In a 7-2 opinion issued in May 2024 by Justice Clarence Thomas, the Supreme Court of the United States (SCOTUS) ruled the statute that funds CFPB through the Federal Reserve instead of congressional appropriations satisfies the U.S. Constitution appropriations clause because the funds come from the Federal Reserve and may be used to pay CFPB expenses in carrying out its duties and responsibilities. Justices Alito and Gorsuch dissented, arguing that the ruling allows CFPB and the executive branch to enjoy financial independence by insulating it from accountability to Congress.
The case stemmed from the CFPB Payday Lending Rule in 2017 to protect consumers from predatory lending practices for multiple attempts to withdraw funds, additional fees, and overdraft charges from bank accounts. The argument was that the CFPB’s funding mechanism is unconstitutional because Congress funds most federal agencies through the appropriations process. In this instance, Congress chose to fund the CFPB through the Federal Reserve to preserve its independence from the political process.
What does SCOTUS’ CFPB Ruling and the ‘Two Strikes’ rule mean for consumer banking?
While the CFPB regulates banks above $10 billion in assets, the SCOTUS ruling is far-reaching. Financial services executives and industry advocates have expressed concerns that it could become the industry norm, pressuring profitability.
Potential Impacts
Fee income could get tighter regulatory scrutiny related to the curtailing of fees tied to deposit products. Half of bank directors and senior executives who responded to Bank Director magazine’s 2024 Risk Survey reported their banks had adjusted fees due to indirect or direct regulatory pressure.
Small Business Rule under Section 1071 of the DFA to amend ECOA and Reg B was to take effect in August 2023 and require certain “covered financial institutions” to track and report new data collected from “covered originations” for small business credit transactions. After the decision, the CFPB extended compliance dates:
- Tier 1 – from Oct. 1, 2024, to July 18, 2025, with initial filing required by June 1, 2026
- Tier 2 – from April 1, 2025, to Jan. 16, 2026, with initial filing required by June 1, 2027
- Tier 3 – from Jan. 1, 2026, to Oct. 18, 2026, with initial filing required by June 1, 2027
(To read more about Section 1071 impacts, click here.)
Payday Lending Rule, which regulates payday, vehicle title, and other small-dollar consumer loans, is set to go into effect in March 2025.
Credit Card Penalty Fees, which amends Regulation Z to limit late fees to “reasonable” amounts, would have been effective May 2024; however, litigation challenging the rule on other grounds will resume so an implementation timeline is unclear.
What should banks do or consider following the SCOTUS CFPB ruling?
- Ask management to explain how revenues could change if the institution has to adjust deposit product fees.
- What revenue shortfall could the Institution be facing?
- How could these changes negatively impact the Institution’s consumer customer base?
Board members and institution leaders should review deposit products from a regulatory point of view and create contingency plans to handle a potential decrease in fee income as late fees that rely on customer default or other actions that require them to sign up for an additional product could fall under heightened scrutiny.
Contact your Rehmann advisor for a personal consultation or Beth Behrend, a Rehmann senior manager in consulting for financial institutions: 616.975.4100 or [email protected].
