Uncertainty on the regulatory front
Litigation and congress may impose changes
There is a lot on the line for bankers this year. Much of it depends on what the Supreme Court decides.”
Since taking the reins at the CFPB, Director Rohit Chopra has committed the agency to expand its authority over the financial services sector with regulatory zeal. He has proposed an extensive and complex small business data collection rule, an examination manual that uses fair lending concepts for non-credit products and an $8 dollar cap for credit card late fees. The CFPB will also be issuing a regulation on consumer data portability that will allow third parties access to bank consumer accounts.
TBA has joined a lawsuit, initiated by the American Bankers Association and the U.S. Chamber, brought in a federal court in Longview challenging the examination manual. We are alleging that the use of fair lending concepts and the Unfair, Deceptive and Abusive Acts and Practices Act on products like deposit services is not justified by federal law.
In October, the federal 5th Circuit Court of appeals issued a ruling that could jeopardize every regulation and enforcement action of the CFPB from its inception 12 years ago. A payday lending group sued the CFPB claiming that the funding of the agency is unconstitutional because it violates the appropriations clause in the Constitution and is not in concert with the separation of powers doctrine. Unlike most federal agencies, the CFPB does not receive appropriated funds from Congress. They can access up to 12% of the revenues of the Federal Reserve System — over $600 million per year. A three judge 5th Circuit panel agreed with the plaintiffs and vacated the regulation.
The 5th Circuit’s primary jurisdiction is over cases in Texas, Louisiana and Mississippi but the unconstitutional finding has caused financial services companies from around the country to challenge CFPB actions. The TBA Longview case has been amended to incorporate the appropriations issue.
Unsurprisingly, the CFPB has asked for expedited appeal to the U.S. Supreme Court to resolve the matter. It is anticipated that they will take the case and hear oral arguments this fall. Other federal appellate courts have upheld the constitutionality of CFPB funding and the agency is asking the highest court to reaffirm their authority.
Just a few years ago, challenges to perceived regulatory overreach and separation of powers issues would not have gained much traction. Now, with the addition of Trump-appointed judges, there is less deference to agencies and more of a willingness to curtail “the administrative state.”
What could the Supreme Court do? The 5th Circuit decision could be reversed. They could uphold part of the decision and send it back to the lower courts for further deliberation. Considering the burdens that the agency has placed (and is in the process of placing more) on community banks, the best option would be for the Court to strike the funding language and kick the ball back to Congress to provide appropriations. The Republican-controlled House would most likely not provide funding without some limitations on this powerful agency. They should consider placing banks under a certain asset threshold back under their traditional compliance regulators and out of the CFPB’s grasp.
The Section 1071 regulation of the Dodd-Frank Act, requiring small business data reporting for fair-lending purposes, will be finalized by the end of March. It is “Exhibit A” in the case against regulatory overkill. It is anticipated that only a few changes will be made to this more than 900-page regulation. Community banks will have to collect 31 different data points for each loan application, aggregate the data and report annually to the CFPB. The rule will impose software costs, training costs and may require the hiring of additional employees. Costs are not the only concern. Overzealous compliance examiners could find it easier to make allegations of lending discrimination through disparate impact analysis even where there is no intent to discriminate.
There is a lot on the line for bankers this year. Much of it depends on what the Supreme Court decides.