The Unintended Consequences of Defunding the CFPB

Under current law, the operations of the CFPB are funded by a transfer of “earnings” from the Federal Reserve System to the CFPB. Since the Federal Reserve System is operating at a loss due to rising interest rates and arguably has no earnings, the Administration has been urged to shut down the agency by executive order. (See Chopra is Out. Now Shutter the CFPB, by Hal Scott in the Wall Street Journal, February 3, 2025.) As discussed below, such an order would have some unintended effects on the application of federal consumer financial laws to banks and certain nonbanks.

Executive orders cannot be inconsistent with applicable laws. Thus, even if the President could terminate funding for CFPB by executive order, the order could not repeal the powers and authorities vested in CFPB by Congress. And, while the agency may not be able to function, its continued legal existence would have an impact on the application of federal consumer financial protection laws to large banks and nonbanks.

One of the authorities transferred to CFPB when it was established is the exclusive authority to prescribe regulations implementing federal consumer financial laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, and the Real Estate Settlement Procedures Act. No other federal agency is empowered to issue regulations related to these laws and the other federal consumer financial laws enumerated in CFPB’s authorizing statute. Defunding CFPB would foreclose any efforts by the banking industry or other financial firms to modify existing regulations related to such laws.

CFPB also has exclusive authority to examine banks with more than $10 billion in assets for compliance with federal consumer financial protection laws and primary authority to initiate enforcement actions for noncompliance with those laws. If CFPB lacks funds to operate, banks with more than $10 billion in assets will face less scrutiny for compliance with federal consumer financial protection laws. The federal banking agencies could fill some of this gap by asserting that a large bank’s noncompliance with a federal consumer financial protection law constitutes an unsafe and unsound banking practice, but such a determination would be based upon specific facts and circumstances. CFPB’s enabling statute also gives the federal banking agencies backup enforcement authority over violations of federal financial consumer protection laws by large banks, but that authority is triggered by submitting a request to CFPB to take the action and CFPB’s failure to do so after 120 days. It is not clear how this backup authority would work if CFPB has no capacity to receive such a request.

Additionally, CFPB’s authorizing statute gives the agency supervisory and enforcement authority over certain nonbanks, including mortgage lenders, payday lenders, and private student lenders. If CFPB ceases operations, these firms will remain subject to state authorities and the Federal Trade Commission.

Finally, if CFPB is unable to conduct examinations of large banks and certain nonbanks, those institutions that currently have a less-than-satisfactory consumer compliance rating will not be able to have that rating reviewed and upgraded. Similarly, those institutions with outstanding consent orders will not be able to have them terminated.  This could impede M&A approvals and make it harder for nonbanks to participate in the rush to acquire bank charters.