assert jurisdiction over
nonbanks, both through its "larger participant"
supervisory authority, as discussed in our November 2023 Advisory, and its previously
"dormant" authority to examine certain nonbanks that are
deemed to pose risks to consumers in the offering of consumer
financial products and services. With regard to the latter,
although the CFPB issued procedures governing nonbank supervisory
designations in 2013, the agency had not begun to make active use
of its supervisory designation authority until 2023. In February
2024, the CFPB published its first supervisory designation in a contested
proceeding, determining that World Acceptance Corporation, a
nonbank installment lender, met the applicable criteria for
supervision. In April 2024, the CFPB issued a procedural rule streamlining
the process by which the agency may designate a nonbank for
supervision under the Dodd-Frank Act. The agency's 2024
procedural rule is the latest action in the CFPB's effort to
continue the expansion of its supervisory jurisdiction over nonbank
entities.
The CFPB is also expected to continue its focus on supervision of
"repeat offenders." In late 2022, the CFPB proposed a rule that would create a
registry for certain nonbank financial firms that become
subject to local, state, or federal consumer financial
protection-related court or agency enforcement orders, while also
announcing through its Supervisory Highlights publication that it
had formed a Repeat Offender Unit (ROU) within the agency's
Office of Supervision. A "repeat offender" generally is
viewed as an institution that has been alleged to have violated
consumer financial protection laws and regulations; in particular,
institutions that are subject to agency consent orders or court
orders in respect of such misconduct. The ROU is tasked with the
following functions: (1) reviewing and monitoring the activities of
repeat offenders; (2) identifying the root cause of recurring
violations; (3) pursuing and recommending solutions and remedies
that hold entities accountable for failing to consistently comply
with federal consumer financial law; and (4) designing a model for
order review and monitoring that reduces the occurrences of repeat
offenses. In light of this broad mandate, in practice the ROU
operates in tandem with financial institutions' normal
examination teams and the Office of Enforcement. Accordingly,
institutions that are deemed to be "repeat offenders" can
continue to expect enhanced scrutiny during routine examinations as
well as with respect to consumer restitution and remediation of
practices and controls that may be required under agency consent
orders or court orders relating to prior misconduct.
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.