The preliminary injunction was granted pursuant to Fifth Circuit precedent that the CFPB’s independent funding structure is unconstitutional.

On May 10, 2024, the US District Court for the Northern District of Texas blocked the Consumer Financial Protection Bureau’s (CFPB) final rule (the Rule) amending Regulation Z to limit credit card late fees. The Rule was initially proposed in February 2023, finalized on March 5, 2024, and was set to go into effect on May 14, 2024.

The Rule aims to ensure that credit card late fees are “reasonable and proportional” to the costs that issuers incur in collecting late payments, as required by TILA. The Rule, however, faced immediate and intense criticism from market participants and trade groups representing banks and credit unions (for more information, see this Latham blog post).

Judicial Challenge

On March 7, 2024, the US Chamber of Commerce and allied bank trade groups filed a lawsuit and a motion for preliminary injunction in the Northern District of Texas seeking to prevent the CFPB from implementing the Rule. The prominent trade group asserted that:

1. the CFPB violated the Credit Card Accountability Responsibility and Disclosure Act of 2009 by preventing issuers from collecting reasonable and proportional late fees when cardholders do not pay their bills on time;
2. the Rule was “arbitrary and capricious” in violation of the Administrative Procedure Act, as the CFPB allegedly relied on “secret data collected for an unrelated purpose”; and
3. the CFPB issued the Rule while operating with funds drawn from the Federal Reserve in violation of the US Constitution’s Appropriations Clause (Article I, Section 9).

This third claim echoed that of another case challenging the CFPB for a rule on small-business lending reporting. In 2022, the US Court of Appeals for the Fifth Circuit stayed that reporting rule, not on its substance but on the issue of CFPB funding. The CFPB appealed, and the US Supreme Court will decide on the constitutionality of the CFPB’s funding structure by the end of the current term in spring 2024.

The Ruling

Judge Mark Pittman issued a preliminary injunction against the Rule, citing the Fifth Circuit’s 2022 stay that is under review by the Supreme Court.

According to the Order, to be entitled to a preliminary injunction, a movant must establish:

1. a likelihood of success on the merits;
2. a substantial threat of irreparable injury;
3. that the threatened injury if the injunction is denied outweighs any resultant harm if the injunction is granted; and
4. that the grant of an injunction will not disserve the public interest.

In the Order, Judge Pittman deemed the substantive statutory arguments made against the Rule “compelling,” but did not rule on any of them. Instead, he issued the injunction solely based on the argument that the CFPB funding structure is unconstitutional.

• Likelihood of Success on the Merits: Under binding Fifth Circuit precedent (“that Congress’s decision to abdicate its appropriations power to the CFPB violates the Constitution’s structural separation of powers”), Judge Pittman held that Plaintiffs had established a likelihood of success on the merits.
• Threat of Irreparable Harm: According to the Order, case law has long recognized that constitutional violations are irreparable. In this case, Judge Pitman noted that “damages could not be computed that compensate for Plaintiffs’ subjugation to an unconstitutional rule.”
• Balance of Interests: Judge Pittman held that if the Court denies an injunction, “Plaintiffs face an enormous undertaking based upon a potentially unconstitutional rule.” However, if the Court grants an injunction, “the CFPB is relatively unaffected because the Final Rule has not yet gone into effect.”
• Public Interest: Judge Pittman stated that the Fifth Circuit “usually goes with the ‘do-no-harm’ approach,” and so applied it in this Order. Because preliminary injunctions “commonly favor the status quo” until full resolution on the merits can be determined, he found this prong satisfied.

As all the elements are satisfied, Judge Pittman held that “a preliminary injunction is warranted here.”

Challenges and Further Litigation

Consumer groups have criticized the injunction and are expected to challenge the Court’s decision. The injunction is also sure to be contested in the coming weeks by the CFPB.

As its 2023-2024 term reaches a conclusion, the Supreme Court is expected to issue a ruling on the constitutionality of the CFPB’s funding. A ruling by the Supreme Court either way will have ramifications for this case, but litigation on the merits is likely to continue.