U.S. Supreme Court Rules the CFPB’s Structure is Constitutional

On May 16, 2024, the U.S. Supreme Court ruled that the funding structure of the CFPB does not violate the Constitution’s Appropriations Clause which states that “‘[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” In other words, the fact that the CFPB is funded independently with money from the Federal Reserve rather than the US Congress is not a violation of the constitution.

Since the ruling last week, the CFPB has already issued a statement emphasizing that the agency would continue to pursue its mission. Additionally, the CFPB has already become more aggressive with their enforcement and regulatory actions, including an interpretive rule which defines lenders who offer “Buy Now, Pay Later” loans as being card issuers for purposes of Regulation Z and the CFPB’s announcement to pursue additional enforcement measures related to pawn shops, medical billing, credit reporting, and financial data. Let’s begin by walking through how we got here and what this means for credit unions.

How did we get here?

The CFPB was created from the Dodd-Frank Act of 2010 to increase accountability in government by consolidating consumer financial protection in the financial marketplace. When it was created, it had a unique funding structure which allowed it to operate independently from the annual congressional appropriations process. This meant that the CFPB’s director could draw funds “reasonably necessary to carry out the Bureau’s duties” from the Federal Reserve’s operating expenses (up to a statutory limit) as opposed to following the process by Congress to approve or deny any funding appropriations requests.

Then in 2018, the Community Financial Services Association (CFSA) filed suit against the CFPB, challenging the CFPB’s “Payday Lending Rule” on the grounds that the CFPB’s funding mechanism violated the Appropriations Clause. In that case, the US District Court in the Western District of Texas ruled that the CFPB’s funding mechanism did not violate the Appropriations Clause. The case was appealed to the US Court of Appeals for the Fifth Circuit which ruled in 2022 that the CFPB’s funding was unconstitutional because it bypassed the congressional appropriations process, thereby vacating the payday lending rule. The CFPB appealed the Fifth Circuit’s ruling and in February of 2023 the Supreme Court agreed to hear the case for its 2023-2024 term.

What does this mean for credit unions?

 The Supreme Court’s decision has broad implications beyond their funding structure, most immediately for the Fifth Circuit ruling which invalidated the CFPB’s payday lending rule.  The Payday Lending Rule restricts lenders’ ability to obtain loan payments through preauthorized account access after two unsuccessful withdrawal attempts. However, due to the Supreme Court decision, the case will be remanded back to the Fifth Circuit and will likely take effect once the CFPB announces a new compliance date for the rule.

 Additionally, the litigation regarding the bureau’s constitutionality was one of the bases for a preliminary injunction delaying implementation of the CFPB’s credit card late fee rule. Now that the constitutionality of the bureau’s funding has been settled, it is likely further motions and arguments will be made in that case, with the plaintiffs continuing to seek a delay of the implementation of the late fees rule and with the CFPB seeking to have the lawsuit dismissed.

Lastly, the CFPB announced that it is extending the compliance date for the small business lending rule (1071 rule) which amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile, maintain, and submit to the CFPB certain data on applications for credit for women-owned, minority-owned, and small businesses. The new compliance dates are based on 290 days having elapsed between the order extending the preliminary injunction and the Supreme Court’s decision. According to the CFPB, the new 1071 compliance dates are:

America’s Credit Unions will continue to provide our members with updates as this new ruling will likely incentivize the CFPB to continue is regulatory, enforcement and supervision policies, including their war on “junk fees.”