The Supreme Court ruled in May that the Consumer Financial Protection Bureau’s (CFPB’s) funding mechanism is constitutional, overturning a lower court ruling that threatened the very existence of the agency. But what, if anything, does that mean for the payments industry?
Before we delve into this question, let’s look at where the lawsuit originated and why the CFPB exists.
Where did the Supreme Court case originate?
The Supreme Court case was the result of a lawsuit brought against the CFPB by the Community Financial Services Association (CFSA) in 2018. The CFSA, a trade group representing payday lenders, questioned the constitutionality of the CFPB funding structure and brought the suit as a means to overturn the CFPB regulation on payday lending in 2017.
How did the CFPB come to be?
The CFPB was authorized by Congress in response to the 2007-2008 financial crisis, which exposed significant weaknesses in regulatory oversight of financial institutions. Specifically in the mortgage market, consumers were subjected to harmful practices, which contributed to the crisis. The CFPB was established in 2010 under the Dodd-Frank Wall Street Reform and Consumer Protection Act to address widespread failures and regulatory gaps in the financial industry, and to protect consumers from unfair, deceptive or abusive practices.
Prior to the CFPB, there was no government agency dedicated solely to consumer financial protection. Responsibilities were distributed among various agencies. This created gaps in regulation and enforcement, allowing for financial products and services to be marketed in potentially predatory or harmful ways. The CFPB was established to fill these gaps, for a more consistent and comprehensive regulatory framework.
In addition to providing more cohesive oversight, the CFPB aims to hold financial institutions accountable and ensure fair, transparent practices. Transparency is key here: presenting financial products and services in a way that is simple and clear for consumers will enable them to make more informed decisions and avoid pitfalls.
How does the CFPB operate and how is it funded?
The CFPB can identify potential violations through several sources including consumer complaints, regulatory referrals, and its own findings. The agency has the authority to take a variety of enforcement actions including:
- Imposing civil penalties to compensate harmed consumers
- Ordering remedies requiring violators to fix the harm they caused
- Other actions, such as banning individuals or companies from participating in the marketplace
- Issuing warning letters to advise a recipient that they may have violated federal law
- Holding administrative adjudication proceedings conducted by an Administrative Law Judge who issues a recommended decision
To ensure the CFPB is free from political influence, it is funded directly by the Federal Reserve. However, the way that it is funded was at the heart of the recent Supreme Court case. Instead of having a set annual budget, Congress authorized the CFPB to request funding in any amount it finds “reasonably necessary” each year up to a $600 million cap.
What does the Supreme Court ruling mean for the payments industry?
First of all, a great deal of chaos in the broader financial industry may have been averted due to the high court’s decision because it upholds the CFPB’s authority and enables the Bureau to operate as usual. Before the Supreme Court made its decision, many experts had cautioned that diminishing the Bureau’s powers would lead to widespread upheaval in the industry, as it would have brought into question the constitutionality of CFPB enforcement action going back years. This would have resulted in multiple legal challenges and actions.
To get a scope of the impact, in 2023 alone, the CFPB filed 29 enforcement actions and resolved through final orders six previously filed lawsuits, requiring defendants to pay more than $3 billion to compensate consumers and more than $500 million in civil penalties.
Secondly, the ruling should enable the CFPB to move forward with future action, including implementation of its new rule to limit late credit card fees. The rule, which was supposed to come into effect this May, was blocked by a federal judge in Texas until the Supreme Court made its ruling. In March of this year, the CFPB announced the details of the final rule, which will lower the amount of credit card late fees from an average of $32 to $8. The change is expected to save consumers as much as $10 billion; however, the banking industry is opposed to it, some voicing concerns that it will negatively impact customer credit limits and loyalty programs.
Thirdly, the high court ruling enables the CFPB to continue to expand its regulatory reach. It’s no secret that as financial technology advances, the CFPB has looked to expand oversight beyond banks and credit unions, although some believe they could be extending their reach too far. In early November 2023, for example, the bureau proposed a new rule that would expand its authority to closely scrutinize digital wallets and payment apps run by nonbanking companies in a similar manner that they examine financial institutions.
If approved, the new rule would not only enable the CFPB to subject large companies that have payment apps, such as Apple and Google, to similar supervisory examinations as financial institutions, the bureau would also have authority to do things like access corporate records plus “interview employees, scrutinize policies and safeguards, and flag problems as they spot them,” said a New York Times article on the proposed rule.
Striking a balance between business growth and compliance
The CFPB points out that it only seeks to protect consumers by holding large companies accountable for what happens on their platforms. “Today’s rule would crack down on one avenue for regulatory arbitrage by ensuring large technology firms and other nonbank payments companies are subjected to appropriate oversight,” CFPB director Rohit Chopra was quoted in the article, which also noted that he has not been shy about his desire to expand the bureau’s authority.
Digital transformation is advancing in the financial sector, with new products to make it faster and easier to move money around. Each new product and process, however innovative and convenient, carries risks – and the CFPB is determined to keep up.
Referencing a CFPB report on Buy Now, Pay Later (BNPL) issued last fall, legal expert Theresa Kananen indicated one area where the CFPB and the industry may be encountering friction. “Obviously, the CFPB does not want to see products out there that are going to exacerbate financial distress. [But] this is completely counter to the industry view. The industry is all about making things fast, frictionless, and accessible. So, it was a bit of a cold stop when the CFPB came out and said, ‘Well, it might be too easy.’”
As the CFPB seeks to expand its ability to protect consumers, industry stakeholders must strike a balance between faster, better solutions – and rigorous, responsible compliance.
Watch the video for a deeper dive into these issues
