CFPB Enforcement Lags in Federal Court Due to Supreme Court Case

The Consumer Financial Protection Bureau, the federal financial watchdog, is facing an existential challenge at the US Supreme Court next term. The uncertainty surrounding the outcome of that case is impeding the agency’s enforcement efforts as lower courts wait for Supreme Court guidance.

The CFPB, established in 2010 in response to the Great Recession, has always courted controversy. In 2020, the Supreme Court took issue with the lack of direct presidential control over the CFPB’s director. But that ruling did not limit the agency’s powers or authorities, and the CFPB has continued to function with its full powers intact.

Next term, the Supreme Court will decide a far more significant question: Is the CFPB’s funding mechanism unconstitutional? The agency cannot function without funding.

The uncertainty surrounding the CFPB’s funding structure has impacted the CFPB’s ability to use litigation as an enforcement tool.

Litigants in eight CFPB enforcement actions pending in federal court have sought to stay such actions. Four have succeeded, while only two have been denied.

This enforcement freeze could last for another year: The Supreme Court may not decide the funding question until June 2024.

Background

The CFPB receives its funding by making requests to the Federal Reserve Board of Governors. In October 2022, the US Court of Appeals for the Fifth Circuit ruled in Community Financial Services Association v. CFPB that the CFPB’s funding mechanism violates the Appropriations Clause.

In February 2023, the Supreme Court agreed to hear the CFPB’s appeal of that decision. Subsequently, the US Court of Appeals for the Second Circuit also weighed in. In CFPB v. Law Offices of Crystal Moroney, the Second Circuit expressly disagreed with the Fifth Circuit and held that the CFPB’s funding mechanism is constitutional—creating a circuit split while the question is pending before the Supreme Court.

Enforcement Actions Slowed in Federal Court

The legal uncertainty has impacted the CFPB’s enforcement activities. We identified 16 active enforcement actions brought by the CFPB in federal district court. Of these:

Litigants have sought a stay in 8 out of 16 cases.
Courts granted stays in four cases, explaining that a ruling upholding the Fifth Circuit’s decision in CFSA would also decide the cases before them.
Two courts denied stay requests.

First, the US District Court for the Eastern District of Illinois denied Transunion’s request to stay. The court stated that the potential harm to consumers due to defendants’ conduct outweighed the benefits of avoiding the litigation a stay would confer. Notably, the court also had already rejected the argument that the CFPB’s funding structure violated the Appropriations Clause in Transunion’s motion to dismiss.

Second, the US District Court for the District of Massachusetts denied the defendants’ motion to stay—for the second time—without issuing an accompanying decision.

Two stay requests remain pending.

Circuit Split Hasn’t Led to Stay Reversals

The CFPB sought to reverse two of the stays following the Second Circuit’s decision in Moroney. Both requests, however, were denied.

First, the US District Court for the Southern District of New York denied the CFPB’s motion to lift the stay in CFPB v. MoneyGram Int’l, Inc. Judge Katherine Polk Failla acknowledged that Moroney “largely resolves the constitutional questions implicated in this case,” but she didn’t believe that this altered her analysis because the Supreme Court’s resolution of CFSA is now “effectively guaranteed.”

Additionally, Failla expressed hope that any delay “will only be a matter of months at this point.” In the court’s view, a continued stay was “the most efficient use of both the parties’ and the Court’s resources.”

Previously, on March 29, 2023, Judge Virginia Phillips of the US District for the Central District of California denied the CFPB’s motion to lift the stay imposed in CFPB v. Daniel A. Rosen, Inc. In Phillips’ view, the downside to a continued delay was outweighed by the possibility that the court and the parties would be subject to unnecessary proceedings and expenses.

The CFPB’s Future

The Supreme Court’s decision to hear CFSA has had a significant chilling effect on the ability of the CFPB to prosecute enforcement actions in federal court. Potentially up to more than a third of all active federal court CFPB enforcement actions could be subject to a stay through June 2024—almost a year from now.

Despite these roadblocks to enforcement litigation, the CFPB has still obtained meaningful settlements—including imposing tens of millions in penalties against the country’s largest financial institutions. Potential defendants to CFPB actions may continue to assess that the benefits of settlement outweigh the uncertainties of litigation, even if such litigation may not commence in earnest for more than a year—or at all, depending on how the Supreme Court decides the constitutional question presented by CFSA.

While we cannot say how many subjects of enforcement may be refusing to settle, we also have not observed a meaningful uptick in CFPB-initiated lawsuits.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Rachel Rodman leads Cadwalader’s fintech enforcement and litigation practice and defends fintechs, banks, specialty finance companies, and other financial services institutions in investigations, supervisory actions, and civil litigation by federal and state financial regulators, the SEC, and state attorneys general.

Keith Gerver is a former Department of Defense intelligence analyst and is a senior attorney in Cadwalader’s white collar defense and investigations practice regularly advising individual and corporate clients on a broad array of criminal, civil, and regulatory matters, with a focus on representations that involve national security.

Kathleen Comerford is a law clerk in Cadwalader’s global litigation Group. She represents and advises clients in a variety of matters, including complex commercial disputes, government investigations and enforcement proceedings, and internal investigations.