The CFPB is Here to Stay. What’s Next for Community Banks?

Regulatory scrutiny could intensify in light of a recent decision by the U.S. Supreme Court affirming the constitutionality of the Consumer Financial Protection Bureau’s funding. 

In a long-awaited ruling on May 16, the U.S. Supreme Court determined the bureau’s funding structure does not violate the appropriations clause of the Constitution. The CFPB is funded by the Federal Reserve and not through the annual appropriations process in Congress; the Community Financial Services Association of America, which represents payday and other small dollar lenders, argued this was unconstitutional. Several bank lobbyists and other groups filed an amicus brief supporting the lawsuit. 

The decision casts doubt on possible relief from an array of new rules promulgated by the bureau. While the CFPB regulates banks above $10 billion in assets, some community bankers and industry advocates have expressed concerns that those rules could effectively become the norm across the industry, adding to mounting profitability pressures. 

“This decision is a large setback for the industry,” says Joseph Schuster, a partner with the law firm Ballard Spahr who focuses on consumer financial services. “As a result of this, I see three things happening. No.1, you’re going to have heavier supervision. No. 2, there’s going to be more enforcement. And No. 3, I think we’re going to see the proliferation of rules, regulations and interpretive guidance.”

Some expect the agency will be especially active in the coming months as it strives to accomplish an ambitious agenda ahead of the presidential election in November. The bureau has issued a slew of rules and proposals over the past year, including small business data collection requirements and various rules concerning overdraft, nonsufficient funds and credit card late fees. Most recently, the agency announced on May 22 that it would begin to treat buy now, pay later loans like credit cards, requiring providers to give consumers the right to demand refunds and dispute charges.  

Implementation of the small business data collection rule was stayed until the question of the bureau’s funding was decided; the CFPB has since extended the compliance deadlines for that rule. A district court also issued an injunction suspending implementation of the credit card late fee rule that remains in place; that case has been transferred from a district court in Texas to Washington, D.C. Those cases should move forward now that the question of the bureau’s funding has been settled. 

In the meantime, the most immediate impact of the Supreme Court ruling will likely be the curtailing of fees tied to deposit products, says Glenn Grossman, director of research at Cornerstone Advisors. In the longer term, he believes that those revenue pressures could fuel more acquisitions down the road as smaller banks feel the impact of shrinking revenue.  

There’s some evidence that bank leaders have already begun to revise their fee structures. Half of the directors and senior executives who took part in Bank Director’s 2024 Risk Survey reported that their bank had adjusted fees due to indirect or direct regulatory pressure.    

Grossman suggests that directors could ask management about how revenues could change if the bank has to adjust the fees it charges for certain deposit products. What kind of revenue shortfall could the bank be facing? Additionally, how fee averse could the bank’s consumer base be? 

He suggests that bank leaders create contingency plans. “How am I going to handle a gap in income?,” he asks. “Can we raise prices? Can we selectively raise prices on certain things?”  

Additionally, boards could scrutinize deposit products through the lens that regulators are likely to take, Schuster says. Late fees or other fees that rely on a customer defaulting or having to sign up for an additional product could be particularly vulnerable. 

“In terms of fees, bank directors should be thinking about whether the fee income exists if the product performs appropriately,” he says. “The CFPB does not like products that subsist on people using the product incorrectly.”