The Consumer Financial Protection Bureau faces increased legal and regulatory challenges to its actions during its wait for the Supreme Court to decide whether its funding structure is constitutional, attorneys and analysts said. A decision from the high court is not expected until early 2024, and in the interim, the financial industry watchdog will likely face roadblocks that slow its ability to execute the aggressive agenda it has been pursuing, industry observers said. "Uncertainty over the bureau's legal standing will encourage financial services companies to challenge every rulemaking and CFPB penalty they don't like," Ian Katz, managing director of Capital Alpha Partners, said in a report. The agency appealed the case to the nation's highest court after the Fifth Circuit Court of Appeals ruled that its funding mechanism does not pass muster under the U.S. Constitution because its money comes from the Federal Reserve, rather than directly from Congress. Banks across the country are closely watching the case, and the court said Feb. 27 it would hear arguments. Instead of taking it up in the current term, the appeal is not on the court's agenda until next term, which begins in October. That means a decision is unlikely until 2024. The CFPB, which has been using every tool at its disposal to scrutinize financial institutions, was hoping the court would hear the case sooner and make the agency's path forward more clear.
The Supreme Court's decision "presents real complications for the Bureau," said John Coleman, a partner with Orrick who previously was the CFPB's deputy general counsel for litigation and oversight. With its ambitious agenda, "uncertainty regarding the validity of [the CFPB's] actions will make it difficult to move forward quickly," Coleman said.
For now, the Fifth Circuit ruling "will continue to cast a shadow over all things CFPB-related — both within the Fifth Circuit and beyond," said Eamonn Moran, senior counsel at Norton Rose Fulbright and a former CFPB official. The uncertainty "goes to the CFPB's status and overall operations, including its ability to conduct enforcement initiatives, exams and rulemaking initiatives," he told S&P Global Market Intelligence.
Moran added that the Fifth Circuit decision has already led to legal challenges and several CFPB court cases have been put on hold. "In other cases, a number of litigants have attempted to invoke the ruling as grounds for judgments in their favor," Moran said.
More will follow suit and cite the Fifth Circuit ruling in their cases against the CFPB, said Chris Willis, co-leader of the financial services industry group at Troutman Pepper. This could slow the progress of the agency's initiatives.
"How many courts are going to stay the actions until they hear from the Supreme Court?" Willis said. "And obviously, if you're the CFPB, you hope courts are not going to stay the actions."
Troutman Pepper partner Misha Tseytlin said companies likely would win victories in the Fifth Circuit while the Supreme Court's decision is up in the air.
"If your company is subject to a CFPB lawsuit, you should be raising this issue," he said. "If you are in the Fifth Circuit, you will prevail."
What the CFPB can do
The CFPB is not expected to sit back idly. Willis noted that the Fifth Circuit ruling has not deterred the CFPB from moving forward with its initiatives, and the agency has been acting as if the case was not pending. "I don't think the bureau is going to do anything different," Willis said.
The CFPB could even speed up its work to finalize rules that would drastically cut credit card late fees, according to Raymond James analyst Ed Mills. Banks have said if the rules become final as is, they would take action to "close the gap" and recoup some of the lost fees through raising annual percentage rates or charging additional fees.
The development means the CFPB could implement the rules "on an aggressive timeline and ahead of the final ruling," Mills wrote in a note. And that rule would be unlikely to be overturned by the Supreme Court's decision, Mills said.
"While the outcome of a ruling that finds the CFPB's structure unconstitutional could hinge on what relief the court suggests to fund the CFPB, we do not anticipate the legacy rules of the CFPB to be thrown into doubt," the Raymond James analyst wrote. To read more click here.