Update 671 — CFPB Constitutionality
Prospects for a SCOTUS Showdown
In the coming weeks, the U.S. Supreme Court is expected to decide whether or not to hear Consumer Financial Protection Bureau v. Community Financial Services Association of America, the long-anticipated legal challenge to the constitutionality of the Consumer Financial Protection Bureau (CFPB)’s funding mechanism.
The decision, avidly argued in the last few months by critics and advocates alike, has a range of possible outcomes and implications for consumer rights, threatening to upend the functionality and funding of other federal agencies. Below we discuss the well and lesser-known value of the CFPB, relevant aspects of its history, and the ramifications of a Supreme Court ruling upholding the decision of the conservative Fifth Circuit.
Good weekends all…..
Since its inception, following the 2008 financial crisis, the Consumer Financial Protection Bureau (CFPB) has faced threats to its leadership structure, its funding and its very constitutionality. The agency, whose rules could have helped prevent the crisis and which has secured over $15 billion on behalf of consumers, is facing a new threat. Within weeks, the Supreme Court is expected to announce whether it will hear CFPB v. Community Financial Services Association of America, a challenge to the constitutionality of the Bureau’s funding mechanism. Allowing the conservative Fifth Court of Appeals’ ruling to stand threatens the status of every rule and action of the CFPB to protect consumers and fair markets and undermines the funding and independence of other financial regulators.
Popular and Protecting Consumers
The CFPB was created to enforce consumer protection laws and keep financial markets functioning smoothly in a fair, competitive, and transparent manner. In this role, the Bureau has served consumers and honest businesses well.
The CFPB has secured over $15 billion on behalf of consumers – over $13.5 billion in relief for up to 175 million consumers in the form of restitution (money returned to them) or canceled debt and $1.8 billion in civil penalties paid by companies that cheated consumers.
No wonder that a federal agency dedicated to and successfully protecting consumers and their finances is popular among voters. A November 2022 poll conducted by a bipartisan team from Lake Research Partners and Chesapeake Beach Consulting found that 79 percent of voters across the political spectrum backed the CFPB’s mission after hearing a brief description of the Bureau and its mission, including 86 percent of Democrats, 75 percent of Republicans and 64 percent of independents. Voters also support the Bureau’s work to:
- Fight financial discrimination
- Rein in harassment by debt collectors
- Protect student borrowers
- Limit credit card and overdraft fees
- Lower the interest rate on high-cost loans
- Stop fintechs from evading consumer protections
The poll findings are consistent with over a decade of opinion research demonstrating enduring public support for the Bureau and its work.
Lake Research Partners and Chesapeake Beach Consulting
The Case Threatening the CFPB
The current threat to the CFPB stems from a 2018 lawsuit filed against the Bureau by the payday lending industry’s top lobbying group, the Community Financial Services Association of America and a Texas affiliate. The CFSA’s suit challenged the Bureau’s 2017 Payday Lending Rule which governed payday and certain other high-cost installment loans.
In October, the U.S. Court of Appeals for the Fifth Circuit ruled that the CFPB’s funding mechanism violated the Constitution’s Appropriations Clause, which establishes Congress’s power of the purse. The Bureau is not funded through annual appropriations from the Treasury, but rather through annual transfers from the Federal Reserve. The Fifth Circuit Court ruled that CFPB’s power to establish the rule came from its “unconstitutional” funding structure and invalidated the Payday Lending Rule.
Now, the Bureau has asked the Supreme Court to overturn the Fifth Circuit’s ruling. While the high court has yet to announce whether it will hear the case, a ruling to uphold the lower court’s decision could have broad implications for the Bureau, the consumers it protects, the markets the agency regulates and other regulatory agencies.
- Implications for the CFPB and Markets
If the CFPB’s funding mechanism is found unconstitutional, the validity of all its rules protecting consumers and providing stability formarkets could suffer the same fate as the Payday Lending Rule. Not long after the Fifth Court issued its ruling, U.S. Solicitor General Elizabeth Prelogar stated that the Court’s “sweeping holdings” in its ruling could “threaten the validity of virtually every action the CFPB has taken in the 12 years since it was created – as well as its ongoing activities.”
