On May 16, 2024, the Supreme Court handed a major victory to the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”), holding that the agency’s funding structure does not—as critics have long argued—violate the Constitution’s Appropriations Clause.[1] With lingering constitutional questions about its structure now mostly settled and an important election on the horizon, the CFPB and its Director, Rohit Chopra, are expected to turn to crowded rulemaking and enforcement dockets with renewed vigor in the coming months. In fact, just days after the Court’s decision came down, the Bureau issued a significant interpretive rule taking aim at one of the fastest-growing segments in consumer finance – the Buy Now Pay Later (“BNPL”) industry.
Below we briefly summarize the Supreme Court’s decision and the BNPL interpretive rule, after which we discuss the near-term outlook for a newly energized—and likely assertive—CFPB.
The Supreme Court's Ruling and Immediate Fallout
In Community Financial Services Association of America v. CFPB, a trade association challenged the CFPB’s structure on the ground that its funding mechanism, which draws from the Federal Reserve without recurring appropriations by Congress, violates the Constitutional requirement that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by law” (the Appropriations Clause).[2] Although that argument prevailed in the Court of Appeals for the Fifth Circuit,[3] a 7-2 majority of the Supreme Court held otherwise.
Writing for the majority, Justice Thomas explained that the statute creating the CFPB qualified as an appropriation because “appropriations need only identify a source of public funds and authorize the expenditure of those funds for designated purposes to satisfy the Appropriations Clause.”[4] The Court’s opinion grounded this holding in both a review of the founding-era meaning of the word “appropriation”[5] and of historical practice before and after the founding, in which Justice Thomas explained the origin of the Appropriations Clause as confirming legislative supremacy over fiscal matters but otherwise granting to Congress “a wide range of discretion,”[6] which the First Congress exercised flexibly, including by funding agencies outside the annual appropriations process.[7]
Justice Kagan, joined by Justices Sotomayor, Kavanaugh, and Barrett, wrote separately to emphasize that Congress’s unbroken history of regularly creating self-funding appropriations from the founding era to the present day reinforced the Court’s holding.[8] Justice Alito, joined by Justice Gorsuch, dissented on the grounds that the Appropriations Clause’s separation-of-powers functions created a duty that Congress “cannot sign away.”[9]
Buy Now Pay Later Industry Draws First Fire
The CFSA decision removed a significant obstacle to the CFPB’s ongoing operations. Many of the Bureau’s recent regulatory initiatives had been enjoined by courts in the Fifth Circuit[10] and the agency had paused some of its enforcement work while the Supreme Court case was pending.[11] The day after the decision was issued, however, CFPB Director Chopra indicated that the Bureau “will be firing on all cylinders,” and the CFPB announced an enforcement action against a fintech lender for alleged unfair, deceptive, and abusive practices.[12] Within a week, the Bureau issued an interpretive rule clarifying that it will treat the majority of BNPL accounts as “credit cards” under the Truth in Lending Act (TILA) and its implementing Regulation Z (the “BNPL Interpretive Rule”).
While BNPL providers in the U.S. offer a number of financial services, the most common BNPL product is a “pay-in-four” payment option that allows buyers to split a retail payment into four installments—25 percent at checkout and 25 percent every two weeks over the next six weeks—without any additional interest. The federal government and most states have not enacted BNPL-specific regulations, although several states have considered or are considering legislation regulating BNPL providers[13] and the California Department of Financial Protection and Innovation has enforced licensing requirements under the California Financing Laws against several major BNPL providers.[14] In general, most regulators have adopted a “wait-and-see” approach to this very fast-growing market segment, opting to allow it to continue to develop while monitoring and publicly noting areas of concern.
Prior to issuing the BNPL Interpretive Rule, the CFPB’s engagement with the BNPL industry generally followed this trend. The Bureau and its director had called attention to BNPL offerings—announcing a “market-monitoring inquiry” in late 2021, soliciting public comment and issuing a report on BNPL market trends and consumer impacts in 2022,[15] releasing research reports on BNPL usage and consumer complaints in 2023,[16] and reportedly beginning to examine at least some BNPL firms for compliance with federal consumer financial protection laws.[17] Until recently, however, the CFPB had not taken any formal regulatory actions with respect to BNPL despite identifying interpretive guidance as a likely next step in connection with its 2022 report.[18]
On May 22, 2024, the CFPB finally made good on its promise in the form of the BNPL Interpretive Rule, which classifies “digital user accounts” used to access BNPL services as “credit cards” and BNPL providers as “card issuers” under the TILA and portions of its implementing Regulation Z.[19] Consequently, the BNPL Interpretive Rule requires BNPL providers to offer their customers the same protections afforded to credit card users under subpart B of Regulation Z, which require providers to investigate customer disputes, refund returned products or cancelled services, and provide disclosures and billing statements that describe the cost of BNPL credit and identify amounts due.
