When the federal Fifth Circuit Court Appeals ruled last week, in Community Financial Services v. Consumer Financial Protection Bureau, that the funding structure of the Consumer Financial Protection Bureau (CFPB) was unconstitutional, voices on the left bemoaned the damage the ruling would do to the CFPB’s supposed independence. In denouncing the ruling, the progressive Consumer Federation of America declared that “the CFPB’s independent structure is key to insulating it from political sway and gamesmanship”
Yet yesterday CFPB Director Rohit Chopra himself cast doubt on the CFPB’s independence when he joined President Biden at the White House to announce a “whole of government” initiative that included a multi-agency crackdown on what Chopra and others in Biden administration label “junk fees.”
As part of this “whole of government” initiative, the CFPB issued a guidance document broadly banning banks and credit unions from issuing overdraft fees. CEI Vice President for Policy Wayne Crews has explained repeatedly why guidance documents that result in new regulations function as “regulatory dark matter” that circumvent the rule of law bypassing Congress and the Administrative Procedure Act’s notice-and-comment process for issuing regulations. In the new edition of Crews’s annual Ten Thousand Commandments report, he details other whole-of-government initiatives on issues like equity and climate.
Biden highlighted the CFPB’s action in a tweet that proclaimed in effect that people will no longer be held responsible for bouncing a check. He tweeted, “My Administration is making clear that charging Americans for a bounced check they deposit or an overdrafted bank account isn’t just wrong. It’s illegal.”
I will comment further on how this initiative essentially amounts to a bailout of those who default and mismanage their bank accounts at the expense of responsible consumers, at all income levels, who carefully manage their checking accounts. Fees for all borrowers will almost certainly rise to make up for the cost of not allowing banks to penalize depositors who default. This bailout that excuses irresponsible financial behavior is similar to the student loan bailout that gave the Biden administration a negative reaction it didn’t expect from those who had paid what they owed.
Here, however, I will write about the good news: The Fifth Circuit Ruling could rein in this and other harmful CFPB policies. Last week, my Competitive Enterprise Institute colleague Devin Watkins and I praised the ruling that found that the funding structure of the CFPB was unconstitutional.
The unanimous judicial panel found that the mechanism created by the Dodd-Frank “financial reform” in 2010—under which the CFPB receives its funding from the Federal Reserve on its own request, rather from appropriations by Congress, as most agencies do—was an “off-books charge card that rings up unappropriated monies” that violates the Constitution’s separation of powers provisions designed to ensure government accountability. The ruling vindicates CEI, as we argued along with fellow plaintiffs that this funding mechanism was unconstitutional starting 2012 in State National Bank of Big Spring v. Mnuchin (originally State National Bank of Big Spring v. Geithner)
As the court noted, agencies subject to the annual appropriations process are subject to review of their actions by Congress as part of funding negotiations. Because the CFPB does not have to answer to Congress in this manner, it has pursued policies that damage consumers and entrepreneurs without accountability to Congress and the voters it represents. As CEI Vice President for Strategy Iain Murray writes in American Liberty News, the Fifth Circuit ruling “is a victory for checks and balances and a defeat for the administrative state.”
The first harmful regulation to fall as a result of this ruling was a rule on small-dollar lenders that was challenged in the lawsuit. Aside from the constitutional issues, this rule, which was sold as a way of targeting “payday” loans, actually affected a variety of small-dollar lenders.
Implemented in 2017 under then-Director Richard Cordray, the rule was revised for the better Director Kathy Kraninger. Kraninger’s overhaul got rid of the rule’s “ability to pay” provision, which would have put small-dollar loans out of reach of the borrowers who most desperately need them to cover basic living expenses or emergencies.
But unfortunately, the Kraninger CFPB kept the rule’s “payments provision” requiring additional authorization to debit a borrower’s bank account after two failed attempts due to insufficient funds. As my CEI colleague Matthew Adams wrote in The Washington Times last year, “This is an unusual burden, because there isn’t any other product or service that requires extra re-authorization after a failed attempt at obtaining payment.” The rule’s provision had resulted in lower-income consumers suffering from a shortage of credit as lenders faced increased risk of default, fraud, or bad-faith borrowing.
Hopefully, this provision will go by the wayside thanks to it being voided by the court and a watchful Congress that will discourage the CFPB from reviving it once again. And hopefully, the overdraft ban and other junky policies pursued by the Biden administration on so-called junk fees will meet a similar fate.