Our Take: financial services regulatory update – May 17, 2024

Change remains a constant in financial services regulation. Read "our take" on the latest developments and what they mean.

Current topics – May 17, 2024

1. Supreme Court finds CFPB funding is constitutional

  • What happened? On May 16th, the Supreme Court in a 7-2 decision rejected a challenge to the CFPB’s funding structure. The decision reversed the Fifth Circuit’s finding that the CFPB is “double insulated” from the Congressional appropriations process because it is funded through the Fed, which itself operates independently from the appropriations process. As a result of the Fifth Circuit decision, the agency’s 2017 payday lending rule was vacated in the areas covered by the Fifth Circuit court, specifically Texas, Louisiana and Mississippi.
  • What did the Supreme Court decision say? The Court found that an “appropriation” only requires that Congress pass a law specifying a source of funding for a specific purpose and that the CFPB’s funding structure meets this requirement.
  • What’s next? Following the decision, the CFPB released a statement welcoming the result and pledging to “continue carrying out the vital consumer protection work Congress charged us to perform for the American people.” The agency can now file for dissolution of the Fifth Circuit’s payday lending rule as well as a stay of its credit card late fee rule issued under identical reasoning.

Our Take

The CFPB has cleared a major legal hurdle but there are more challenges to come. This week’s decision confirms that the CFPB is here to stay, removing the possibility that virtually every rulemaking and action taken by the agency would be deemed unconstitutional. While this existential threat is now gone, we expect continued challenges to individual rulemaking and guidance by the agency - as we have seen with the small business lending rule and updates to its exam manual - by alleging that the CFPB (a) issued the rulemaking or guidance arbitrarily and capriciously, and (b) failed to perform an adequate cost benefit analysis. If the Supreme Court pares back agencies’ abilities to interpret their own statutory authority in an upcoming decision regarding “Chevron deference,” the door will open for even more legal challenges around the CFPB’s interpretation of terms such as “unfair, deceptive, or abusive acts or practices” as well as its ability to oversee nonbanks and areas such as AI and digital currency.

Despite these challenges, we expect that the agency will go full steam ahead with its investigations, enforcement and rulemaking agenda. Firms should anticipate continued high scrutiny of areas that have become key priorities under Director Chopra’s tenure such as fees and contract clauses that the agency considers unfair, deceptive or abusive as well as issues related to fair lending, anti-competitive practices and big tech companies offering financial services. As evidenced by its enforcement action, updated small business lending compliance schedule, and the fact that the agency is actively recruiting enforcement attorneys, the CFPB’s already vigorous pursuit of its agenda is set to only pick up.

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