The Consumer Financial Protection Bureau has survived more than a couple of near-death experiences, and 2024 promises more of the same.
The CFPB came roaring into existence in the wake of the 2010 Dodd-Frank Act and broke new ground and barriers under Director Richard Cordray. During the Trump years, it survived being led by Mick Mulvaney, a major critic of the CFPB when in Congress who seemed dead set on rendering it impotent while he held the acting director’s gavel.
The latest threat to the bureau is a lawsuit that has been appealed to the U.S. Supreme Court, Community Financial Services Association of America Ltd. v. Consumer Financial Protection Bureau. At issue is CFPB’s funding.
Rather than being subject to the normal congressional appropriations process, which arguably gives Congress influence over any agency, the CFPB draws its funding from the Federal Reserve’s budget, which is independent of the appropriations mechanism. A federal appeals court in Texas ruled in early 2023 that the CFPB’s funding structure violates Article I, Section 9 of the Constitution. The ruling was appealed to the Supreme Court, which heard oral arguments on the case last October; a decision is expected this spring.
But that’s just part of what will make 2024 a tumultuous year for the CFPB and the organizations it regulates. (A companion article discusses other Washington-related trends: Washington Watch: 5 Issues Bankers Should Monitor in 2024.)
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The CFPB Won’t Go Slow Waiting for the Supreme Court
CFPB has — by design — been an irritant to the banking industry and other financial entities that it supervises directly or writes rules for. Its power to basically assert jurisdiction over players that it deems bureau-worthy — big techs’ payments efforts and buy now, pay later firms are two examples — fulfilling the banking industry’s decades-long mantra calling for a “level playing field” of rules has been scant comfort.
Experts warn against putting too many chips on the Supreme Court ruling against CFPB. The decision could come down at any time in the first half of 2024.
“I don’t think the case has changed the bureau’s behavior, at least not in the way that it’s signaling publicly and choosing how to communicate with the public,” says Brian Johnson, managing director at Patomak Global Partners and a former deputy director at CFPB. He points out that the bureau launched a major hiring effort for additional enforcement attorneys after the case was heard by the high court.
“If the Court were to find that CFPB’s funding mechanism is unconstitutional, then all hell will break loose, to put it mildly,” says Alan Kaplinsky of Ballard Spahr LLP. “I don’t expect that that’s going to happen.”
Kaplinsky is senior counsel of the firm’s Consumer Financial Services Group, and its former practice group leader. He bases his reading on both the oral arguments and a webinar he conducted with six people who filed friend of the court briefs. All of the latter feel the CFPB will win the case.
If that happens, he says, the bureau will likely become even more aggressive, though Kaplinsky says it’s hard to envision how. And if the bureau does lose, that won’t undo everything the next day.
“I expect that they will kick the can over to Congress to sort it all out, to remedy the funding mechanism,” says Kaplinsky. If that happens, he says, “then anything and everything that the CFPB has done will become open game for our dysfunctional Congress.”
The Congressional Review Act Will Accelerate Pending Rules
In the meantime, the CFPB has a full load of initiatives. Some that could come up very early in 2024 as the CFPB races to pre-empt interdiction enabled by the Congressional Review Act.
Since it was enacted in 1996, the “other CRA” —as opposed to the Community Reinvestment Act — is one of those checks and balances that the nation’s founding fathers didn’t design. The Act gives Congress the right to pass a joint Senate-House resolution of disapproval when a federal agency issues a final rule or other document that enough members dislike. If the President signs the resolution, then the rule cannot go into effect — or stay in effect, if already operative.
Out of many attempts, only 20 rules have been nixed by Congress and that effort supported by the President. Only one attempt made it through both houses in 2023, a disapproval of a CFPB rule dealing with small business lending data. But President Biden vetoed the joint resolution in late December 2023. A vote to override the veto is doubtful.
Here’s one key reason the Congressional Review Act could accelerate rulemaking at the CFPB: Once Congress receives notice of a new rule, it has 60 days to use CRA power, subject to some adjustments. Given the upcoming election, a party change in the White House, a turnaround of control in the Senate, or a stronger Republican contingent in the House could affect a rule’s survival if the changeover occurred within that window.
As a result, “I think there will be a flurry of regulatory activity in the first quarter and into the second quarter of 2024,” says Johnson.
Here is a rundown of pending issues, rules and other matters coming out of the CFPB in the immediate future and some items that may blossom during 2024.
Focus on Bank Fees in First Half of 2024
President Biden’s 2023 State of the Union address dwelled on the need to eradicate “junk fees” — “hidden charges that companies sneak into your bill to make you pay more and without you really knowing it initially” — throughout the economy. The speech specifically referred to CFPB’s proposed rule on credit card late fees, introduced only a few days earlier.
“It’s highly likely that the 2024 State of the Union speech will mention a final credit card late fees rule,” says Johnson, and he expects a regulation on overdraft fees and nonsufficient funds fees to come right behind the card late fee rule. Late in 2023, the bureau published a study on overdrafts that reported that one in five consumers overdrawing their account and being charged a fee did not expect that they would do so. The study is seen as setting the stage for rulemaking.
