As of the October term of 2023, the United States Supreme Court had taken on an appeal of a decision to review a possible constitutional conflict in the interpretation of the funding mechanism for the Consumer Financial Protection Bureau (CFPB). The case itself was raised by a trade group of Payday lenders, seeking to undermine a rule that it found to restrict lending in this space. That’s a massively non-trivial way of saying that there was a possible way to completely undermine this bureau to protest a decision it made and potentially relegate it to the regulatory dustbin of history. It would have been quite a coup had it worked.
In the meanwhile, this uncertainty was a setback to the CFPB’s mission and essentially held up some agenda items that the CFPB was seeking to address. So, on May 16th, when the SCOTUS ruling came out in favor of the existing financing mechanism would be sustained, there was a bit of a CFPB tailwind and perhaps some pent-up demand, and boy did they let off some steam in initiating new efforts.
There is a funky carve out buried deep in Reg E, the Electronic Fund Transfers Regulation protections that provides coverage for the recovery of unauthorized financial losses due to fraud, which is the primary mechanism that protects consumers. Its specific to when there are funds transfers initiated within an online consumer banking system (this online part is likely the basis for the CFPBs argument), and it *specifically* calls out Fedwire or a similar network. I’m genuinely not sure why this exception exists, but if I am to speculate, it is notably so discrete, that it is most likely a demand of another lobby at the time of its inception. This little carveout is not well known to many of us bank fraud nerds, in fact. Most institutions will make a policy of reimbursement of most unauthorized funds transfers, stay channel agnostic to be well ahead of a potential conflict with a regulator. Said another way, many financial institutions seek to maintain a level reimbursement policy that maintains all payments channels’ reimbursements in parallel and won’t seek to contest a claim on an unauthorized funds transfer. Hopefully you can see the setup here.
Finally, a bank has taken a stand in support of the law as it is written and a state where a few cases of this have been channeled through an Attorney General, which has resulted in the CFPB is seeking to align on the “spirit” of the law with a Statement of Interest. If we were waiting for a showdown between the CFPB and a challenge to the existing hegemony of Reg. E, this may be a big moment to watch.
In fact, it’s a few distinct efforts and entities that matter in the context of fraud liability now. Indeed, a handful of different debates and venues about fraud and scams and where the next legal boundaries are in limbo. Another one is in the Senate finance committee, where a few bipartisan Senators may seek to align on a set of boundaries for what scams are considered reimbursable. In another effort, the Government Accountability Office is meeting with subject matter experts, such as the Independent Community Bankers of America, among others, to evaluate the requirement of existing regulations and how they affect reimbursement protocols.
So, as the sands under us continue to be shifting, creaking under the massive weight of new scams that are ruthlessly effective at fleecing hapless consumers, and the writing is on the wall. To be sure, this is a moment of inflection, where what appears to be push by a trade agent to undermine a regulatory entity, has resulted in an unexpected and ironic outcome. The very carveout that was perhaps placed to protect a very specific interest, may have undermined the entire industry’s footing that consumers should be responsible for payment scams. The backlog of action by the CFPB has only added to the pressure and as other countries start to also change their liability models, the picture is growing clearer. Change is afoot, globally, but occurring locally, in the most free-market focused country in the world.
