Consumers, Financial Services Win With CFPB Making Rules of Road

Consumers and financial services businesses alike dodged a bullet with the US Supreme Court’s decision May 16 rejecting a challenge to the constitutionality of the Consumer Financial Protection Bureau.

The challenge to the now 13 year-old agency was brought by a trade association representing payday lenders and was based on the CFPB’s supposedly unaccountable funding mechanism, which sits outside the annual congressional appropriations process.

The decision in Consumer Financial Protection Bureau v. Community Financial Services Association of America, Ltd, ensures that the CFPB will continue operating as the cop on the beat overseeing consumer credit, payment, and financial data markets. The CFPB has been a powerful advocate for consumers’ interests, achieving $19 billion in consumer relief since 2011 and promulgating regulations and undertaking enforcement actions that will save them billions more going forward.

The decision isn’t just a win for consumers. It’s also a win for many financial services businesses. The CFPB provides the critical legal infrastructure on which nearly the entire consumer financial services markets relies. It’s easy to overlook the importance regulatory agencies have in providing legal infrastructure, but their role in creating rules of the road can be analogized to that of a municipal transportation department ensuring that there are working traffic lights and road signs. Without lights and signs, traffic at busy intersections would be a complete mess because no one would be certain of rights of way. As a result, most drivers would be much more cautious, while a handful would be much more reckless, a suboptimal situation for everyone.

Some of the legal infrastructure the CFPB provides is purely ministerial, equivalent to making sure that the light bulbs are replaced in traffic lights. For example, the dollar figures in certain statutes has to be inflation adjusted periodically. Those inflation adjustments are not self-executing, however, but instead require CFPB action.

If all CFPB actions over the past 13 years were to be voided, those dollar figures would be around 39% lower than they are today, substantially changing certain cutoffs for liability for financial services businesses.

Other parts of this legal infrastructure are more substantive, akin to deciding the timing on traffic lights and where there will be stop signs. A number of statutes administered by the CFPB have broad prohibitions on financial institution behavior but authorize the CFPB to define safe harbors from liability. For example, a creditor that uses the CFPB’s model credit cost disclosure forms is deemed to comply with the Truth in Lending Act’s disclosure requirements. If the CFPB were invalid, however, then lenders could no longer rely on those model forms, and they would be left wondering if the forms they use would actually be legally compliant.

Likewise, the $14 trillion home mortgage market depends on a regulatory safe harbor from the statutory prohibition on making mortgage loans without verifying the borrower’s ability to repay. The CFPB’s regulatory safe harbor allows lenders to rely on the mortgage having certain lower-risk terms as a substitute for actual verification of ability to repay. Without that safe harbor, mortgage lenders would have to engage in substantially different underwriting, and even then, they would have no way of being sure if their lending practices left them vulnerable to suits by disgruntled borrowers.

If the CFPB’s actions over the past 13 years were unconstitutional, all of this legal infrastructure would disappear, which would produce chaotic uncertainty in consumer financial markets, a situation that would harm both consumers and many financial service providers. Payday lenders, however, are among the financial institutions least reliant on this legal infrastructure and the most threatened by the CFPB’s continued vitality. Hence their cynical challenge to the CFPB’s constitutionality in order to avoid their own accountability to the agency for unfair, deceptive, and abusive acts or practices.

The Supreme Court’s decision shuts the door on a decade of attacks on the CFPB’s constitutionality. Settling the agency’s constitutionality will ensure stability in financial regulation and protect the legal infrastructure, but it doesn’t mean that the CFPB will lack accountability. Far from it: Specific CFPB regulations and enforcement actions can continue to be challenged in court, and surely will be, which is exactly how our system of government is supposed to work.

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

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

Adam J. Levitin is the Carmack Waterhouse Professor of Law and Finance at Georgetown Law. He filed an amicus brief in support of the CFPB in the case.

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