The Consumer Financial Protection Bureau (CFPB) is at a crossroads. Rather than live up to its "independent" promise, the agency has been nothing short of a political football. There is plenty of blame to go around on both sides of the CFPB battle, but the legal maneuvering and the race to the Supreme Court is not the solution. Rather, now is the time for Congress to act like adults and find the remedy for the CFPB that will allow the agency to be true to its mission of protecting consumers while at the same time ensuring a robust and compliant consumer financial services industry.
On February 27, 2023, the United States Supreme Court granted the CFPB's petition for a writ of certiorari in the case CFPB v. Community Financial Services Association of America, Limited, et al. ( the "CFSA case"), and agreed to review a U.S. Fifth Circuit Court of Appeals decision finding that the CFPB's funding structure, through the Federal Reserve rather than the congressional appropriations process, violates the U.S. Constitution's separation of powers and appropriations clause. This is the second time in less than three years that the Supreme Court has agreed to address the constitutionality of the federal agency that was created over a decade ago by the Dodd-Frank Act in the wake of the financial crisis and mortgage meltdown.
The last time, in Seila Law v CFPB, the Supreme Court struck down the language of the Dodd-Frank Act that provided for a single director removable only for inefficiency, neglect or malfeasance. The court found this structure to be unconstitutional and a violation of the Constitution's separation of powers. The court provided no remedy in the Seila case as none was requested beyond striking the removal provision. Seila did nothing to change the agency, its mission or its work. Prior rules remained in place, and enforcement, supervision and new rulemaking continued. Many tried to argue that the unconstitutional finding by the Supreme Court invalidated the agency's work, but that argument has been rejected by multiple appeals courts and numerous district courts.
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So, here we go again. The Supreme Court may very well agree with the Fifth Circuit and say that the CFPB's funding structure, outside of congressional appropriations, is unconstitutional, but will that help anyone? That finding, alone, would cause the funding portion of the Dodd-Frank statute to be stricken, and Congress will be forced to figure out a solution. But the Fifth Circuit decision also held that as a result of the unconstitutional funding structure, the regulation at issue (the Payday Lender Rule) was invalid. If the Supreme Court affirms, there is a risk that all of the regulations enacted with unconstitutional funding would be invalidated. Opponents of the CFPB risk throwing out the good with the bad, as many of those regulations have provided much-needed clarity to the business sectors that they regulate. Industry would be foolish to think that life would be better without many of the regulations for which the CFPB is responsible. At the same time, supporters of the CFPB must recognize that the refusal to compromise on structure or funding could lead to ruin. Whether there are appropriations or even a commission (instead of a single director), the mission remains the same. Nothing about the CFPB's work will change nor should it. Spending the next two years on a risky gamble of "our way or the highway" could, at the end of the day, harm consumers the most.
The court will probably not render a decision until early 2024. It is highly unlikely that a divided Congress, in an election year, will touch such a toxic subject. So, if the CFPB suffers a bad enough loss, both the financial services industry and consumers will ultimately pay the price of a powerless, unfunded agency in utter limbo. Of course, the Supreme Court could reject the Fifth Circuit's analysis, but that will only prolong the fight.
As attorneys who deal with regulatory issues on a daily basis, we understand the frustrations of regulatory burden. However, the investment in compliance for the past decade has proven positive. Certain verticals, like debt collection, have become more standardized with formal expectations, which ultimately has driven down complaints. Until this past year, the mortgage market has thrived, and foreclosure levels are down. The entire consumer financial services industry successfully weathered the onset of the pandemic. At the same time, the CFPB has, with what seems like growing frequency, unfairly leveraged its lack of accountability to circumvent legislation and the rulemaking process in its enforcement and supervision activities. The agency's failure to undertake legitimate cost-benefit analysis as mandated under the Administrative Procedures Act is concerning and has been harmful to businesses large and small.
Unless the adults in the room come together and find a legislative fix before a decision by the Supreme Court, this financial services limbo risks harm to all constituencies and everyone will lose.