In an unusual procedural move, the BNPL Interpretive Rule will become effective 60 days following publication in the Federal Register, even though the CFPB is accepting advisory comments on the Rule until August 1, 2024. The Bureau has indicated that it may—but is under no obligation to—take further actions if warranted based on the comments that it receives.
Implications for BNPL Providers and Next Steps
Many BNPL providers already issue standard disclosures and allow consumers to dispute transactions, but they may not do so in the exact form or manner prescribed by Regulation Z. Additionally, the BNPL Interpretive Rule highlights that where another party, including a bank, extends BNPL credit on behalf of a BNPL provider or acts as the BNPL provider’s agent, that party may also be covered by Regulation Z.[20] BNPL providers and their partners may not have reviewed their existing disclosures and practices to confirm technical conformance with the requirements under Regulation Z because, prior to the BNPL Interpretive Rule, few observers believed that BNPL accounts constituted “credit cards,” and they could incur significant costs doing so on an expedited basis given the 60-day effective date for the BNPL Interpretive Rule. This issue is likely of particular importance for any national banks that partner with BNPL providers, in light of recent guidance from the Office of the Comptroller of the Currency on managing operational and third-party risk in BNPL partnerships.[21]
For these reasons, we expect BNPL providers—and their bank and retail partners—to actively engage with the CFPB’s comment process, notwithstanding the limitations imposed by the Bureau, over the immediate term. Now that its actions are unlikely to be immediately enjoined by trial courts in the Fifth Circuit on the basis of its constitutionality, the CFPB may also move ahead with other BNPL-related regulatory priorities identified at the time of the 2022 report that it believes affected companies may be reluctant to challenge on the merits. These include further scrutinizing BNPL providers’ use of consumer data in coordination with the Federal Trade Commission, regulating BNPL providers’ provision and use of consumer reporting companies’ data, and expanding CFPB supervision of BNPL providers.[22]
Over the longer term, some observers have expressed cautious optimism that uniform federal standards and protections could benefit BNPL providers by promoting consumer confidence in BNPL products.[23] At the same time, CFPB Director Chopra’s prepared remarks announcing the Rule indicate that the Bureau’s interpretation could extend to almost any innovative form of consumer retail credit, stating that “Essentially, any mechanism, tool, or procedure that consumers can use from time to time to buy goods or services on credit gets the protections that consumers have come to know and expect with credit cards.” If the CFPB plans to address innovative retail credit products by applying the existing framework for credit cards—notwithstanding significant structural differences in the products’ duration, terms, origination channels, or business models—it could limit further innovation in BNPL specifically and consumer credit generally.
The CFPB Will Maintain an Active Rulemaking Agenda Through the Election
The BNPL industry may have been the first to draw fire from a reinvigorated CFPB, but it will not be the last. Director Chopra’s remarks following the Supreme Court’s decision identified a number of other regulatory priorities that are likely to see further action from the Bureau in the short-to-medium term, including:
- Consumer reporting and medical debt. The CFPB has been publicly considering changes to its rules governing consumer reports for much of the past several years, particularly around such reports’ inclusion of information on consumers’ medical debts. Last September, the Bureau initiated a small business review process for a slate of potential changes to consumer reporting regulations that would require consumer reporting companies to remove medical debt information from consumer reports.[24] This process—a legal prerequisite for proposed rules that would have a significant economic impact on a substantial number of small entities—typically presages future agency rulemaking. Shortly after the CFSA decision, CFPB Director Chopra confirmed that the Bureau is likely to formally propose a rule banning medical debt from credit reports soon, reportedly as early as this month.[25]
- Overdraft and nonsufficient funds fees. Earlier this year, the CFPB proposed separate regulations that would substantially restrict the ability of depository institutions with more than $10 billion in assets to charge overdraft fees and would prohibit any “covered financial institution” under Regulation E (primarily depository institutions) from charging a non-sufficient funds fee for a transaction that is instantaneously declined.[26] Director Chopra’s remarks on the CFSA decision indicated the CFPB will be “working to finalize rules on overdraft fees and nonsufficient fund fees” in the coming months.[27]
