What is next for the CFPB after the Supreme Court’s decision affirming its constitutionality?

On Thursday, May 16, 2024, the Supreme Court affirmed the constitutionality of the funding structure of the Consumer Financial Protection Bureau (CFPB, or Bureau).

Unlike most federal agencies, the CFPB is not required to petition Congress for annual funding. Rather, by statute, Congress has authorized the Bureau to draw from the “combined earnings” of the Federal Reserve System the amount the Bureau concludes is “reasonably necessary” to carry out its duties, limited only by an inflation-adjusted cap. 12 U.S.C. § 5497(a).

In a 7-2 ruling, with Justice Clarence Thomas writing for the majority, the Supreme Court held that this funding scheme does not violate the Appropriations Clause – reversing the Fifth Circuit’s controversial contrary ruling from 2022.

The majority relied heavily on the history of the Appropriations Clause, stressing the significant variations in how early appropriations were structured. The majority observed that early appropriations each satisfied two minimum requirements:

1. Specifying a source of public funds, and
2. Designating a purpose for those funds.

The majority also found that CFPB’s funding statute meets these minimum requirements by specifying that:

1. The funds come from the Federal Reserve, and
2. May be used to “pay the expenses of the Bureau in carrying out its duties and responsibilities.”

CFPB v. Community Financial Services Association of America, Ltd., Op. 15 (quoting 12 U.S.C. § 5497). The Court therefore held that the CFPB funding statute satisfies the Appropriations Clause.

Justice Samuel Alito, joined by Justice Neil Gorsuch, dissented – criticizing the majority for allowing the CFPB to enjoy “financial independence that the Appropriations Clause was designed to prevent.” Dissent at 23. The dissent stressed that the CFPB’s novel funding structure insulates it from accountability to Congress, and that “[t]his autonomy has real-word consequences.” Id. at 24. The dissent cited recent CFPB guidance warning against denying credit based on immigration status, as well as proposed rules regarding medical debt and overdraft fees, as evidence of the agency’s assertion of expansive authority. Id.

Reigniting consumer protection wildfires

In the months leading up to this decision, the CFPB was arguably quieter than it had been at any point since it opened its doors in 2011. The constitutional challenge called into question the validity of all of the CFPB’s rulemaking and enforcement activities. Enforcement actions slowed, and many courts entered stays pending the Supreme Court’s decision. The challenge delayed the implementation of three significant rules:

• Payday Lending Rule
  • The Supreme Court’s ruling last week reversed a Fifth Circuit decision that vacated the CFPB’s Payday Lending Rule.
  • The ruling clears the way for the Payday Lending Rule to finally take effect, but the exact timing remains to be determined.
  • The Payday Lending Rule seeks to regulate payday, vehicle title, and other types of small-dollar consumer loans. It was scaled back by the CFPB, and now principally imposes notice and consent requirements before lenders may withdraw payments from consumers’ bank accounts. The primary goal of the Rule is to prevent practices that lead to “cycles of debt” – a priority issue for the CFPB.

• Small Business Rule
  • The Small Business Rule under Section 1071 of the Dodd-Frank Act requires certain lenders to track and report numerous new data points from small business applicants.
  • The Small Business Rule was stayed on a nationwide basis pending the Supreme Court’s funding decision. In light of the Court’s ruling, the stays will soon be lifted, although challenges to the Rule on other grounds will continue to be litigated.
  • Following the Supreme Court’s decision, the CFPB quickly extended the compliance dates set forth in the Rule. For Tier 1 institutions (the highest volume lenders), the new compliance date is July 18, 2025, with the initial filing required by June 1, 2026.

• Credit Card Penalty Fees Rule
  • The Credit Card Penalty Fees Rule, which amends Regulation Z, limits late fees. It purports to ensure that fees are reasonable.
  • Like the Small Business Rule, the Credit Card Penalty Fees Rule was blocked nationwide pending the Supreme Court’s ruling on the CFPB’s funding. As with the Small Business Rule, the stay will be lifted, and the litigation challenging the Rule on other grounds will resume.
  • However, for the legal challenges, the effective date of the Credit Card Penalty Fees Rule would have been May 14, 2024. Thus, the Rule’s implementation timeline is unclear.

In its announcement immediately following the Supreme Court’s decision, the CFPB stated: “As we have done since our inception, the CFPB will continue carrying out the vital consumer protection work Congress charged us to perform for the American people.” Companies should consider revisiting the CFPB’s Fall 2023 Regulatory Agenda, as well as recent supervisory highlights and reports, for an indication of where the agency will focus its efforts in the coming months.

Key takeaways

Challenges to CFPB’s rules and enforcement actions are likely to continue to arise. Future plaintiffs may find support in other Supreme Court decisions expected this Term. The concerns animating Justice Alito’s dissent – regarding the importance of limits on agency authority and separation-of-powers principles – are likely to influence forthcoming majority decisions in pending cases such as Loper Bright Enterprises v. Raimondo, where the court is considering whether to overrule Chevron v. Natural Resources Defense Council, or at least clarify the parameters of agency deference.

In addition, the next round of challenges may focus on the major questions doctrine, to which the Supreme Court has given new life in recent years. See West Virginia v. EPA, 597 U.S. 697 (2022). Alternatively, some are now suggesting that funding challenges based on Congress’s directive that the CFPB’s funds come from the “combined earnings” of the Federal Reserve System might find purchase given the Federal Reserve’s operating losses in recent years.

In sum, currently, the CFPB has survived an existential crisis with a solid 7-2 decision. Regulated entities may now expect increased scrutiny of their consumer compliance practices in the coming year, along with increased enforcement activity.

For further information about this decision, please get in touch with the authors or your DLA Piper contact. For further information about our financial services practice, please contact Austin Brown, Isabelle Ord, or Margo Tank.