The CFPB’s Expanding Regulatory Influence and its Impact on Consumer Financial Services

The Consumer Financial Protection Bureau (CFPB) continues to exert significant influence over the U.S. financial services industry, often raising concerns about its regulatory actions and the unintended consequences they may have on consumers and financial institutions. Recent reports and rulemakings from the CFPB underscore these issues, particularly in areas like credit card fees and fraud prevention.

Credit Card Fees and Late Payments

The CFPB’s recent amendments to its credit card late fee rules have sparked considerable debate. The Bureau's CARD Act Report indicates that $53 billion worth of balance transfers occurred in 2022, a sum greater than the total holdings of the top seven credit card issuers. This highlights the significant impact that rule changes could have across the industry. While the Bureau claims the new rule could benefit consumers, particularly those who frequently miss payments, it fails to account for the broader implications for cardholders who never pay late—comprising 74 percent of all credit cardholders and 47 percent of subprime cardholders. The reduction in late fees from $30 to $8 may save some consumers money in the short term but could result in higher maintenance fees, lower rewards, or higher interest charges on interest-bearing accounts for these consumers. The potential long-term consequences include the risk of increased debt and a lower credit score, making it harder for consumers to access other forms of credit like mortgages or auto loans. These concerns were raised during the comment period but were not addressed by the CFPB in its final rulemaking. The Consumer Bankers Association (CBA) is challenging this rulemaking through a lawsuit, leading to a preliminary injunction preventing the rule from going into effect as the litigation proceeds.34

Fraud and Scams

Fraud and scams remain prevalent, with the CFPB’s oversight facing evolving challenges. The types of fraud and scams have shifted over the past year, with instant peer-to-peer (P2P) fraud slowing down while check fraud and synthetic identity fraud have resurged. In response, the CBA commissioned a white paper with Nick Bourke to develop a national strategy for preventing fraud against consumers and businesses. The white paper underscores the need for enhanced consumer education to help individuals avoid falling victim to scams, destigmatize such incidents, and empower consumers to report fraud. The CFPB should leverage its Civil Penalty Fund to launch a robust consumer education campaign about these growing threats. Additionally, inter-agency cooperation with bodies like the FTC and FCC, as well as adequately resourced law enforcement, is crucial in curbing the rise in fraud.

Process Issues and Regulatory Overreach

The CFPB’s approach to rulemaking has been criticized for disregarding procedural norms. Notably, the October 11, 2023, advisory opinion on Section 1034(c) of the Dodd-Frank Act introduced new regulatory requirements without following the necessary rulemaking process under the Administrative Procedure Act (APA). This advisory opinion creates new enforcement liabilities and regulatory obligations without public notice or comment, undermining the Bureau’s accountability and transparency. Similarly, the September 17, 2024, consumer circular on overdraft practices introduces new record retention requirements without proper rulemaking procedures, effectively imposing new obligations without stakeholder input. These actions represent a pattern of regulatory overreach that undermines the stability and predictability of the regulatory landscape. The CBA and other industry groups have filed lawsuits challenging these actions, with courts vacating parts of the CFPB’s rules due to these procedural deficiencies.35

Misuse of UDAAP Authority

The CFPB’s recent update to its UDAAP exam manual also drew criticism for overstepping its statutory authority. The manual’s provisions reflect the CFPB’s new view that "unfairness" can be applied to alleged discriminatory practices using disparate impact analysis. Historically, such theories have been seen as unreliable predictors of discrimination, yet the CFPB has extended fair lending laws to non-lending products and services. This move created significant uncertainty in the marketplace, prompting legal action by CBA and other trade associations. A U.S. district court ruled in favor of the plaintiffs, vacating the manual’s update and declaring it beyond the CFPB’s authority.36 The Bureau’s appeal of this decision underscores ongoing concerns about its overreach and the need for legislative reform.

Needed Reforms

In light of these issues, the new Congress should consider structural reforms to the CFPB to enhance stability and accountability. CBA supports legislation like the CFPB Transparency and Accountability Reform Act, which proposes reforms such as a shift from a single-director leadership model to a bipartisan commission, placing the Bureau under the annual Congressional appropriations process, and requiring robust cost-benefit analyses with rulemakings. The Clarity in Lending Act, passed by the House Financial Services Committee in May 2024, includes reforms to the Bureau’s UDAAP authority and processes for balancing stakeholder input on Section 1071. These legislative measures aim to bring greater accountability and transparency to the CFPB, ensuring that its regulations are well-considered and benefit consumers without stifling the supply of affordable credit.

Conclusion

As the new administration and Congress take office, there is an opportunity to recalibrate the CFPB’s approach. A reevaluation of its rules and enforcement practices is essential to mitigate unintended consequences and promote a balanced regulatory environment that supports consumer access to affordable credit while protecting them from fraud and abusive practices. The CFPB must work with stakeholders to address these challenges through careful consideration of the costs and benefits of its regulations.