- Pending and enjoined actions. As mentioned, courts in the Fifth Circuit had enjoined a number of final rules issued by the CFPB on the basis of the Fifth Circuit’s now-reversed decision that the Bureau was unconstitutionally funded. In addition to the Bureau’s payday lending rule, which was the subject of the CFSA decision, final rules requiring lenders to report small business lending data and limiting the amount credit card issuers could charge in late fees had also been enjoined.[28] The Bureau is likely to ask that these injunctions be lifted, allowing the relevant rules to go into effect unless the relevant plaintiffs successfully raise alternate grounds for the rules to be enjoined. These substantive challenges under the enabling statutes and the Administrative Procedure Act may prove more difficult for plaintiffs to successfully make—indeed, the Fifth Circuit has already held in its prior decision on the CFSA case that the final payday lending rule was within the CFPB’s statutory authority and did not violate the Administrative Procedure Act.[29]
Clarity On the CFPB’s Constitutionality May open the Floodgates for Enforcement Actions
Finally, CFPB enforcement activity is likely to see a significant uptick from the historically low levels that prevailed over the last several months as the agency awaited a decision on its constitutionality. See Figure 1. Director Chopra has reportedly indicated that as many as 14 enforcement actions had been paused pending the outcome of the Supreme Court case.[30] These actions are now likely to resume, supported by additional enforcement capacity that the CFPB has announced it will add over the course of 2024,[31] resulting in a flurry of enforcement activity by the CFPB.
Figure 1: CFPB Enforcement Actions by Quarter
Indeed, there are already signs of life on the enforcement front. The day immediately following the CFSA decision, the CFPB unveiled a public enforcement action against a financial technology company in a rare Friday announcement, alleging that the company had engaged in unfair, deceptive, and abusive practices in connection with originating and servicing small-dollar loans that were compensated through “donations” and “tips.”[32] Firms that have been engaged with CFPB supervisory and enforcement staff should expect the pace of reviews and investigations to intensify soon if it has not already, especially in light of recent internal reorganizations to give the CFPB’s Director more direct control over supervisory and enforcement staff.[33]
Battles Over CFPB Actions Shift to Substance
Many—perhaps all—of these regulatory and enforcement initiatives are likely to be hotly contested by affected firms. Now that the CFSA decision has resolved the constitutionality of the CFPB’s funding, these challenges are likely to evolve to focus on the extent of the CFPB’s authority under relevant statutes and its compliance with procedural requirements under the Administrative Procedure Act and related laws.
But another shoe may soon drop, making predictions about the future course of administrative actions difficult to predict. The Supreme Court is expected to rule any day on whether to maintain the federal courts’ longstanding Chevron doctrine—under which courts defer to an administrative agency’s interpretations of an ambiguous statute administered by the agency—and is widely expected to curtail or eliminate the doctrine entirely. Depending on the outcome of these cases, the standards applied to challenges of CFPB actions could vary significantly, from modestly deferential to significantly skeptical of CFPB actions, leading to higher general uncertainty about the future state of consumer financial services regulation as the CFPB kicks its rulemaking and enforcement engines into high gear.
We will continue to monitor developments and provide updates as appropriate.
_________________________________________________________________________________
[1] U.S. Const. art. I, § 9, cl. 7.
[2] This was not the first constitutional challenge to the CFPB’s structure and the first was successful. In a 2020 opinion in Seila Law LLC v. Consumer Financial Protection Bureau, 591 U.S. 197, the Supreme Court held that the Bureau’s leadership structure violated constitutional separation-of-powers principles because Congress vested authority in a Director who could not be removed by the President except in very narrow circumstances.
[3] Community Financial Services Association of America v. Consumer Financial Protection Bureau, 51 F.4th 616,640 (5th Cir. 2022), rev’d 601 U.S. 426 (2024).
[4] Consumer Financial Protection Bureau v. Community Financial Services Association of America, 601 U.S. 416, 426 (2024) (“CFSA”).
[5] Id., at 426–427.
[6] Id., at 427–432.
[7] Id., at 432–434.
[8] Id., at 441–445. Justice Jackson also concurred to note that she would not have gone beyond holding that the legislation funding the CFPB meets “meets the Appropriation Clause’s minimal requirements” on the basis of the clause’s text alone. Id., at 445–447.
[9] Id., at 448.
[10] See, e.g., Chamber of Commerce v. Consumer Financial Protection Bureau, No. 4:24-CV-00213-P, 2024 (N.D. Tex. May 28, 2024), Texas Bankers Association v. Consumer Financial Protection Bureau, No. 7:23-CV-00144, 2023 WL 8480105 (S.D. Tex. Oct. 26, 2023).
