Lat month, the U.S. Supreme Court granted the Solicitor General’s cert petition on behalf of the Consumer Financial Protection Bureau (CFPB) in CFSA vs. CFPB. This petition appeals a Fifth Circuit Court of Appeals ruling that found the CFPB’s independent funding structure unconstitutional. This erroneous ruling has already started to affect the CFPB’s ability to do its critically important job, which will leave consumers open to potential harms and abuses in the financial marketplace.
It also creates an unprecedented amount of uncertainty in the marketplace, especially for honest businesses who are trying to do right by consumers. Additionally, this decision has the potential to destabilize other parts of the federal government that also rely on an independent funding structure, including Social Security, Medicare, and most federal financial regulators.
In the aftermath of the 2008 financial crisis, which left 21 million Americans without work and more than nine million families without homes, Congress passed the critical Dodd-Frank law which created the CFPB. The CFPB is charged with enforcing federal consumer financial laws and has a number of tools to accomplish that task effectively, including law enforcement, statutory authority to combat unfair, deceptive or abusive act or practices, direct supervision of financial institutions, and public education.
Like most other federal financial regulators, the CFPB was provided an independent funding stream to ensure that it could do its job effectively and consistently, insulating it from political gamesmanship that often delays and affects the annual appropriations process. This reliable funding stream is critical to the CFPB’s ability to govern large sectors of our economy, enforce consumer protection laws, and protect consumers and honest businesses alike.
However, the independent funding stream does not mean that Congress lacks sufficient oversight over the CFPB. The opposite is in fact true—the Dodd Frank Act placed a number of intentional controls on the CFPB’s authority to ensure that the agency pursues its consumer protection mission in a balanced and responsible manner. For example, the CFPB Director must testify semi-annually and the Bureau must regularly provide Congress with various reports on the financial marketplace. In addition, the Bureau must coordinate and consult with other federal financial regulators, and its enforcement measures are appealable, and many other controls.
The CFPB’s independence allows it to govern, oversee, and regulate the financial marketplace, with sufficient oversight and accountability by Congress and other agencies. However, the Fifth Circuit’s ruling calls that and far more into question.
Effect on CFPB’s Ability to Do Its Job
Since its doors opened, the CFPB has issued rules and guidance to make the credit reporting, debt collection, mortgage servicing, credit card, and banking industries more transparent, equitable, and accountable to the public. It has fought discrimination in the banking, credit, and housing marketplaces. It has protected consumers from being denied services or charged higher rates because of their race, sexuality, gender identity, or national origin. The CFPB has educated consumers about how to apply for financial products, spot risky practices, and exercise their rights in the financial marketplace. It has provided critical research about how payday loans create a cycle of debt, overdraft practices disproportionately harm low-income consumers, students are targeted by unsafe and deceptive products, and service members and their families face unique harms in the financial marketplace. This is just a sampling of the critically important work the CFPB has accomplished over the last decade to strengthen the financial marketplace by making it more competitive, equitable, fair, and safe.
Beyond its regulatory, research, and education work, the CFPB is an enforcement agency, it is tasked with enforcing critical consumer protection laws that govern consumers rights across the financial marketplace, and Congress granted the CFPB a myriad of tools to effectively hold wrongdoers accountable. During its tenure, the CFPB has collected $16 billion in consumer relief, on behalf of 192 million consumers who have been wronged by financial providers. This relief takes many different forms, including monetary compensation, principal reductions, and canceled debts. In addition, it has charged $3.7 billion in penalties to violators of the law.
Many consumers are already affected by the repercussions of this case. Since the Fifth Circuit decision, there have been a number of enforcement actions that have been dismissed or stayed pending the Supreme Court’s decision.
For example, MoneyGram, a repeat offender and the remittance provider for 47 million consumers in the US, has argued that the remittance rule is “void and unenforceable” because it was codified with unconstitutional funding. This argument, and subsequent stay of the case, leaves those 47 million Moneygram consumers unprotected and potentially open to further harm. The remittance rule is a critical regulation that governs necessary consumer disclosures, cancellation, refund, and error resolution rights, and it imposes provider liability. Should consumers’ rights be further violated, the Fifth Circuit decision makes it even harder for those consumers and the CFPB to hold Moneygram and other violators of the remittance rule accountable.
