Conservative attack on regulators, big business may get more than they bargained for

Last week, a federal appeals court ruled that the CFPB’s funding structure was unconstitutional, dealing a major blow to the CFPB that could put the agency’s very existence at risk.

The decision is a victory for Republicans and a conservative movement working to deregulate the state, but their allies in business are more ambivalent about the potential impact of a decision that could undermine a range of regulations and legal safe harbors that the industry has planned for Ten years.

“Uncertainty is the buzzword of the moment,” said Jonathan Kolodziej, a partner at Bradley LLP who advises financial services firm KBE.
About compliance. “While the CFPB may be bad for the company, we have invested a lot of time and energy at this point to achieve our goals,” he added. “Erasing it will only add more burden and uncertainty to the situation. ”

The court ruling invalidated a 2017 rule regulating the payday lending industry on the grounds that the CFPB’s funding structure was unconstitutional. The institution is funded by the Federal Reserve, which is funded by fees assessed by depository institutions and interest earned on its portfolio of securities.

“Congress’ decision to renounce its constitutional appropriation authority, ceding the power of its purse to the Bureau, violates the Constitution’s structural separation of powers,” wrote Judge Corey Wilson’s three-judge panel appointed for Trump, which heard case.

The decision is currently only binding in federal courts in Texas, Louisiana and Mississippi, but the SEC is expected to appeal to the Supreme Court.

Although the decision only rescinds the payday loan rule, the logic used to arrive at this conclusion — that the rule was enacted and enforced using funds allocated unconstitutionally — means that any rule or action by the agency may be Those grounds were challenged in court.

Many of the rules issued by the CFPB are designed to create legal certainty for businesses, including safe harbors related to debt collection practices and mortgage loan issuance.

“If the CFPB is unconstitutional, the mortgage market will be in disarray,” said Adam Levitin, a law professor at Georgetown University. wrote on twitter, noting that the “qualified mortgage” rule protects mortgage issuers from lawsuits in state and federal courts. If the rule is repealed, it could open the door to a flood of lawsuits by borrowers who can claim they were duped into taking out loans.

Even if these legal protections are at risk, it is unclear whether businesses will necessarily be exempt from consumer protection laws enacted after the financial crisis.

The Dodd-Frank financial reform law that created the agency also gives state attorneys general the power to enforce new protections, Jeff Ehrlich, a former deputy enforcement director at the CFPB and a McGuireWoods partner, told MarketWatch.

“Most of the work, especially law enforcement, will be done by someone,” he said. “The FTC also has room to make up for any slack,” he added, noting that the agency also has the power to enforce some consumer protection laws.

The CFPB decision is just the latest in a series of federal court cases that have challenged the foundations of the modern regulatory state.

In May, a panel of the Fifth Circuit Court of Appeals issued an opinion that Congress violated the Constitution when it authorized the Securities and Exchange Commission to decide whether to bring enforcement action in federal or internal courts. Administrative Court.

The ruling used what’s known as the “non-delegation doctrine,” a legal theory that the Constitution prohibits Congress from delegating its powers to regulators without adequate guidance, or using “comprehensible principles” to guide its discretion Right to deal.

Drew Stevenson, who teaches administrative law at South Texas Law School in Houston, told MarketWatch that the non-delegation principle is one that “was briefly in vogue in the 1930s” but was “obsolete” until recently revived by the conservative movement to weaken the administration. States, most notably in a recent case, opposed the Supreme Court ruling on the EPA and the Biden administration’s vaccine authorization.

While businesses may cheer the disintegration of one or more specific statutes under this doctrine, recently published research by legal scholars Pamela McCann and Charles Shipan found that the generally applicable, revived nondelegation doctrine “has disintegrated Congress since World War II.” Almost every major law passed.”

That level of uncertainty, said Javier Heres, a securities attorney at Jones Keller, “is another challenge of understanding where the wind is going and how best to advise clients when the SEC knocks on the door.”

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