[11] Rohit Chopra, Director, Consumer Financial Protection Bureau, Prepared Remarks Regarding the Supreme Court’s Decision in CFPB v. CFSA (May 17, 2024).
[12] Consumer Financial Protection Bureau v. SoLo Funds, Inc., No. 2:24-cv-04108 (C.D. Cal. May 17, 2024).
[13] See, e.g., S.B. 8808, 2024 Assemb., 2023-2024 Sess. (N.Y. 2024); S.B. 692, 193rd Gen. Ct., Reg. Sess. (Mass. 2023).
[14] See, e.g., Sezzle, Inc., 2020 Cal. Sec. LEXIS 628 (C.A. Dep’t of Bus. Oversight 2020), Afterpay US, Inc.; 2020 Cal. Sec. LEXIS 46 (C.A. Dep’t of Bus. Oversight 2020); Klarna Inc., CFL Lic. No. 60DBO-44020 (C.A. Dep’t of Bus. Oversight 2020).
[15] Notice and Request for Comment Regarding the CFPB's Inquiry Into Buy-Now-Pay-Later (BNPL) Providers, 87 Fed. Reg. 3511 (Jan. 24, 2022); Consumer Financial Protection Bureau, Buy Now, Pay Later: Market Trends and Consumer Impacts (Sept. 2022).
[16] Consumer Financial Protection Bureau, Consumer Response Annual Report (Mar. 2023); Cortnie Shupe, Greta Li, and Scott Fulford, Consumer Use of Buy Now, Pay Later: Insights from the CFPB Making Ends Meet Survey, CFPB Office of Research Publication No. 2023-1 (Mar. 2023).
[17] See, e.g., Affirm Holdings, Inc. Quarterly Report (Form 10-Q) (Mar. 8, 2024) (noting that Affirm, a major BNPL provider, is subject to supervision by the CFPB).
[18] Rohit Chopra, Director, Consumer Financial Protection Bureau, Prepared Remarks on the Release of the CFPB’s Buy Now, Pay Later Report (Sept. 15, 2022).
[19] Truth in Lending (Regulation Z); Use of Digital User Accounts to Access Buy Now, Pay Later Loans, (proposed May 22, 2024) (to be published in the Federal Register and codified at 12 CFR 1026).
[20] BNPL Interpretive Rule, at n. 29.
[21] Office of the Comptroller of the Currency, Retail Lending: Risk Management of ‘Buy Now, Pay Later’ Lending, OCC Bull. 2023-37 (Dec. 6, 2023).
[22] Rohit Chopra, Director, Consumer Financial Protection Bureau, Prepared Remarks on the Release of the CFPB’s Buy Now, Pay Later Report (Sept. 15, 2022).
[23] Evan Weinberger, CFPB Avoids Fights Treating Buy Now, Pay Later Like Credit Cards, Bloomberg Law (May 23, 2024).ok
[24] Consumer Financial Protection Bureau, Small Business Advisory Review Panel for Consumer Reporting Rulemaking: Outline of Proposals and Alternatives Under Consideration (Sept. 15, 2023).
[25] Leah Nylen & Paige Smith, Credit-Report Revamp Targeted as Soon as Next Month by CFPB, Bloomberg Law (May 21, 2024). It is possible, although not known, that the proposal could include some or all of the broader changes identified for consideration by the CFPB during the small business review process.
[26] Overdraft Lending: Very Large Financial Institutions, 89 Fed. Reg. 13852, 13908 (to be codified at 12 CFR pts. 1005, 1006); Fees for Instantaneously Declined Transactions, 89 Fed. Reg. 6031 (to be codified at 12 CFR Pt. 1042).
[27] Rohit Chopra, Director, Consumer Financial Protection Bureau, Prepared Remarks Regarding the Supreme Court’s Decision in CFPB v. CFSA (May 17, 2024).
[28] See supra, note 10.
[29] See supra note 3.
[30] Banking with Interest, The Massive Impacts of a Whirlwind Week for Banking Policy (May 22, 2024).
[31] Consumer Financial Protection Bureau, The CFPB’s Enforcement Work in 2023 and What Lies Ahead (Jan. 29, 2024).
[32] Consumer Financial Protection Bureau v. SoLo Funds, Inc., No. 2:24-cv-04108 (C.D. Cal. May 17, 2024).
[33] Evan Weinberger, CFPB Internal Shaekup to Supercharge Fintech, Big Bank Cops, Bloomberg Law (April 19, 2024)
