Until recently, the most popular topic of discussion in the financial services world has been the outcome of the Supreme Court case CFPB v. Community Financial Services Association of America, regarding the constitutionality of the CFPB’s funding mechanism. The case was an existential threat to the CFPB, its enforcement litigation, open rulemakings, and the overall U.S. financial regulatory framework. Many financial institutions, consumer advocates, and legal experts alike were on edge, waiting to see if the CFPB's structure, specifically its funding independent of congressional appropriations, would withstand judicial scrutiny.
Now that the Supreme Court has ruled in favor of the CFPB's funding mechanism (and the opposite outcome seemed unlikely after oral argument before the Court), the speculation has turned to what's next. The coverage has mostly focused on the implications for defendants in the midst of the CFPB's enforcement litigation and its regulatory agenda. Bottom line: It's now full speed ahead, full stop.
The ruling not only preserves the CFPB's current operations but also emboldens the agency to expand its reach and influence. With so much power and so few, if any, checks on its actions, the CFPB is bound to continue with a sense of invulnerability. The CFPB has many tools at its disposal to choose from. From investigations to examinations, rulemaking, circulars, the bully pulpit, and more, here are some of the ways the CFPB may further flex its muscles to push its outcome-based agenda, using overbroad interpretations of the Consumer Financial Protection Act restriction on unfair, deceptive, abusive, acts or practices (UDAAP) and other federal consumer financial laws.
Targeting Service Providers and Currently Non-Supervised Financial Institutions
For over a decade, traditional financial institutions like banks and credit unions have been subject to periodic examinations by the CFPB. However, in light of the Supreme Court's decision, the CFPB will continue to broaden its examination scope to include newer financial players such as “service providers,” fintech companies, digital payment platforms, digital advertising platforms, and other nontraditional financial service providers and supporting companies. The CFPB may also reach deeper, beyond “larger participants” in markets where examination is already the norm. This expansion would focus on ensuring these entities comply with consumer protection laws, particularly those related to UDAAP, data privacy, transparency, and fair lending practices.
The examination process itself could become more rigorous and frequent. Traditionally, examinations have focused on a set schedule, but the CFPB might continue to shift toward a more dynamic approach, prioritizing institutions and sectors based on perceived risks to consumers. This risk-based approach means that institutions previously considered low-risk might find themselves under increased scrutiny if the CFPB identifies emerging threats or trends within their operations.
Additionally, the CFPB's examination teams may start leveraging advanced technologies and data analytics to enhance their oversight capabilities. By utilizing big data and machine learning algorithms, the CFPB can identify potential compliance issues more quickly and accurately, allowing for more targeted and efficient examinations. This technological advancement not only increases the effectiveness of the CFPB's oversight but also puts additional pressure on financial institutions to ensure their compliance systems are robust and up to date.
More Aggressive Investigations
The CFPB has historically been assertive in its investigative approach, but we can expect an increase in the intensity and frequency of these investigations. Sometimes the government will take the position that certain cases are worth litigating to set precedents or to enforce compliance on a broader scale. With the Supreme Court's backing, the CFPB is likely to feel emboldened to pursue high-profile investigations more aggressively, even if they are based on novel or untested legal interpretations, potentially leading to significant fines and penalties for violators.
High-profile cases could include targeting major financial institutions or large-scale fintech companies that play a crucial role in the financial ecosystem. The CFPB might focus on practices that have widespread impact, such as discriminatory lending, deceptive marketing, or unfair fees. By taking on prominent cases, the CFPB aims to send a strong message to the industry about the importance of compliance and consumer protection.
Moreover, the CFPB might adopt a more proactive stance in its investigations, seeking out potential violations rather than waiting for complaints to be filed. This proactive approach could involve mystery shopping, continuing to encourage whistleblowers, and other investigative techniques to uncover hidden or systemic issues. Financial institutions must be prepared for the possibility of surprise investigations and ensure their practices can withstand intense scrutiny.
Circulars and Guidance Documents
While active CFPB rulemakings will continue, the process is lengthy and subject to litigation and potentially review by Congress (the Congressional Review Act requires agencies to report the issuance of “rules” to Congress and provides Congress with special procedures, in the form of a joint resolution of disapproval, under which to consider legislation to overturn rules). Another avenue by which the CFPB can exert its influence is the issuance of circulars and guidance documents. These tools allow the Bureau to clarify its interpretations of existing laws and regulations, effectively shaping industry practices without the need for formal rulemaking. For example, the CFPB might issue new guidance on the application of UDAAP standards, emphasizing stricter enforcement against practices deemed unfair, deceptive, or abusive. This approach has already been used by the CFPB, and future use could impact a wide range of activities, from marketing and advertising to the structuring of financial products.
