The Supreme Court of the United States (SCOTUS) heard oral arguments in October for a case that challenges the constitutionality of the Consumer Financial Protection Bureau’s (CFPB) funding structure. While the case involves a payday lender and not a credit union, the outcome of the case—which may not be released until June 2024—may have implications for credit unions.
SCOTUS heard the case after a lower court vacated a payday lending rule issued by the CFPB in 2017 determining the rule exceeded the agency’s authority. Lawyers for Community Financial Services Association of America (CFSA) argued that funding the CFPB through transfers from the Federal Reserve, rather than annual appropriations through congressional activity, is unconstitutional and makes regulations such as the payday lending rule unconstitutional.
“It seemed that CFPB attorneys made some strong arguments that the CFPB is not the only agency funded through standing appropriations, including agencies that have had similar enforcement authorities,” said Ann Petros, NAFCU’s vice president of regulatory affairs, following the SCOTUS oral arguments. A prime example was the Customs Service, which was created in 1789 with standing appropriations, but then switched to annual congressional appropriations 130 years later.
“An interesting argument by CFSA is that when the Dodd-Frank Act, which created the CFPB, was enacted, legislators intended to insulate the agency and protect it from future congressional actions by funding it through standing appropriations,” said Petros. “CFSA argued that it is difficult to claw back the grant of authority from standing funding unless the president agrees to it, or Congress has enough votes to override a presidential veto.” This difficulty results in a lack of accountability for the agency, and a lack of checks and balances on its actions, she added.
NAFCU and CUNA filed an amicus brief that supports the payday lenders’ argument that Congress violated the Constitution when it passed the law in 2010 that created independent funding for the CFPB. However, NAFCU wants SCOTUS to rule narrowly on the question of the payday lending rule rather than calling all CFPB rules into question.
If all CFPB rulemaking is called into question, it might affect rules that credit unions have complied with for years, said Petros. “Credit unions have put a lot of time and money into compliance with mortgage origination and servicing requirements, and they rely on safe harbor provisions included with these rules,” she said. “There should be room and time for Congress to review, ratify and adjust CFPB rules if necessary so we don’t have to undo everything that has been put into place to comply.”
The CFPB’s scope of authority over credit unions and accountability is an ongoing concern for credit unions. “Credit unions are regulated by the NCUA, which is funded by the organizations it regulates through fees and is overseen by a bipartisan board,” said Petros. The source of funding and oversight ensures greater accountability, which is lacking with the CFPB, she added.
In a NAFCU survey of credit union members about the performance of the CFPB in relation to the protection of consumers, especially small businesses and underserved communities, responses showed that:
60% believe the CFPB does not act with consumers’ best interests in mind.
75% indicated that the financial services space is less safe or no safer for consumers than it was in 2010.
“The CFPB should be about consumer protection not about bank or credit union enforcement,” said Greg Mesack, NAFCU’s senior vice president of Government Affairs. Credit unions are regulated by the NCUA, but they often find themselves competing with under-regulated fintechs that are not subject to NCUA or in many cases, CFPB rules, he said. “Ninety-two percent of members believe that the CFPB has not leveled the playing field and has actually made the problem worse, not better,” he said. “The majority of members with assets below $500 million report feeling the regulatory burden more acutely every day.” NAFCU’s advocacy efforts related to the CFPB cover a wide range of issues that include the rule-making process, funding, accountability and scope of regulatory and enforcement authority. These efforts can be strengthened with help from credit unions, said Mesack. “Having data from frontline credit unions helps us make the case to reform and improve the CFPB,” he said. “We all want the agency to be what it was meant to be when the Dodd-Frank Act was passed.”