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Supreme Court: CFPB Funding is Constitutional

After oral argument in CFPB v. Community Financial Services Association of America, Ltd, we predicted that the CFPB would live to see another day.  Today the Supreme Court confirmed that prediction. 

In a 7-2 decision joined by all his colleagues except fellow conservative Justices Alito and Gorsuch, Justice Clarence Thomas wrote that the Consumer Financial Protection Bureau’s funding mechanism does indeed meet the requirements of the appropriations clause. He used text and history to justify as constitutional the CFPB’s funding from the Federal Reserve, rather than a line-item in the federal budget. Justice Alito disagreed, writing that this decision renders the appropriations clause a “minor vestige.”

This case was about the CFPB’s Payday Lending Rule, promulgated in 2017 to combat high-interest consumer loans.  The lower court rejected every other argument regarding the CFPB’s ability to promulgate and enforce its rules—except one.  The entire structure failed because its funding mechanism was unconstitutional. Or so the Fifth Circuit held.

So much for all those cases involving the CFPB that have been on hold pending this decision. They have effectively been revived today. We’ve written about the CFPB’s Small Business Lending Rule regarding implementation of Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and predicted the onerous rule would result in litigation. In fact, the Chief Judge of the Southern District of Texas enjoined enforcement of the rule—as to specific plaintiffs—pending this decision.

Just last week, Judge Mark Pittman of the Northern District of Texas temporarily blocked the CFPB’s new cap on credit card late fees.  That rule, scheduled to take effect this week, would have capped late fees at $8 unless the issuer could prove that wasn’t enough to cover its collection costs.  The case had been subject to some judicial ping pong, with Judge Pittman originally transferring it to the District of Columbia while throwing some shade at forum shopping.  The Fifth Circuit quickly reversed that transfer and sent it back to Judge Pittman. His most recent decision (which threw some shade at the Fifth Circuit) was based primarily on the Fifth Circuit’s decision in CFPB v. Community Financial, which the Supreme Court just overturned. Until today, that precedent created a likelihood of success on the merits, the first prong required for the injunctive relief sought by the credit card companies.

Last year we wrote about a federal court in New York that stayed an enforcement action brought by the CFPB and the New York Attorney General against Credit Acceptance Corporation, alleging unfair practices, high interest rates, and predatory lending.  She agreed with Credit Acceptance that the case should be put on hold until after the Supreme Court sorted out the CFPB’s funding mechanism. Absent other roadblocks, that case should now be able to proceed.

The CFPB shared our skepticism after oral argument last October and decided to aggressively stand its ground. It has been very active since then, promulgating rules, initiating litigation, exercising supervisory authority over nonbank lenders, and more.

So yes, as we predicted, reports of the death of the CFPB were greatly exaggerated.  At Dalton & Tomich, we represent banks, credit unions, nonbank lenders, and small and middle market businesses.  Please contact us today to discuss your organization’s rights, remedies, and compliance with state and federal laws and regulations.

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