Circulars and guidance documents are powerful tools because they provide immediate guidance on the CFPB’s position to the industry, yet they lack the due process associated with formal rulemaking. This means that individual financial institutions and the industry must stay vigilant, and challenge or adapt rapidly to new guidance to avoid allegations of potential violations.
In addition to UDAAP, the CFPB might continue to issue guidance on other key areas, such as data privacy, cybersecurity, and fair lending. These topics are increasingly relevant in the digital age, where consumers' personal and financial information is often critical to providing offered services.
UDAAP Enforcement
One of the most potent tools in the CFPB's arsenal is its authority to enforce UDAAP provisions. The Bureau has already demonstrated a willingness to use this authority to target a variety of practices it considers harmful to consumers. After the Supreme Court decision, we may see an even broader application of UDAAP enforcement. For instance, the CFPB is already taking action against many of the disclosed fees charged by financial institutions, labeling them as unfair or abusive under UDAAP. This includes certain overdraft fees, late payment fees, or even certain types of interest rate changes before or in place of rulemakings. It could also mean the CFPB could seek to ban entire financial services products and services.
UDAAP enforcement can be particularly challenging because it encompasses a wide range of behaviors that allegedly can harm consumers. The CFPB's broad interpretation of what constitutes UDAAPs allows it to address both obvious and subtle forms of consumer harm in an exam or investigation context. Financial institutions must carefully evaluate their practices to consider the risk that they may inadvertently engage in activities that could be alleged to be UDAAPs, and the strength of the CFPB’s legal position if it were to be contested.
In recent years, the CFPB has characterized certain practices as potentially being “unfair” or "abusive" under UDAAP. This trend is likely to continue, with the CFPB setting out new ways to interpret and enforce the unfair and abusive standards. Financial institutions should pay close attention to the CFPB's actions and guidance in this area when assessing compliance risk and considering how to avoid potential enforcement investigations and actions.
Enhanced Focus on Fair Lending
Fair lending practices will likely remain a critical area of focus for the CFPB. The Bureau's mandate to prevent discriminatory lending practices aligns with its broader mission to protect consumers. With the Supreme Court's ruling reinforcing its funding mechanism, the CFPB may increase its scrutiny of lenders, particularly those serving minority and underserved communities. This could result in more rigorous enforcement actions against institutions found to engage in discriminatory practices. It also may result in the CFPB going beyond core market areas that it already scrutinizes to those that are in and around new market areas, including markets that it does not have statutory jurisdiction to regulate. The CFPB's enhanced focus on fair lending could also involve more detailed data analysis, targeted examinations, and increased collaboration with community organizations to identify and address discriminatory practices.
Furthermore, the CFPB uses disparate impact analysis to uncover unintentional discrimination. Disparate impact occurs when a seemingly neutral policy disproportionately affects a protected class. By examining the outcomes of lending practices, the CFPB could target outcomes and policies that result in unequal treatment of consumers, even if there was no intent to discriminate.
Technological Innovation and Compliance
As the financial services industry continues to evolve with technological advancements, the CFPB will need to adapt its regulatory approach. The use of artificial intelligence, machine learning, and big data analytics in financial services presents both opportunities and challenges. The CFPB may issue new regulations or guidance to address the potential risks associated with these technologies, ensuring they are used in a manner that protects consumers while fostering innovation—and within those actions the Bureau may target specific practices it seeks to outlaw. One area of focus could include software that helps to power financial institutions, algorithmic bias, data breaches, and privacy concerns.
Consumer Education and Advocacy
Beyond enforcement and regulation, the CFPB has a significant role in consumer education and advocacy. The Bureau may enhance its efforts to educate consumers about their rights and provide resources to help them navigate the financial system. This could involve launching new public awareness campaigns, creating more accessible educational materials, and partnering with community organizations to reach a broader audience.
Influencing and Collaboration with Other Agencies
The CFPB does not operate in a vacuum; it often influences the legal and regulatory policy positions taken by other government agencies, including state attorneys general, and collaborates with other federal and state agencies to achieve its goals. In the wake of the Supreme Court's decision, we can expect the CFPB to strengthen these partnerships with willing participants. Joint enforcement actions, information sharing, and coordinated policy initiatives will likely continue.
