Payments Report: News from Washington, Brought to you by NEACH
VOLUME 2024-3 (MAY 24)
Overview: The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) has given indications of a more aggressive approach to its mandate, especially since the U.S. Supreme Court cleared the constitutional cloud hanging over the agency earlier this month.
The Bureau’s Funding Structure Ruled Constitutional
As we have previously reported, the CFPB has been fighting a court battle over the fate of its existence since 2018. In November 2017, the Bureau adopted a rule to regulate payday loans and other short-term consumer loans (the “Payday Lending Rule”). A collection of trade groups sued the Bureau in federal court to invalidate the rule. Among several other arguments, the plaintiffs claimed the Bureau’s self-funding mechanism—which allows the Director of the CFPB to set a reasonable budget and withdraw the funds from the Federal Reserve without prior approval—violated the Constitution’s separation of powers. In October 2022, the U.S. Court of Appeals for the Fifth Circuit ruled that this funding structure was unconstitutional and issued a stay preventing enforcement of the Payday Lending Rule.
The Fifth Circuit’s stay only froze the Payday Lending rule, but the Court’s ruling called into question the Bureau’s existence and every action it had ever taken. But on May 16, 2024, the Supreme Court voted 7-2 in favor of the CFPB. While the Bureau had taken a “business as usual” approach while the case was pending, the ruling significantly bolstered the agency.
Green Light for Paused Initiatives
In addition to allowing the CFPB to have the stay against the Payday Lending Rule lifted, the ruling should allow the Bureau to go forward with a number of other efforts. Perhaps first among them will be to lift the stay on another of the Bureau’s controversial rules. On March 5, 2024, the CFPB issued a final rule that would substantially limit credit card late fees. It was slated to go into effect on May 14. But almost immediately, a group of plaintiffs that included the U.S. Chamber of Commerce and the American Bankers Association sued the CFPB, seeking to block the rule from taking effect pursuant to the Fifth Circuit’s ruling on the constitutionality of the Bureau. The plaintiffs brought the action in the federal district court in Fort Worth, Texas, largely because this court is part of the Fifth Circuit and would therefore have to issue a ruling consistent with the Fifth Circuit’s prior ruling. After an expedited process, the district court issued a preliminary injunction blocking enforcement of the rule.
The rule would substantially reduce the safe harbor for credit card late fees to $8 (from $30 for initial late payments and $41 for subsequent late payments) and the cap on such fees to 25% of the minimum payment (from 100%). Part of the district court’s reasoning for granting the plaintiffs’ request was the pending constitutional challenge to the Bureau’s funding structure, since the district court was bound by the Fifth Circuit’s ruling. Although the late fee rule was halted, as reported by American Banker last month, at least one bank had already raised its interest rates to offset the new limits expected to be imposed under the rule.
Now that the Supreme Court has reversed the Fifth Circuit’s ruling, the way is clear for the Bureau to have the stay against the rule lifted. Yet, it is worth noting that the district court judge also acknowledged in passing that the plaintiffs also had “compelling arguments” that the Bureau's rule violated the CARD Act, Truth in Lending Act, and APA. It remains to be seen whether the plaintiffs will proceed on those grounds. Nevertheless, some experts are predicting that the Bureau will now proceed “full steam ahead,” as more than a dozen enforcement actions and investigations that had been halted in federal courts may now move forward.
The Bureau’s Recent Activity
Shortly before the Supreme Court issued its ruling, the CFPB took action against two student loan companies that included an order of $3 million in restitution to consumers and over $2 million in fines. On the heels of the Supreme Court ruling, the Bureau issued another consent order against a telemarketing company for “swindling student loan borrowers.” It ordered the company to cease operations entirely and pay a $400,000 fine. Two days later, the Bureau issued an interpretive rule about “Buy Now, Pay Later” lenders.
Perhaps more significantly, concurrent with these activities, the CFPB has conducted an internal reorganization that could have an effect on its enforcement and supervision decisions and updated procedural rules related to the supervision of nonbank entities. Eagle-eyed observers noted that within the background information provided with the rule update, the agency disclosed that in “late February 2024, the CFPB began a transition to a new organization structure for its supervision and enforcement work.” Under the reorganized structure, certain functions have been shifted and the heads of the enforcement and examination divisions will now report directly to the Bureau’s Director. As a result, the Director will have direct input on supervisory issues as well as whether to bring an enforcement action. The intention is to allow the Bureau to act faster and quickly adapt to new developments in consumer financial services. In an internal email provided to Bloomberg Law, Director Rohit Chopra wrote, “A flatter organization structure will allow us to be more agile in our response to emerging risks and will facilitate faster decision-making.”
Designation for Supervision Procedures
Substantively, the procedural rules also have notable industry implications. One of the less publicized provisions of the Consumer Financial Protection Act (“CFPA”) grants the Bureau
authority to designate a nonbank entity for supervision if the Bureau has reasonable cause to determine the entity is engaging in conduct that poses “risks to consumers” with regard to financial products or services. To be clear, the designation of a nonbank entity for supervision does not require a determination that it violated laws or regulations, only that it poses risks to consumers. Essentially, the CFPB has the power to put any nonbank business that offers consumer financial products or services, regardless of size, under its supervisory authority if the agency determines the business poses a risk to consumers. In 2013, the Bureau adopted procedural rules governing the designation process, but this authority was largely unused for the better part of a decade until the Bureau updated the rules in 2022.
The designation process requires an opportunity for the target to respond. As established under the original rules, a target company receives a Notice of Reasonable Cause and is provided the option of accepting the supervisory authority of the CFPB or contesting the designation. If the target contests the designation, it runs the risk of the Bureau publishing a public order, after hearing the target’s arguments, setting out the reasons why the Bureau has determined that the company poses a risk to consumers. Industry stakeholders have called this process “naming and shaming.” The updated procedural rules clarify the process: the Bureau will publish all supervision orders issued to companies that object to or ignore the Bureau’s designation. Orders relating to companies that agree to the Bureau’s designation for supervision will remain confidential. Additionally, whereas the old rules limited supervision orders to a two-year period, under the new rules the Bureau granted itself discretion to determine how long a company should remain subject to special supervision for risky activities. Just prior to issuing the new procedural rule, the CFPB published its first decision and order in a contested designation case, which helps crystalize the Bureau’s policies. In particular, the Order discusses the Bureau's interpretation of “risk to consumers” under the CFPA. The Order notes that the CFPA does not define risk, but the Bureau understands it to refer to "”the possibility of loss or injury,” and further explains that the CFPA does not specify the character or magnitude of the risk, which the Bureau interprets as congressional intention “to grant the CFPB significant discretion to determine whether the character and magnitude of the risks posed by a particular covered person's conduct merit supervision.” The Order also serves to provide insight into the Bureau’s thinking about what constitutes “reasonable cause” that a company poses risks to consumers. In the case, the Bureau largely relied on consumer complaints, which the target did not dispute. Instead, the company argued that “unverified” consumer complaints are an insufficient basis to designate the company for supervision. The CFPB rejected this argument, stating that “consumer complaints, even if unverified, are sufficient to satisfy” the burden to “establish reasonable cause.” This indicates a broad stance on what is necessary to justify Bureau supervision.
Outlook: In the absence of a constitutional threat to the agency, the CFPB appears ready to take an aggressive stance on enforcement and supervision matters. A number of halted actions and rules are now poised to be unfrozen. Additionally, the new procedural rules governing designation of companies for supervision will increase the agency’s reach over fintech companies and financial institutions not otherwise subject to its examination authority.