FEDERAL GOVERNMENT RELATIONS
Supreme Court Upholds CFPB Funding Structure
This week the U.S. Supreme Court ruled 7-2 that the mechanism Congress established to fund the Consumer Financial Protection Bureau does not violate the Appropriations Clause of the Constitution. Beyond the legal questions addressed in the case, the decision has implications for three other legal actions against the CFPB: the legal challenges to the Section 1071 small-business data collection final rule, the bureau's credit card late fee final rule and the CFPB's update to its UDAAP manual. Those matters will proceed on other legal grounds.
The CFPB receives its funding directly from the Federal Reserve based on a request from the bureau's director. In CFPB v. Community Financial Services Association of America, the Fifth Circuit Court of Appeals in 2022 ruled that such a funding structure was unconstitutional because Congress ceded direct control over the agency's budget by insulating it from annual appropriations. The majority of Supreme Court justices rejected that argument in their decision.
"Under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes," said Justice Clarence Thomas, writing for the majority. "The statute that provides the bureau's funding meets these requirements."
The funding argument was referenced in the three other ongoing lawsuits brought against the bureau. Still, those cases relied on other legal arguments and will continue to be litigated on those other grounds.
Read the Supreme Court decision
FHFA Seeks Public Input on Updating FHLB's Mission
The Federal Housing Finance Agency issued a request for input on the mission of the Federal Home Loan Bank system on Thursday as the agency considers the next steps for related rulemaking. FHFA expects to issue a proposed rule on FHLB's mission, and responses will be considered in the development of that rulemaking.
FHFA's recent report, "Federal Home Loan Bank System at 100: Focusing on the Future," recommended that the agency clarify its mission and update how it evaluates system banks' achievement of those goals.
The agency is requesting public input in three categories: updating the regulatory statement of the FHLB system's mission to better reflect its appropriate role in the housing finance system; developing metrics and thresholds to evaluate mission achievement; and identifying how the system's banks could incorporate incentives for members with a "strong and demonstrable connection" to the FHLB mission. Feedback is due by July 15, 2024.
Congress Votes to Overturn SEC Treatment of Crypto Custody Assets
On Thursday, the Senate voted 60-38 in favor of a House resolution to overturn a Securities and Exchange Commission staff accounting bulletin that changes how banks and other publicly traded entities are expected to account for digital assets held in custody. H.J. Res. 109, introduced by Reps. Mike Flood, R-Neb., and Wiley Nickel, D-N.C., was previously passed by the House. Sen. Cynthia Lummis, R-Wyo., introduced the Senate companion measure. The resolution must be signed by President Biden to take effect.
House Lawmakers Urge Fed to Repropose Basel III Endgame Capital Rules
Pressed by House lawmakers, Federal Reserve Vice Chairman for Supervision Michael Barr Wednesday declined to commit to reproposing the Basel III endgame capital rules if there are substantial changes to the proposal before it is finalized. Barr and the top officials at the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency appeared before the House Financial Services Committee for the first of two days of congressional oversight hearings. Most of the hearing focused on a recent report finding widespread sexual harassment and discrimination at the FDIC. Still, lawmakers also questioned regulators on the capital proposal, with committee members concerned about its economic impacts should it go into effect.
"This proposal will severely reduce financing and access to capital for small businesses, making it harder for them to secure funding to hire workers, maintain their operations and expand operations," Rep. Roger Williams, R-Texas, said. "This could result in a domino effect, stifling economic growth in local communities where these banks are often a driver of entrepreneurship."
Barr and other Fed officials have previously said that broad and substantial changes will be made to the Basel proposal in response to the public comments received about it. However, Barr was questioned by lawmakers on whether the Fed would repropose it, which would subject the proposal to a second round of public comment and review. Barr didn't commit to any course of action. "We haven't made a decision on process yet," he said. "We're really focused right now on getting the substance right."
Also during the hearing, Rep. Brad Sherman, D-Calif., asked Barr about potential changes to the Fed discount window and whether the agency is looking at requiring some banks using the program to post collateral equivalent to a large percentage of their uninsured deposits, as reported by the Wall Street Journal last month. Again, the vice chairman was noncommittal about a course of action. "We're working through the substance of that now," Barr said. "We are looking at a range of measures to make sure that banks are ready to use the discount window."
Watch a recording of the hearing
Lawmaker Shares Concerns About Reg II Proposal's Effect on Banking Access
Lowering the cap on debit card interchange fees will hinder a bank's ability to offer low- and no-cost bank accounts to low- and moderate-income Americans, Rep. David Scott, D-Ga., said Wednesday during the House Financial Service Committee's oversight hearing of banking regulators. Scott questioned Federal Reserve Vice Chairman for Supervision Michael Barr on the Fed's proposal to revise Regulation II to lower the cap. Barr didn't commit to any course of action, saying the agency is still reviewing public comments.
Scott also asked Barr whether the Fed shares banks' concerns about the effects of lowering the cap on their ability to offer low- and no-cost bank accounts. Again, Barr said the agency is still reviewing comments. "I don't have an answer to your question yet, but those are the kinds of comments we'll take quite seriously," Barr said.
Report: Consumer Financial Protection Violations Totaled $8.8 Billion Over Six Years
A review of enforcement actions by state and federal financial regulators over the past six years found that consumer protection violations and privacy violations resulted in nearly $8.8 billion in penalties in the period studied. The research by information services firm Wolters Kluwer found that 95% of all consumer-related enforcement actions from 2018 to 2023 were taken by state authorities, with the vast majority of infractions being insurance violations. However, in terms of total financial penalties, insurance violations totaled $475 million compared to the $8.4 billion for consumer protection violations. Total penalties for privacy violations were more than $329 million.
Financial offenses accounted for the highest penalty amounts, with 74% of violations issued by federal authorities. The report documented 34 anti-money laundering enforcement actions over the six years studied, and together they resulted in nearly $17 billion in penalties. There were also 59 banking violation enforcement actions, together resulting in more than $3.7 billion in penalties.
Court Blocks CFPB's Late Fee Rule from Taking Effect
A federal judge in Texas last Friday issued a preliminary injunction blocking the Consumer Financial Protection Bureau’s credit card late fee rule from taking effect on May 14 as scheduled. The ruling came in the case brought by banking industry associations, the U.S. Chamber of Commerce and other plaintiffs. In issuing the ruling, Judge Mark Pittman found that the plaintiffs had a substantial likelihood of success on the merits and that they faced a threat of irreparable harm from the CFPB's rule based on the binding Fifth Circuit ruling in CFPB vs. Community Financial Services Association of America. The rule, which applies to credit card issuers with at least 1 million open accounts, reduced the safe harbor dollar amount for late fees to $8, eliminated a higher safe harbor dollar amount for late fees for subsequent violations of the same type and eliminated an annual inflation adjustment for the safe harbor amount.