May 16, 2024

U.S. Supreme Court Upholds CFPB Funding Structure

The U.S. Supreme Court ruled today that the funding structure for the Consumer Financial Protection Bureau does not violate the Appropriations Clause of the U.S. Constitution.

“Under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes,” said Justice Clarence Thomas, writing for the majority. “The statute that provides the bureau’s funding meets these requirements.”

The 7-2 ruling reverses a lower court’s decision. In October 2023, the Supreme Court heard arguments in Community Financial Services Association of American v. CFPB on appeal following a ruling from the 5th U.S. Circuit Court of Appeals. In October 2022, the 5th Circuit found the CFPB’s independent funding through the Federal Reserve System without expressed annual appropriation violated the appropriations clause of the U.S. Constitution. The majority of Supreme Court justices rejected that argument in their decision.

“We are disappointed and disagree with the court’s decision,” said MBA President and CEO Jackson Hataway. “Ultimately, congressional action is required to fix the broken funding model for the CFPB, and we will continue to push for more accountability to reign in the CFPB.”

Beyond the legal questions addressed in the case, the decision has implications for three other legal actions against the CFPB involving ABA. Those matters will proceed on other legal grounds.

• the legal challenges to the Section 1071 small business data collection final rule
• the bureau’s credit card late fee final rule
• the CFPB’s update to its UDAAP manual

With this ruling, the CFPB can move forward with Section 1071 implementation of the Dodd-Frank Act in reissuing deadlines for compliance with the final rule. Last August, a federal judge in Texas issued an order blocking enforcement of Section 1071 while the Supreme Court heard a challenge to the constitutionality of the CFPB’s funding structure.

Court Blocks CFPB’s Late Fee Rule From Taking Effect

A federal judge in Texas issued a preliminary injunction Friday blocking the Consumer Financial Protection Bureau’s credit card late fee rule from taking effect May 14 as scheduled. The ruling came in the case brought by American Bankers Association, the U.S. Chamber of Commerce and other plaintiffs.  

In issuing the ruling, Judge Mark Pittman found that the plaintiffs had a substantial likelihood of success on the merits and that they faced a threat of irreparable harm from the CFPB’s rule based on the binding 5th U.S. Circuit Court of Appeals ruling in CFPB vs. Community Financial Services Association of America. The rule, which applies to credit card issuers with at least 1 million open accounts, reduced the safe harbor dollar amount for late fees to $8, eliminated a higher safe harbor dollar amount for late fees for subsequent violations of the same type and eliminated an annual inflation adjustment for the safe harbor amount.

“MBA was relieved that implementation of this rule was blocked, but unfortunately the judge did not rule on all the arguments presented for the preliminary injunction and instead relied on the previous funding challenge was pending in the Supreme Court,” said MBA President and CEO Jackson Hataway. “The CFPB’s rule does not consider the overall impact on card services that will increase credit costs for everyone and reduce access for many, harming all consumers who the CFPB is charged to protect. We are hopeful the parties will move the court to keep the preliminary injunction in force, pending a decision on the merits of the case.”

ABA, Associations: Lowering Debit Card Fees Will Harm Consumers, Violate Law

A Federal Reserve proposal to lower the cap on debit card interchange fees would harm consumers, banks and credit unions, the American Bankers Association and eight bank and credit union associations told the Fed. In addition, the associations said the proposal would violate the law by prohibiting banks from recovering the costs they incur in providing affordable debit card programs. The groups urged the Fed to rescind its proposal to update Regulation II.

“If the proposal is finalized as proposed, it is estimated consumers would pay an extra $1.3-$2 billion annually in higher account fees,” they said. “Nor is it likely that this harm would be offset by lower retail prices. There is no evidence that merchants passed on cost savings from capped interchange fees to consumers after the 2011 rule was promulgated, and thus, it is unlikely that merchants would pass on any additional savings realized if the proposal is finalized.”

MBA General Counsel Keith Thornburg noted the comment letter provides the framework for a legal brief.

“It seems likely that Reg II and the Board of Governors will face a substantial court challenge from our industry if the rule is finalized,” Thornburg said.

Thornburg said the proposal would harm all consumers, especially low-income consumers. The proposal will undermine financial institutions and the security of payment systems by depriving them of sufficient revenues to cover costs and maintain the security of the card payment system. The rule does not comply with the Durbin Amendment and does not properly allow for cost recovery by the banking system.

In the letter, the associations said small banks and credit unions would bear the brunt of the effects of lowering the caps. They also said the proposal is not grounded in fact and would violate the Durbin Amendment and the Constitution as it is not designed to allow issuers to recover their costs and a reasonable rate of return.

“Courts have repeatedly held that price-control regulations that fail to allow a reasonable return are unconstitutional,” they said.

Bankers Associations: OCC Must Fight States Encroaching On National Bank Oversight

MBA joined the American Bankers Association and state bankers associations in urging the Office of the Comptroller of the Currency to defend its regulatory authority against state attorneys general and lawmakers. During 2024 state legislative sessions, several states considered — and a few enacted — legislation that would allow state regulators to establish and enforce safety and soundness standards for national banks, including standards dictating when a bank can deny or terminate financial services for current or prospective customers.

The associations in their letter said that competition among state-chartered and national banks is vital to the U.S. economy, and that dual-chartering framework depends on the OCC defending its nearly exclusive national bank visitorial powers from state authorities and “preserving the essential powers of national banks amid a range of harmful and often conflicting state laws.”

“[B]oth the OCC and the Supreme Court have repeatedly recognized national banks’ incidental powers evolve alongside financial innovations and the growing needs of an ever-more complex American economy,” the associations said. “Less national banks quickly be made vulnerable to myriad, often conflicting state laws, the OCC must be and remain vigilant in all situations in which national bank preemption is appropriate.”

MO Reps Grill FDIC Chair At House Hearing

Congressman Blaine Luetkemeyer and Congresswoman Ann Wagner grilled Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, during a House Financial Services hearing Wednesday.

Luetkemeyer criticized the FDIC for weak management and poor regulations, citing the failures of three banks last year.

“You knew about it for a year, did nothing and in doing that you endangered not only the viability of those banks but the viability of our system,” Luetkemeyer said.

As previously reported by MBA, the Missouri representatives called on Gruenberg to resign following a report that found the FDIC failed to provide its employees a workplace safe from sexual harassment, discrimination and other misconduct.

At Wednesday’s hearing, both Luetkemeyer and Wagner again called for Gruenberg to resign.

“FDIC Chair Gruenberg must answer for the utterly horrific reports of sexual harassment and discrimination at his agency,” Wagner posted on X.