The CFPB has an ambitious agenda — but so does the Supreme Court

Rohit Chopra
Rohit Chopra, director of the Consumer Financial Protection Bureau, has said the bureau is “no stranger” to litigation challenging the agency’s constitutionality. The Supreme Court is poised to hear oral argument on another such case this fall that could hold much of the agency’s rulemaking agenda in the balance.

Bloomberg News

The Consumer Financial Protection Bureau has a jam-packed agenda ahead with final rules coming soon that would cut credit card late fees to $8, create a registry of corporate “bad actors,” and require nonbanks to disclose terms waiving consumers’ rights to arbitration.

But the CFPB is operating under a cloud of uncertainty with the Supreme Court scheduled to hear oral arguments in October in a case challenging whether the bureau’s funding is constitutional. The legal and regulatory uncertainty will continue until the high court rules on the case by June 2024 at the latest. CFPB Director Rohit Chopra has been clear that the bureau is “not holding back” on rulemaking or enforcement.

“The CFPB is certainly no stranger to these types of challenges,” Chopra told American Banker in a recent interview

But the CFPB got hit with further legal turbulence this week when a federal judge in Texas temporarily blocked implementation of the bureau’s small business data collection rule until the Supreme Court case is decided. Bankers have since urged the bureau to halt all bank data collection under the rule until after the outcome of the Supreme Court’s decision.

The ruling could change the calculus for the CFPB’s regulatory agenda going forward, potentially holding off several rules from going into effect. The judge granted a preliminary injunction to members of two bank trade groups and a private bank that had sued the CFPB, setting the stage for other trade groups to follow suit. 

“This creates the precedent that fundamentally alters the CFPB’s agenda for the next year,” said Ed Mills, managing director at Raymond James. “The biggest development in favor of the industry is the most recent ruling and that there is a judge that says the CFPB can’t do anything until the Supreme Court has decided.”

The big question for banks, consumers and investors is not whether industry trade groups will sue the CFPB to block any final rules from going into effect but when and where they will sue. Trade groups have already threatened to sue the CFPB over the credit card late fee proposal, with the choice of venue likely in Texas, where Republican jurists dominate the U.S. Court of Appeals for the Fifth Circuit.

The CFPB “is going to get sued for everything and part of the reason why they get sued is because a number of the lawsuits have been successful,” added Mills.  

The industry’s playbook for how to successfully gut a CFPB rule — and challenge the constitutionality of the bureau — is the years-long litigation over the payday lending rule. The bureau issued the payday rule in 2017 and was sued in 2018 by two Texas payday groups. Last year, a three-judge panel on the Fifth Circuit ruled that the CFPB was unconstitutionally funded through the Federal Reserve System and invalidated the payday rule. The CFPB appealed that ruling last year, teeing up the current constitutionality case before the Supreme Court. 

In the case this week that temporarily halted the small business data collection rule for banks, the two bank trade groups also had appealed to the Fifth Circuit. 

CFPB Director Rohit Chopra is poised to issue four final rules by year-end that could be challenged. A rule on credit card late fees is expected to be finalized in September or October and go into effect early next year. The rule is a priority for Chopra and many experts think the CFPB will not change its proposal to drop late fees to $8 from between $30 to $41 currently. 

“Chopra has the authority to issue the rule on credit card late fees, and trade groups likely will look to file a lawsuit in Texas to get before the Fifth Circuit,” said Dan Smith, president and CEO at the Consumer Data Industry Association and a former CFPB assistant director.

Todd Zywicki, a law professor at the Antonin Scalia Law School at George Mason University, said the credit card late fee rule “does seem more likely to get the chopping block if the final rule resembles the proposal.”

Two more final rules expected by year end on nonbank registries — one for so-called “bad actors,” and the other that is a workaround of the CFPB’s invalidated arbitration rule  — are also expected to be challenged. The CFPB proposed a rule in December that would create a public database of corporate lawbreakers, requiring nonbanks to report any state and local court orders or judgments involving consumer financial products. A second registry proposed in January would require nonbanks to register contract terms waiving consumers’ rights to arbitration. 

“The bad actors’ registry just puts a bull’s eye on the industry,” said Eric Johnson, a partner at Hudson Cook. “I can see somebody challenging both of those rules while we’re waiting for the Supremes to act, especially now that two banking associations have had success before a judge.” 

Finally, a much-anticipated proposal on open banking that would give consumers control over their personal financial data is expected to be finalized in 2024. 

Chopra is mindful of the timeframe and deadlines for getting rules from the proposal stage through the public notice-and-comment process, and to the final rule stage before enactment. If the CFPB waits too long, there is always a threat — albeit a minor one, experts say — that a rule could be repealed by Republicans, assuming they take control of the Senate and Presidency and retain the House in 2024. Republicans used an obscure legislative process called the Congressional Review Act to overturn the CFPB’s arbitration rule in 2017 by a vote of 51-50. 

The Congressional Review Act is one of the reasons the CFPB is moving quickly to propose other rules and get them finalized next year before the election. Proposed rules are coming in 2024 on overdraft fees, nonsufficient funds fees and credit reporting.

By halting compliance with a rule, industry hopes to stall or at least put off enactment until another day. 

“The delay is really important for the industry because it opens up other avenues,” said Mills. “If there is an effective delay, could industry be saved by a Supreme Court decision and by the 2024 presidential election?”

The CFPB is moving quickly on rules to appear as though it is “business as usual,” despite the threat of the Supreme Court case, experts said. 

“I can see where Chopra has sped up the bureau’s activities because they are trying to show all the good they think they’re doing for consumers to justify their existence and prove their worth to Congress,” said Johnson.

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