“It’s not lost on anyone that we’re entering the heart of federal election campaign season,” says Johnson.
The pattern with overdrafts was familiar, he continues. First come enforcement actions under existing rules, then regulatory activity to firm things up. Johnson says that the coming overdraft rulemaking coming will likely lean on “UDAAP.” This concept originated in Dodd-Frank, expanded from an older compliance principle. It stands for “Unfair, Deceptive and Abusive Acts and Practices,” and may form part of the rationale of the coming rule.
Kaplinsky thinks the overdraft proposal will emerge in early January, severely limiting overdraft fees and barring NSF fees outright.
Explore a three-month view of consumer transactions and trends during the 2023 holiday spending season, including BNPL activity and mobile wallet purchase performance.
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Three Deeper CFPB Trends Highlighted by the Fees Issue
These impending rules on fees shine a spotlight on other trends that both Johnson and Kaplinsky see.
1. Increased willingness to sue the bureau over its rules and policies.
Kaplinsky thinks lawsuits will become the norm after CFPB publishes any final regulation.
“I see a constant tension next year, with CFPB promulgating regulations and being sued by whoever’s ox is getting gored. That’s something that wouldn’t have happened a few years ago. Back then everybody was very reluctant to sue the CFPB because they are not going away and you will always have to deal with them.”
— Alan Kaplinsky, Ballard Spahr LLP
The small business lending data proposal that prompted the 2023 CRA attack was already the subject of lawsuits. Now that the challenge has been overruled by Biden, he says, those suits will resume. He expects the matter to be in the courts at least through yearend.
Kaplinsky foresees that the bureau’s pending open banking proposed regulation, under Dodd-Frank’s Section 1033, will also be challenged in court. This is in spite of it not being nearly as controversial as the small business rule.
2. The growing politicization — and political control — of the CFPB.
Johnson points to a shift in the bureau’s own behavior in the wake of a mid-2020 Supreme Court decision in the Seila Law LLC case. In brief, the Court found that the President has the right to remove the bureau’s director without cause.
As a practical matter, says Johnson, the ruling changed the character of CFPB. Instead of being an independent regulatory agency as created in the Dodd-Frank Act, he says, it is now, effectively, a dependent executive agency. This shift manifests itself, he says, in the bureau’s increasing willingness to dance to the administration’s tune, whether it be carrying out a project under an Executive Order or getting on board of the President’s crusade against junk fees.
“I think that change in that aspect of the way the bureau operates is here to stay,” says Johnson. At some point, he suggests, Congress may wake up to the shift and decide to do away with the bureau’s special funding arrangement, under which the legislative branch has no say in spending at present. Hence the importance of the Community Financial Services Association of America case pending with the high court.
In the meantime, says Johnson, that coordination with the executive branch has produced a bureau that behaves much more politically. And one that participates in some Biden administration executive orders for a “whole government” press on this issue or that.
3. Rulemaking “technique” at the bureau continues to diverge from the prudential banking regulators — the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.
The CFPB tends to regulate through policies, speeches, press releases, enforcement actions and other measures, rather than through formal rules. In some ways, this enables the bureau to act on issues more quickly than can be accomplished using the standard rulemaking process, with its public comment periods and other formal requirements. But opponents don’t like the inability to influence developments.
Compliance officers have understood since the bureau’s earliest days that understanding “the rules” required reading everything emanating from CFPB, not just actual rules, and parsing it all to figure out what was expected. However, Johnson points out that the regulatory result tends to be a short-term focus.
From the viewpoint of the regulated, however, this approach could have some advantages. Press releases, policy statements and other steps that aren’t part of formal rulemaking can be overridden or amended much more quickly by a new adminstration’s CFPB director, compared to formal rules and regulations implemented under the Administrative Procedures Act.
In the event of a White House turnover, “much of the bureau’s effort could be reversed in fairly short order,” says Johnson.
Arbitration Issues Arise Again
Back in 2017, the bureau’s Arbitration Agreements Rule was disapproved by both the House and Senate under the CRA and the resolution of disapproval was signed by then-President Trump. As a result, the rule was expunged from the Code of Federal Regulations.
In September 2023, a consortium of consumer advocacy groups petitioned the bureau to take up the arbitration issue again. Many consumer banking contracts, especially for credit cards and checking accounts provided by large banks, contain mandatory arbitration clauses. Frequently the consumer signing such agreements not only agrees to the arbitration process but also waives the ability to pursue a complaint in arbitration or in court as a member of a class, rather than individually.
Under terms of the Congressional Review Act, a rule struck down can’t be replaced by another that is in “substantially the same form.” To address that, the consumer group petitioners want pre-dispute mandatory arbitration barred, but want post-dispute arbitration agreements to be permitted. Opponents, including Kaplinsky, have submitted a study that indicates that “hardly anyone ever agrees after a dispute has arisen to resolve it through arbitration. It just never happens,” he says. Nonetheless, he says it’s likely CFPB will be taking up the petition in 2023.
