CFPB Faces Fresh Fights After Supreme Court Lifts Funding Cloud

The Consumer Financial Protection Bureau is clear to ramp up enforcement and defend several major regulations in litigation after the US Supreme Court decision that its spending structure is constitutional.

The ruling allows the agency to focus on enforcement, where it has been publicly quiet in recent months, without fear of a court decision demolishing it. Targeted companies can still challenge agency actions in court, though.

Bruising battles over controversial rules such as its cap on credit card late fees, small business lending demographic data collection, and forthcoming restrictions on overdraft fee programs also await the agency in the final months of President Joe Biden’s term.

“The message to the agency will be full steam ahead, we need to get as much done as possible,” Rachel Rodman, a White & Case LLP partner and former top CFPB attorney, said.

CFPB funding through the Federal Reserve is valid under the US Constitution’s appropriations clause, the high court found in a 7-2 ruling Thursday in CFPB v. Community Financial Services Association of America. The decision ends legal threats to the CFPB’s very existence that have percolated through the courts since Congress created the agency in the 2010 Dodd-Frank Act.

“The broad sweeping challenges to the CFPB are over at this point,” said Andrew Kim, a partner in Goodwin Procter LLP’s appellate and Supreme Court litigation practice.

‘Revenge Tour’

CFPB Director Rohit Chopra and his enforcement team now have more leeway to start getting far more aggressive than they have been in recent months, while the high court case was pending. The agency has taken only four public enforcement actions in 2024, a significant slowdown from recent years.

“The CFPB will continue carrying out the vital consumer protection work Congress charged us to perform for the American people,” the agency said in a Thursday statement.

Chopra and the CFPB are likely to come out swinging after their Supreme Court win, some defense attorneys said.

“They are waking up the bear during hibernation. It’s the revenge tour,” said Joann Needleman, the leader of Clark Hill PLC’s financial services and regulatory practice group.

Attorneys say some smaller companies have been ignoring CFPB civil investigative demands and other investigatory requests while the Supreme Court case lingered. That’s likely to prove to be a losing gambit now.

“The strategy of poking the CFPB in the eye and refusing to cooperate with the CFPB’s enforcement process—that will stop,” Kim said.

Even if there’s not a tsunami of new cases, expect more enforcement, according to Dorsey & Whitney LLP partner Joseph Lynyak, who has represented financial institutions before the CFPB.

“They have been ramping up in terms of their staffing, so they will be well in position to take enforcement actions if they have to,” he said.

Rule Revival

Lower federal courts in Texas paused two major CFPB rules amid legal challenges after the US Court of Appeals for the Fifth Circuit’s October 2022 ruling that the funding structure was unconstitutional.

Chief Judge Randy Crane of the US District Court for the Southern District of Texas put the agency’s small business lending data collection rule on hold last October, pending the Supreme Court’s decision.

Judge Mark Pittman of the US District Court for the Northern District of Texas applied a preliminary injunction to the CFPB’s $8 credit card late fee cap May 10, pending the Supreme Court’s ruling. The late fee rule was supposed to take effect May 14.

Litigation over those rules is likely to get restarted quickly.

“That basis as a reason to argue the CFPB doesn’t have the authority to do certain things has been rejected by the Supreme Court,” Rodman said.

Before those rules can take effect, the agency will have to ask the courts for the existing injunctions to be lifted. Industry group plaintiffs that sued to block the rules will have the chance to ask for fresh injunctions on substantive grounds, Kim said.

The agency will be confronted with procedural and substantive lawsuits over any coming regulations that industry opposes, said Graham Steele, who served as the assistant Treasury secretary for financial institutions in the Biden Administration.

A pending Supreme Court decision on the scope of agency leeway to regulate under ambiguous laws could throw up another obstacle to CFPB rulemaking.

“The CFPB’s won the existential portion of this and now it’s just a pitched battle going rule by rule,” Steele said.

The credit card late fee cap and the small business data collection rules aren’t the only ones affected by Thursday’s ruling.

The underlying issue in the litigation that culminated in the high court’s opinion was a challenge to a 2020 CFPB payday lending rule enacted by former director Kathy Kraninger, a Trump appointee. The rule, a scaled-back version of a regulation initially finalized by Obama-era CFPB Director Richard Cordray, limited payday lenders’ ability to access customer bank accounts, among other changes.

The Fifth Circuit found the payday lending rule met the standards set by the Administrative Procedure Act even if the CFPB was unconstitutionally funded. Now that the funding question has been resolved in the CFPB’s favor, the payday lending rule is clear to go into force, attorneys say.

Litigation over CFPB regulations weren’t the only cases that were stayed while the Supreme Court deliberated.

As of July 2023, eight defendants in CFPB enforcement actions sought a stay while the funding question was being decided and four were successful, according to research from attorneys at Cadwalader, Wickersham & Taft LLP.

Those cases are going to restart quickly, Rodman, who was part of the Cadwalader team that conducted the research before joining White & Case, said.

Future Funding

The CFPB isn’t entirely clear of funding headaches.

Under Dodd-Frank, the agency in any given fiscal year can draw on a maximum of 12% of the central bank’s total operating expenses as reported in 2009 and adjusted for inflation. That translates to a maximum $750.9 million withdrawal from the Fed for fiscal 2023, $785.4 million for fiscal 2024, and $823.1 million for fiscal 2025, according to the CFPB’s annual performance report.

The agency is beginning to get close to its cap even as its regulatory responsibilities expand with the increasing innovation and new products coming into consumer financial markets. The CFPB’s budget came to $696.6 million in fiscal 2023 and is projected to jump to $762.9 million and $810.6 million in fiscal 2024 and 2025, according to the report.

And if it needs more resources, the CFPB may have to turn to Congress, where Republicans decried the Supreme Court’s ruling.

“I don’t think they’ll get the cap lifted. I just can’t see that happening,” Rodman said.

Steele, the former top Treasury official, said he believes at least some of the projected increase in the CFPB budget was intended to offset a loss at the Supreme Court. Because of that, there’s more room to maneuver under the cap for the CFPB.

“They’ve gotten a lot done with what they’ve had. They’re in a good place going forward now to police these markets,” he said.

The case is CFPB v. Consumer Financial Services Association of America, U.S., No. 22-448, opinion 5/16/24.