The U.S. Supreme Court’s ruling last week in CFSA v. CFPB that the CFPB’s funding mechanism does not violate the Appropriations Clause of the U.S. Constitution removes what many observers consider to be the last remaining existential threat to the agency.  The ruling will have a broad impact on the CFPB’s activities.  Soon after the ruling, the CFPB announced its plans to significantly increase the size of its enforcement staff.  Dozens of pending matters such as enforcement actions and petitions to modify or set aside civil investigative demands have been stayed pending the outcome in CFSA.  Those matters can now move forward.

The Supreme Court’s CFSA ruling will also impact the pending lawsuits challenging CFPB regulatory actions.  Indeed, in addition to the underlying lawsuit in CFSA challenging the CFPB’s payday loan rule, it has already impacted the lawsuit challenging the CFPB’s credit card late fee rule.  CFSA is expected to impact these pending lawsuits as follows:

• Late Fee Rule. We have published a separate blog discussing the fast-paced activity in the late fee case since the Supreme Court’s ruling.  As discussed in our blog, because the district court in granting the plaintiffs’ motion for preliminary injunction relied on the Fifth Circuit’s CFSA decision which was reversed by the Supreme Court, the next round of activity in the case will be focused on whether the district court should continue the preliminary injunction based on the plaintiffs’ non-constitutional arguments and whether the case should again be transferred to D.D.C.  Once these issues play out, the most likely scenario is that the parties will file cross-motions for summary judgment based on the plaintiffs’ non-constitutional claims although it is possible the CFPB will file a motion to dismiss.

• Payday Loan Rule. The case is now back before the Fifth Circuit, having been remanded by the Supreme Court. In its CFSA decision, while agreeing with the plaintiffs that the CFPB’s funding mechanism was unconstitutional, the Fifth Circuit rejected the plaintiffs’ other arguments for invalidating the payday loan rule.  In addition to their funding argument, the plaintiffs argued that (1) the rule’s promulgation violated the Administrative Procedure Act (APA); (2) the rule was promulgated by a Director unconstitutionally insulated from presidential removal; and (3) the CFPB’s UDAAP rulemaking authority violates the Constitution’s separation of powers by running afoul of the nondelegation doctrine.  The Supreme Court’s grant of certiorari was limited to the Appropriations Clause question.  On May 16, immediately following the Supreme Court’s decision, the plaintiffs submitted a letter to the Fifth Circuit in which they asserted that the Fifth Circuit panel had “erred in its disposition of the non-Appropriations Clause challenges in this case, which the Supreme Court did not review.”  They also asserted that because they were the prevailing party, they did not have a prior opportunity to seek rehearing in the Fifth Circuit concerning those challenges.  Accordingly, they stated their intention to file a rehearing petition following entry of any new judgment affirming the district court (which rejected their Appropriations Clause argument).  In addition, to give them an opportunity to seek a rehearing, they asked the Fifth Circuit to issue its mandate upon entry of a new judgment in accordance with the default timing provisions in Federal Rule of Appellate Procedure 41, rather than immediately.  In October 2021, the Fifth Circuit entered an order staying the compliance date of the payment provisions in the payday loan rule until 286 days after the trade groups’ appeal is resolved. It is possible the CFPB will soon announce a new compliance date for the payment provisions.

• Small Business Lending Rule. In October 2023, after initially entering a preliminary injunction that was limited to the plaintiffs and their members, the Texas district court extended its preliminary injunction to apply on a nationwide basis.  The court’s extended preliminary injunction (1) stayed all deadlines for compliance with the rule for the plaintiffs and their members, parties that intervened in the lawsuit after the initial ruling and their members, and all covered financial institutions until after the Supreme Court’s CFSA decision, and (2) required the CFPB, if the Supreme Court ruled that its funding was constitutional, to extend the deadlines for compliance with the rule to compensate for the period stayed.  Last week, following the Supreme Court’s decision, the CFPB announced that it plans to issue an interim final rule to extend the rule’s compliance deadlines.  It also announced the new compliance dates which are based on 290 days having elapsed between the order extending the preliminary injunction and the Supreme Court’s CFSA decision.  The plaintiffs and intervenors have filed a consolidated motion for summary judgment in which they have argued that the CFPB (1) exceeded its statutory authority in imposing additional data points that are not mandated by Dodd-Frank, and (2) acted arbitrarily and capriciously in violation of the APA in promulgating the rule.  (In their summary judgment motion, the plaintiffs and intervenors only sought summary judgment on their non-constitutional claims.  They did not seek summary judgment on their Appropriations Clause claim but indicated they would seek leave to amend their filings consistent with any applicable direction provided by the Supreme Court when it ruled in CFSA.)  The CFPB has filed a cross-motion for summary judgment. 

• UDAAP Exam Manual. In November 2023, the CFPB filed an appeal with the Fifth Circuit from the Texas federal district order granting summary judgment to a group of trade associations in their lawsuit against the CFPB challenging the changes made to its UDAAP Exam Manual in March 2022.  Those changes provided that unfair acts or practices encompassed discriminatory conduct, even in circumstances to which federal fair lending laws, such as the Equal Credit Opportunity Act, did not apply.  The Fifth Circuit subsequently entered an order staying further proceedings pending the Supreme Court’s CFSA decision.  In granting summary judgment to the trade associations, the district court concluded that the manual changes were invalid because the CFPB’s funding was unconstitutional under the Appropriations Clause, and relying on the Supreme Court’s “major questions doctrine,” the changes exceeded the CFPB’s UDAAP authority.  With the Supreme Court having ruled that the CFPB’s funding does not violate the Appropriations Clause, the Fifth Circuit will need to decide whether the district court’s ruling based on the “major questions doctrine” was correct.

The Supreme Court’s CFSA decision means that the Appropriations Clause argument rejected by the Supreme Court will not be available as a basis for challenging future CFPB final rules. (We note, however, that in an opinion published in yesterday's Wall Street Journal, Harvard Professor Emeritus Hal Scott calls the CFPB’s victory in CFSA “pyrrhic” and opines that another Appropriations Clause challenge is available to litigants seeking to challenge CFPB rules based on the fact that the CFPB, under Dodd-Frank, may only receive payments from the Federal Reserve out of “earnings” and the Federal Reserve has lost money since September 2022.)  Plaintiffs will still be able to challenge future final rules on non-constitutional grounds, such as APA violations.  

The CFPB has proposed several rules that could be finalized this year.  (In fact, the CFPB is likely to seek to issue as many final rules as possible within the next month to avoid Congressional Review Act challenges during the next Congress.)  The proposed rules consist of (1) rules that would create two registries, one for nonbanks subject to certain enforcement orders and another that would establish a system for the registration of nonbanks subject to CFPB supervision that use “certain terms or conditions that seek to waive consumer rights or other legal protections or limit the ability of consumers to enforce their rights” with arbitration provisions among the terms that would trigger registration, (2) a rule to supervise nonbank companies that qualify as larger participants in a market for “general-use digital consumer payment applications,” (3) a rule restricting overdraft fees, and (4) a rule prohibiting NSF fees on certain declined transactions.  The CFPB is expected to soon issue a proposed rule on personal financial data rights to implement Section 1033 of Dodd-Frank.

On May 30, 2024, from 12:00 p.m. to 1:30 p.m. ET, Ballard Spahr will hold a webinar: “Supreme Court: CFPB Funding Mechanism is Constitutional. What Do Banking Leaders Need to Know?”  

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