If the Supreme Court sides with the CFPB, there will be a wave of lawsuits

The Supreme Court is expected to rule on whether this is the case at the end of June the funding structure for the Consumer Financial Protection Bureau is constitutional. If the court sides with the lenders who sued the CFPB, claiming its funding is unconstitutional, the consequences would be enormous. for other agenciesincluding the Federal Reserve, the Office of the Comptroller of the Monet, and the Federal Deposit Insurance Corp.

But many legal experts think it is more likely that the Supreme Court will rule in favor of the CFPB oral arguments was heard in October when only one justice — Associate Justice Sonia Sotomayor — questioned what remedy there should be if the agency’s funding through the Federal Reserve System is found to be unconstitutional.

Because the justices failed to spend much time on a solution — and instead were deeply skeptical that Congress improperly funded the agency — many financial industry attorneys are now guessing what will happen. will happen with various rules and lawsuits suspended pending the outcome of the case. the case of Consumer Financial Protection Bureau vs. Community Financial Services Association of America.

“I expect the CFPB to win,” said Alan Kaplinsky, senior counsel at Ballard Spahr, who expects it took so long to reach a ruling because of divided decisions by the justices. “There will be multiple opinions, dissenting opinions and probably concurring opinions, and it will take time to get all of that done.”

Several attorneys who filed amicus briefs on behalf of CFSA, the leading trade group payday lenders who have sued the CFPB in 2018, don’t think the payday lenders will win, Kaplinsky said. The general view was that Solicitor General Elizabeth Prologar, who represented the CFPB, presented a stronger case than her counterpart, Noel J. Francisco, a former solicitor general who represented the payday groups, who struggled to secure a majority during oral arguments of the justices that Congress had improperly delegated its powers to the CFPB.

“They haven’t asked the agency or either party, how do we solve this? What is the solution?” said AJ Dhaliwal, partner at law firm Sheppard Mullin. ‘Because they didn’t get into that, they can’t blow [the CFPB] upwards.”

Michael Benoit, chairman of the law firm Hudson Cook LLP, said if the Supreme Court were to side with the lenders, the impact on federal financial regulators would be enormous.

“I never felt like the funding argument was very strong,” Benoit said, adding that while the Supreme Court should not be political, “a decision that invalidates decades-long funding mechanisms would be a political earthquake in an election year — especially this election year.”

That’s what many legal experts initially thought all previous CFPB rules and actions would be threatened when a three-judge panel of the U.S. Court of Appeals appeared before the 5th Circuit canceled the payday loan came to power in 2022 and found that funding the CFPB outside the Congressional appropriations process violates the Constitution’s separation of powers. Since then, challenges to the CFPB’s funding have been part of nearly every legal brief in lawsuits filed against the agency in some way, attorneys said.

But since the oral arguments took place in October, there has been a turnaround. Legal experts believe a flood of lawsuits will be unleashed after the Supreme Court rules in favor of the CFPB.

“It will be a flurry of activity,” Kaplinsky said.

Last year the CFPB embarked on a hiring spree in one of the agency’s largest recruitment drives ahead of future lawsuits.

Two major rules currently on hold will continue, including the payday loan rule and the Small Business Data Collection Rule. Moreover, a controversial one anti-discrimination policy This can be appealed to the CFPB.

“There is currently a lull before the decision,” Dhaliwal said. “The fall was extremely busy and since the new year it has become very quiet, partly because of the Supreme Court decision that is coming out.”

Meanwhile, nine enforcement actions and five petitions to enforce civil investigative demands have been stayed pending the outcome of the CFSA case, according to the CFPB.

“The CFPB looks forward to the Court’s decision, and in the meantime, we have continued to carry out the critical consumer protection work that Congress has mandated,” a CFPB spokesperson said.

Of the rules that have been suspended, the payday rule is the best example of how an agency rule can remain mired in litigation for years.

The payday rule was first developed and finalized in 2017 by former CFPB Director Richard Cordray and was stripped of a provision that requires lenders to determine whether a borrower can repay a loan. The original 2018 compliance date was postponed by a Texas judge after trade groups filed a lawsuit. the desk. What will remain, if the rule is implemented after the Supreme Court case, is a restriction that prohibits payday lenders from making more than two failed attempts to withdraw payment for a payday loan from a consumer’s checking account. The restrictions were intended to protect borrowers from having their money seized by lenders and from repeated overdrafts.

Meanwhile, the small business data collection rule — known as 1071 because of its section in the Dodd-Frank Act — would require banks, credit unions and small business lenders to collect and report data on loan applications, primarily to determine whether small companies collect and report data on credit applications. Business loans are made to small businesses owned by women and minorities.

Last year, the U.S. District Court for the Southern District of Texas upheld a rule in which plaintiffs alleged that the CFPB exceeded its statutory authority by expanding the data collected from lenders to 81 data points, far more than the 13 mandated by the Dodd-Frank Act. The rule has been set aside pending the outcome of the case in the Supreme Court. Republicans in Congress, joined by a handful of Democrats, have tried in vain to annul the rule.

Another legal challenge involves a sweeping anti-discrimination policy that CFPB Director Rohit Chopra adopted in 2022 by making a change to the agency’s exam manual. The updated manual on the federal prohibition on “unfair, deceptive or abusive acts or practices,” known as UDAAP, asserted that discrimination in any financial product is an “unfair” practice that could give rise to liability.

“The case is important because the court issued the order based not only on the constitutional issue, but also on the fact that the CFPB exceeded its statutory authority,” Kaplinsky said, adding that “there was no presumption at all that [UDAAP] intended to cover discrimination.”

Last year, a federal judge in Texas spoke summary judgment granted and abandoned the policy after determining that the CFPB exceeded statutory authority. If the CFPB prevails in the Supreme Court case, the court’s ruling will stand, even though the CFPB may appeal.

“Once the Supreme Court’s ruling is announced, the CFPB will take enforcement action or file a lawsuit after the fact,” Dhaliwal said. “They will be ready to pull the switch.”