Supreme Court Ruling on CFPB’s Fate May Rewrite the Rules of Banking and Credit

For the Consumer Financial Protection Bureau (CFPB), the courts have been a hotbed of action, lawsuits, appeals and back-and-forth between lawyers.

Almost everything boils down to the decision that will come down from the Supreme Court — a decision that will determine whether the agency can exist at all.

In terms of the timeframe, the decision is widely expected to be imminent, with some media sites reporting that the decision on the constitutionality of the CFPB’s funding might be handed down as soon as this week. There’s no hard and fast schedule here, as decisions can be made as late as the last day of the term, which stretches into late June or early July.

The when may be a question mark, but the impact of the decision on the financial services industry may be nothing short of seismic.

The road to the marbled steps of the highest court in the land has been long.

The original lawsuit arguing that the CFPB’s funding was and is unconstitutional was lobbed by the Community Financial Services Association of America and the Consumer Service Alliance of Texas. The case wound its way through various appeals and rulings before landing in the Supreme Court’s hands.

The agency traces its roots back to 2008 and was formed through Dodd-Frank. The CFPB gets its funding from the Federal Reserve rather than through the congressional appropriations process. At the end of 2022, the U.S. Court of Appeals for the Fifth Circuit ruled funding mechanism is unconstitutional and violates the appropriations clause. The matter now rests with the high court.

Vacating Enforcement Actions — and Rules, Too?

If the Supreme Court rules that the funding mechanism is indeed unconstitutional, among the repercussions, conceivably, is that the enforcement actions stretching back years also would have been unconstitutional. To get a sense of scope and impact, consider the fact that last year alone, the agency filed 29 enforcement actions and resolved through final orders six previously filed lawsuits. The corporates and banks that were on the receiving end of those actions paid $3.1 billion in compensation to individuals and paid nearly $500 million in civil money penalties.

Most immediately, there has been a chilling effect on one action that was supposed to take effect Tuesday (May 14). CFPB rulemaking would have capped most credit card late fees at $8, where the average fee had been $32. Last week, Judge Mark Pittman of the U.S. District Court for the Northern District granted an injunction that halted the rule from taking effect. In doing so, Pittman cited a 2022 court ruling that found the CFPB’s funding structure unconstitutional.

“Consequently, any regulations promulgated under that regime are likely unconstitutional as well,” Pittman wrote in his ruling. “Thus, plaintiffs establish a likelihood of success on the merits.”

The ruling granting the preliminary injunction does not give a time frame for how long the injunction will last.

Other rules have debuted in recent months from the CFPB. Last fall, for example, the agency proposed its Personal Financial Data Rights rule, which is commonly referred to as Rule 1033, and helps shape how banks and third-party providers access and use data (and how consumers can permission that data to be shared).

There are several outcomes here. The Supreme Court can rule that the funding mechanism is constitutional, which would presumably give the CFPB the green light to continue operating as it has since 2011. The wildcard here, on the credit card fee front, is what happens with the injunction. The court might rule the funding mechanism is unconstitutional — and, conceivably, funding might come from Congress.

If the court rules that the funding of the agency is unconstitutional, the ripple effect would at least open the door to myriad legal challenges against 11 years of actions and rules.

An outright nullification of those rules begs the question as to what comes next. Where uncertainty reigns, caution reigns too. Might it be the case that corporates and financial services firms will be loath to make any changes to products and services or embrace open banking until the dust settles? Much rides on the opinions of the men and women who will rule from the bench this spring.