Though industry groups often rail against the Bureau and the regulations it imposes on behalf of consumers, financial companies and lobbyists rely on the CFPB’s rules for stability and are quietly terrified of the chaos the Supreme Court ruling could unleash on markets.
To understand how an invalidation of the Bureau’s rules could affect markets, we can look at what would happen following the potential invalidation of the CFPB’s qualified mortgage rule. Under Dodd-Frank’s ability-to-repay standard for mortgages, companies were required to assess borrowers’ ability to meet payments before approving loans. The Bureau’s QM rule exempted mortgages with specified characteristics from this requirement. If this rule was similarly invalidated, borrowers with qualified mortgages could bring legal challenges against companies that failed to assess their ability to repay.
The CFPB has promulgated a broad range of industry rules that promote fairness and economic stability including the
- Mortgage disclosure rule
- Mortgage servicing rule
- Rules on mortgage originator compensation
- Appraisal requirements and disclosures
- Escrow and homeownership counseling requirements for higher-cost loans.
- Implications for Other Agencies
The CFPB is not the only agency with rule-making authority funded outside of the annual appropriations process. The Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the National Credit Union Administration are funded outside of the appropriations process. These regulators are funded by fees charged to the companies they regulate. Throughout American history, no depository institution regulator has been funded through the annual appropriations process. Also getting their funding outside the appropriations process are the Farm Credit Administration, the Farm Credit Insurance Corporation, the Bureau of Engraving and Printing, and the Federal Housing Finance Agency, and programs like Medicare and Social Security.
The Fifth Circuit judges tried to suggest their ruling would not affect other agencies, claiming that the Bureau is unique among regulatory agencies since it receives funding from the Fed, which is itself insulated from the appropriations process. They claim that the CFPB is uniquely “double insulated.” However, as Professor Adam Levitin at Georgetown Law has noted, the differences outlined by the judges are not “constitutionally significant.”
More Threats on the Horizon?
As the CFPB v. CFSA case looms, a broad range of threats – both legislative and judicial – continue to face the Bureau.
In the case that the Supreme Court upholds the Fifth Circuit’s ruling, Congress could move to appropriate funding for the Bureau. Given the current Republican House majority, and the demonstrated willingness of some Republican congress members to tolerate chaos to extract preferred concessions, negotiations could lead to new restrictions on the CFPB’s power.
Representative Andy Barr (R-KY), the chair of the House Financial Services Committee’s Subcommittee on Financial Institutions and Monetary Policy, is expected to reintroduce the TABS Act in the coming weeks. This could represent House Republicans’ opening offer in potential negotiations. Given the Democratic majority in the Senate and the Biden administration’s cooperation with the agency on its agenda to promote competition in the American economy, the bill is unlikely to pass.
The still-to-be-finalized draft of the TABS Act would seek to rename the CFPB, the Consumer Financial Empowerment Agency and make the Bureau subject to annual Congressional appropriations.
Additionally, there are currently over 20 additional cases threatening to undermine the CFPB’s authority and work before the courts.
Defend CFPB and Its Funding
Challenges to the CFPB are not new and will undoubtedly persist as the Bureau continues to effectively fight as what Senator Warren calls the “cop on the beat for consumers.” As the Bureau’s work continues to benefit consumers at the expense of the predatory banks and corporations’ profit margins, ongoing lobbying efforts by industry groups will continue to permeate the ongoing conversation around the Bureau’s work.
Congress and the administration must vocally reinforce their commitment to protect the CFPB, oppose the TABS Act and prepare to negotiate on the Bureau’s behalf should a new legislative fight arise. And in the face of the potential invalidation of the CFPB’s funding mechanism and the rules it has promulgated, Congress must be prepared to negotiate on behalf of consumers to shore up the regulatory scaffolding the CFPB has upheld for the past 12 years.