Further, MoneyGram is not the only offender who has used the Fifth Circuit ruling to the disadvantage of consumers. An enforcement action against First Cash and Cash America West, a repeat offender for violations of the Military Lending Act (MLA), has been stayed in the wake of the Fifth Circuit decision. The MLA protects active duty servicemembers and their families from predatory lending, and this case leaves servicemembers and their families in Louisiana, Mississippi, and Texas at risk of further violations of the MLA.
In addition, the CFPB is not the only enforcement agency whose authority has been hampered. State Attorneys General have also begun to see the effects of this harmful ruling. In Pennsylvania v. Mariner Finance LLC, Mariner Finance, six states alleged widespread violations of multiple consumer protection laws which resulted in $121.7 million in premiums and fees for add-on products that, along with other practices, kept consumers in a cycle of debt. As a result of the Fifth Circuit ruling, Mariner argued that the Consumer Financial Protection Act, the basis for the CFPB and states’ authority to enforce consumer financial protection law, is generally unenforceable. Mariner Finance is a subprime installment lender that targets low- and moderate-income consumers with over 480 locations in 27 states.
A stay of litigation in these cases means that the conduct at issue—violations of critical consumer protection laws— may very well be ongoing, and it will be increasingly difficult to undo.
The CFPB’s enforcement actions, along with those brought by state AGs, make markets more competitive, create a level playing field for honest businesses, and produce a safer, more equitable, and more transparent financial services marketplace for consumers. With wrongdoers and violators of the law using this case to skirt state and federal enforcement authority, consumers are suffering the consequences.
Bigger than the CFPB
The logic applied in the Fifth Circuit decision is not unique to the CFPB. The CFPB is far from the only agency or program to receive independent funding, and opponents of the CFPB have made it clear that they will not stop there. The Competitive Enterprise Agency has said that “no executive agency should receive a monetary supply without the affirmative consent of Congress every year.” It is difficult to overstate the potentially catastrophic nature of a ruling that calls our entire financial system into question.
The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Federal Housing Finance Agency, the National Credit Union Administration, the Farm Credit Administration, the Farm Credit Insurance Corporation, the Bureau of Engraving and Printing, the Public Company Accounting Oversight Board, and Federal Prison Industries, along with Medicare, Medicaid, Social Security, the Affordable Care Act, unemployment benefits, child nutrition assistance are all funded outside of the annual appropriations process. Congress, in setting up these critically important agencies and programs, understood that independence and reliable funding, coupled with sufficient oversight, were key to the success of these agencies and programs.
In fact, the FDIC has already voiced its concern for the Fifth Circuit ruling and the risk it poses for the FDIC to govern the U.S. banking system. In a recent report, the FDIC’s Office of the Inspector General warned that “there is a risk that the Fifth Circuit’s ruling could also be applied to the FDIC.”
Industry and experts have affirmed this fear.
For example, Peter Conti-Brown, a noted expert on the Federal Reserve at the University of Pennsylvania’s Wharton School, stated that “if the CFPB’s budgetary autonomy falls, then the Fed’s should fall immediately thereafter and that would be catastrophic. That would be the end of Fed independence because then anyone in the House of Representatives or the US Senate could hold the Fed hostage for any purpose or no purpose every single year.”
The CFPB is not alone in how it is funded, and while this ruling stands, will not be the only affected agency. Another independent agency, the Public Company Accounting Oversight Board, has already been the subject of lawsuit alleging its independent funding stream is also in violation of the Appropriations clause.
Congressional Attempts to Undermine the CFPB’s Independence
Finally, the House Financial Services Committee has already noticed numerous bills that would hinder the CFPB’s ability to protect small businesses, servicemembers, consumers of color, and more broadly, consumers.
For example, the Taking Account of Bureaucrats’ Spending Act, also known as the TABS Act, would replace the CFPB’s stable funding mechanism and subject the agency to annual appropriations by Congress. As illustrated above, this legislation, or any legislation that attempts to change the CFPB’s leadership structure or enact procedural hurdles for the agency to use its rulemaking authority, will hamper the CFPB’s authority and weaken its critical oversight and regulation of the financial marketplace.
What is Next?
The Supreme Court has accepted the Solicitor General’s cert petition on behalf of the CFPB, which means that the Supreme Court will hear the case next term. In the meantime, we can expect more fallout in the marketplace, for consumers, and for the financial regulatory system, at a time when consumers are already struggling with rising interest rates and record levels of inflation.
Ultimately, the Supreme Court should reverse the Fifth Circuit decision for the sake of consumers and the economy.