Supreme Court Victory Emboldens CFPB Agenda

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.

For more information about how CFPB rulemaking or enforcement may impact your business, please contact any of the authors of this Advisory or your usual Arnold & Porter contact. The firm’s Financial Services and White Collar Defense and Investigations practice groups would be pleased to assist with any questions about expected CFPB rulemaking, enforcement, or supervision following the Supreme Court’s ruling, or financial regulation more broadly.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.