CFPB Funding Case Raises Worries for Other Banking Regulators
March 6, 2023, 8:30 AM - Evan Weinberger
--- Supreme Court weighing future of CFPB independent funding
--- Broad ruling has potential to open door to Fed, FDIC challenges
--- Practice Center: Banking & Finance (Bloomberg Law subscription)
The Supreme Court’s pending review on whether the Consumer Financial Protection Bureau’s funding stream is unconstitutional is fanning concerns about other financial regulators’ ability to cover their costs.
The US Court of Appeals for the Fifth Circuit in October ruled that the CFPB’s funding through the Federal Reserve—outside the congressional appropriations process—violated the Constitution.
The ruling sought to distinguish between the CFPB’s direct funding and how other financial regulatory agencies—such as the National Credit Union Administration (NCUA) and the Office of the Comptroller of the Currency (OCC)—are funded, primarily through fees charged to the banks and credit unions they regulate.
But many legal scholars and attorneys think that distinction is a thin one. A broad enough high court ruling could make the funding and independence of federal banking and credit union regulators ripe for a challenge from enterprising plaintiffs, they say.
Even if the CFPB doesn’t wither, an expansive ruling impacting other agencies that subjects them to appropriations—and requisite annual fights over funding levels on Capitol Hill—is worrisome to regulators and some pockets of the financial industry.
“The court could also write a broader opinion that could undermine the independence of other agencies, either directly (unlikely) or impliedly, which would lead to lawsuits against the Fed, OCC, and many other federal agencies, including some that are not involved with finance,” Kathleen Engel, a professor at Suffolk University Law School, said in an email.
Officials at other regulators are likely experiencing some queasiness as well, albeit at lower levels than their counterparts at the CFPB.
The Federal Deposit Insurance Corp.’s inspector general said in a February report that, should the Supreme Court uphold the Fifth Circuit’s ruling, “there is a risk that the Fifth Circuit’s ruling could also be applied to the FDIC.”
Added Uncertainty
The Supreme Court agreed to take on the Biden administration’s bid to overturn the Fifth Circuit’s ruling in late February but denied its request for a hearing in the current term. Instead, the case will be heard in the court’s next term, beginning in October.
The delay has added to the uncertainty for the CFPB. A ruling against the agency would mean all of its rules, guidance, and enforcement actions could be deemed invalid. The Biden administration and divided Congress, too, would have to agree on a new way to fund the agency, or let it die out.
So far, the administration and its Democratic allies in Congress have resisted Republican calls to figure out a way to get the CFPB onto the congressional appropriations process, saying the Fifth Circuit was wrong.
Still, the Fed—largely funded by interest on securities—as well as the FDIC, OCC, NCUA, and nonfinancial federal agencies funded outside of the appropriations process will likely seek to consult with the solicitor general’s office, said Joseph Lynyak, a partner at Dorsey & Whitney LLP.
The Justice Department’s solicitor general will argue on behalf of the Biden administration in the Supreme Court.
“I would certainly be concerned,” Lynyak said.
‘A Mess’
The Supreme Court has, in the past, expressed concern about sowing chaos in the financial system with its decisions. It has room to carefully craft a ruling against the CFPB that won’t affect other regulators.
We “just really want to see a narrow decision that resolves the funding of the CFPB,” said Greg Mesack, senior vice president of government affairs at the National Association of Federally-Insured Credit Unions (NAFCU).
Trade groups like NAFCU representing credit unions and mortgage bankers are already worried about the potential havoc that a broad ruling ultimately leading to the CFPB’s elimination would have on consumer finance. The 12-year-old CFPB is responsible for ensuring consumers’ fair treatment by banks, lenders, and other financial institutions.
“It would be a mess,” said Ann Petros, NAFCU’s vice president of regulatory affairs.