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Fair Lending Scrutiny and Litigation at CFPB
In October 2021, then-new CFPB Director Rohit Chopra participated in a Department of Justice press conference unveiling a unified push against redlining in all forms. Attorney General Merrick Garland said at the time that DOJ was “committing ourselves to addressing modern-day redlining by making far more robust use of our fair-lending authorities.”
CFPB has been pursuing fair-lending cases as part of this thrust since. In a November speech, Kristen Clarke, assistant attorney general, spoke of the attack on redlining as being “on the broadest scale in the Justice Department’s history.” (More about redlining can be found in a companion article to this report.)
CFPB already had the power to pursue fair-lending violations before the new push. And Kaplinsky recommends keeping an eye on a pending case that was filed back in 2020, CFPB v. Townstone Financial.
Townstone Financial is a nonbank retail mortgage firm based in Chicago. The bureau’s suit alleges that Townstone drew almost no applications for loans for properties in African-American neighborhoods in the Chicago metropolitan statistical area, and few applications from African Americans in the MSA. Key to the case is the claim that the company made racially disparaging statements during weekly radio shows and podcasts that effectively resulted in redlining, by discouraging African Americans from applying for mortgages in that area.
When Does Redlining Begin?:
The CFPB's Townstone case turns on whether a lender can violate the Equal Credit Opportunity Act that discourages someone from applying for credit or whether someone must have applied for a loan for discrimination to occur.
ECOA refers only to applicants, while its implementing rule, Regulation B, refers to both applicants and prospective applicants. The case — which CFPB lost at trial — is on appeal in the U.S. Seventh Circuit and oral arguments were heard in December. Kaplinsky says a loss of the appellate case could substantially impact CFPB’s ability to go after redlining cases.
Will CFPB Drop the Other Shoe on Buy Now, Pay Later?
In December 2021, the bureau issued an extensive call for data from major nonbank buy now, pay later firms that culminated in a large report on the trend in September 2022. Since then, the bureau was expected to pull the nonbank BNPL companies more directly under its umbrella through regulation. Yet, as of yearend, there hasn’t even been a proposed rule. (In late 2023 the Comptroller’s Office issued guidance on BNPL for national banks.)
Kaplinsky thinks some of the bureau’s urgency cooled at a point when the BNPL business began to flag in 2022 and some companies hit financial trouble. However, the boom seen in BNPL usage during holiday spending in late 2023 may bestir the bureau, he thinks.
“I wouldn’t be surprised if the bureau does something,” says Kaplinsky. “It may not be a full-blown regulation. It could be in the form of guidance or an advisory opinion or something like that.”
Patomak’s Johnson notes that the bureau’s concerns about BNPL include the lack of a cohesive credit reporting framework, and BNPL providers’ non-participation in credit reporting.
When Debt Doesn’t Look Like Debt:
For many consumers, the relative invisibility of buy now, pay later financing has actually made BNPL more desirable because that spending isn't reflected in their reported debt load.
Johnson says this can lead to “loan stacking” — accumulation of debt that isn’t completely reported, either with one BNPL provider or across multiple ones.
“I had thought the bureau might try to address BNPL through a Fair Credit Reporting Act rulemaking,” says Johnson. But that hasn’t materialized thus far. A higher priority for the bureau in FCRA, he says, appears to be rulemaking to attempt to remove medical debt from credit reports. (In April 2023 credit bureaus removed medical debt collections items of under $500 from credit reports.)
Read more of our buy now, pay later coverage:
- A Bright Future for BNPL Is in the (Bank) Cards
- Why Consumers Don’t Think BNPL Is ‘Debt’ (and Why It Matters)
- Why U.S. Bank Is Elbowing into the Competitive BNPL Space
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On the Horizon: Artificial Intelligence
Since his arrival at CFPB, Rohit Chopra has been skeptical of artificial intelligence’s role in financial services. The bureau has set out its concerns about AI in a couple of ways.
One is in remarks Chopra made when the bureau and three other bodies — DOJ, the Equal Employment Opportunity Commission, and the Federal Trade Commission, where Chopra had been a commissioner — issued a joint statement holding that use of advanced technology like AI that resulted in bias would not be tolerated.
Chopra promised to “root out discrimination caused by any tool or system that enables unlawful decision making.”
On its own, the bureau has issued statements on accountability by financial providers when using “black box algorithms” for lending and tapping algorithms for customer selection and advertising placement. In September 2023, the bureau issued guidance for lenders on using AI. This included the stipulation that applicants receive “accurate and specific” reasons when denied credit by AI.
As complex as those issues are, they will only grow more complicated as generative AI becomes a more significant factor in financial services.
“My hope for the bureau would be that rather than taking an oppositional stance, it would do the work necessary to understand the potential uses of AI, the potential benefits for consumers and the industry and for markets at large,” says Johnson. He’s concerned that the bureau has fewer resources to aim at exploring the implications of such innovations than it used to. The CFPB Office of Innovation was folded into a larger group in 2022, the larger entity being focused on obstacles for new market entrants rather than research into new technologies.
“Careful analysis takes time,” says Johnson. “But I think it’s appropriate for an agency to take a deliberative position rather than making up its mind and then trying to find ways to make good on its conviction.”