U.S. District Court Stays CFPB's Rule on "Junk Fees"
A U.S. District Court for the Northern District of Texas issued a preliminary injunction staying the CFPB's credit card late fee rule prior to its effective deadline of May 14, 2024. (See related coverage.) As a result of the injunction, the CFPB’s final rule is stayed pending resolution on the merits.
The District Court's action followed a 5th Circuit determination that the CFPB's funding structure is unconstitutional. (The 5th Circuit ruled that that the CFPB's independent funding process, which runs through the Federal Reserve rather than through congressional appropriations, violates the Constitution's separation of powers clause, as it diminishes the authority of the legislative branch. See related coverage.) The Court stated: "any regulations promulgated under th[e current] regime are likely unconstitutional as well. Thus, Plaintiffs establish a likelihood of success on the merits." As a result, the District Court granted an injunction as to the implementation of the credit card late fee rule.
In its conclusion, the Court stated that it "accepts the rulings of Fifth Circuit in this case without passion or prejudice. ... but would be remiss [if] it did not point out the potential landmines the court’s ruling could pose for a trial judge’s day-to-day docket-management discretion, especially in a busy division."
Commentary
It's too early to tell whether this ruling poses any long-term risks to the fate of the CFPB's final rule.
In granting the preliminary injunction, the District Court found that the plaintiffs had established a "likelihood of success on the merits" based upon a 5th Circuit holding that the CFPB's funding mechanism was unconstitutional, and as such "any regulations promulgated under that regime are likely unconstitutional as well." The District Court found that the balance of interest test weighed in the plaintiffs' favor because if the Court denied the injunction, plaintiffs would "face an enormous undertaking based upon a potentially unconstitutional rule," whereas if the Court granted the injunction, "the CFPB is relatively unaffected because the Final Rule has not yet gone into effect."
The Supreme Court granted the CFPB's cert petition to review the 5th Circuit decision, with oral argument in the case taking place on October 3, 2023, and a ruling expected by the end of next month. Although the District Court did not address the plaintiffs' other arguments, i.e. that the CFPB's rule violates the Truth in Lending Act, the CARD Act, and the Administrative Procedure Act, it did say that these other arguments are "compelling." This may signal the Court's willingness to continue the preliminary injunction and, eventually, grant summary judgment on one or more of these alternative grounds should the Supreme Court overturn the 5th Circuit decision (or of the Supreme Court affirms the 5th Circuit decision, but does not make its decision retroactive).
For its part, the CFPB said in a statement that it will continue to "defend this rule," without specifying what the agency's next move will be. In any case, it is worth noting that the plaintiffs originally asked for a decision by March 26, so credit card issuers could appropriately prepare for sending notices of the rule change to millions of card users. Since this decision was issued right before the effective date, this is not a total win for industry. Card issuers have likely incurred compliance costs to date. (See also, statement by U.S. Chamber of Commerce.)
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