On Oct. 3, the U.S. Supreme Court will hear oral arguments on the 5th Circuit decision which held that the funding structure of the Consumer Financial Protection Bureau (CFPB) is unconstitutional, Community Financial Services Association of America Ltd v. CFPB. Legal scholars, elected officials, CFPB lawyers, trade groups and others have made arguments relative to the merits of that decision. As a former regulator who worked for both an annually appropriated agency and then later the CFPB, I will focus on the impact a lack of stable funding would have on the CFPB's supervisory and examination efforts and the potential consequences for consumers and the financial services industry.
Prior to joining the team that stood up the brand-new CFPB in 2010, I worked for 20 years for the Massachusetts Division of Banks starting as an entry-level bank examiner during the S&L crisis and then ultimately serving as the Commissioner of Banks through the financial crisis.
The division supervises Massachusetts state-chartered banks and credit unions as well as thousands of licensed nonbank entities to ensure financial safety and soundness and compliance with consumer protection and applicable fair lending laws.
For decades, the division and other state banking departments have enjoyed strong partnerships with the Federal Deposit Insurance Corp., the Federal Reserve and the National Credit Union Administration, which share responsibility to supervise state-chartered banks and credit unions. The cost of state supervision is partially subsidized by these federal agencies through alternating examination agreements, joint exams of large institutions and deeply discounted pricing for state examiners to attend federal bank examination schools. CFPB partnerships with state bank regulators are less mature but aim to achieve similar goals.
The division is funded through appropriations made by the Massachusetts state legislature. While the cost to run the division is covered through assessments and examination fees borne by the industries it regulates, these fees, typically far greater than the funding provided, are credited to the state's general fund. Reliance on appropriated funds is most challenging during down economic times when bank conditions often weaken and the need for examination staffing is greatest. Many state banking departments struggle to receive the funding they need to fulfill their core responsibilities and rely heavily on partnerships with their federal counterparts to supervise depository institutions. Resource constraints impacted the ability of state regulators to respond quickly to abuses in the mortgage market prior to the financial crisis of 2008.
The Dodd-Frank Act consolidated numerous consumer protection responsibilities, including rulemaking, within the CFPB. However, rules are not effective absent diligent oversight. This is an important lesson from the financial crisis.
The CFPB has supervisory authority as the primary federal regulator charged with ensuring compliance with most federal consumer protection laws and regulations for banks and credit unions with assets greater than $10 billion and certain nonbank entities. As of June 30, 2023, fewer than 4% of the banks in the United States were subject to CFPB supervision. However, these 150+ banks account for approximately 85% of the nation's banking assets. The CFPB is also the only federal agency with examination authority over nonbank mortgage lenders, pay day lenders, private student lenders and larger participants in the markets for consumer reporting, debt collection, student loan servicing, foreign money transmission and auto finance. Accordingly, CFPB's supervisory responsibility extends to tens of thousands of nonbank entities.
Each of the 11 Federal Home Loan banks will be sent a supervisory letter and an advisory bulletin on bank credit risk from their regulator the Federal Housing Finance Agency, according to a report from the FHFA's Office of Inspector General.
Subjecting the CFPB's budget to the congressional appropriations process will have both predictable and unintended consequences. At a minimum, the CFPB's funding could become increasingly volatile impacting its ability to fulfill a core mandate.
Despite its enormous supervisory jurisdiction, the CFPB has by far the smallest examination force of all the federal bank regulatory agencies. Subjecting the CFPB to the uncertainty of the appropriations process, which neither the FDIC, Federal Reserve System, OCC or NCUA are subject to, would result in inconsistent and reduced funding, cuts to its examination staff, challenges to multiyear supervisory plans and potentially lax oversight of the largest banks and credit unions in the country as well as more lightly regulated nonbanks. As a result, there is a potential for a perverse outcome in which smaller depository institutions, typically examined every two to three years, would be examined for compliance more frequently than larger banks and nonbanks.
Subjecting the CFPB to appropriations would reduce the oversight of the financial entities that given their size, reach and risk profile arguably pose the greatest risk to consumers. Accordingly, the potential for consumer harm could increase substantially. This impact would not be limited to consumers, however, as reputational damage caused by even a few bad actors often affects the broader industry. Moreover, a CFPB with an even smaller exam force might attempt to cure market conduct challenges through more prescriptive rule writing. This would increase costs for all financial institutions, including those under $10 billion in assets.
Finally, state and federal bank regulators would have their resources strained as they would need to reallocate staff to cover financial entities that were previously more thoroughly examined by the CFPB.
CFPB has remained a lightning rod over the 12 years since it opened its doors. The agency has a duty to execute its responsibilities in a fair, balanced and transparent fashion. Fastidious congressional oversight of the CFPB, given its sweeping mandate, is essential. However, subjecting the CFPB to appropriations threatens negative consequences for consumers and the financial services industry alike.
