Commerce Clause Issues in the Regulation of Non‐​Bank Financials

If you believe that the Constitution’s Commerce Clause empowers Congress to do pretty much anything it wants (that is, if you believe that me scratching my nose impacts interstate commerce), then you can stop reading now—you’re beyond help.


If, however, one follows both the history of banking law and the wording of the Commerce Clause, which in Article I, Section 8 in listing the powers of Congress reads “To regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes,” then there arises the possibility that Congress lacks the authority to regulate non‐​bank financials, such as payday lenders, in the manner envisioned by the Consumer Financial Protection Bureau (CFPB), as created by the Dodd‐​Frank Act.


After you spend over a decade reading federal consumer finance laws, as I have, you notice a trend. Terms like “federally related mortgage loan,” which appears in, among other places, the Real Estate Settlement Procedures Act, or “national bank,” which appears in lots of places, like the Home Owners’ Loan Act or the Federal Deposit Insurance Act, or “housing creditor” as defined under the Alternative Mortgage Transaction Parity Act, appear repeatedly. The commonality of these terms? They always tie back to deposit insurance or some sort of federal guarantee, such as those made by the Federal Housing Administration or Fannie Mae and Freddie Mac.


The structure of federal consumer finance laws has historically gotten around the Commerce Clause by tying said laws to the acceptance of some federal benefit. In the case of banks, the bargain is, Banks get deposit insurance, which is ultimately backed by the taxpayer, and in exchange they get stuck with a whole host of regulations, some relating to safety and soundness, many others not. This scheme has been expanded by trying similar restrictions to the ability to sell a loan to Fannie or Freddie.


While I think this arrangement has been a Faustian bargain for the banks, the fact is they don’t have to take deposit insurance or ask for any other type of bailout.


What is truly revolutionary (in a bad way) about the CFPB’s new powers over non‐​banks is that they go beyond this traditional framework. I assume, and hope, we aren’t going to start bailing out payday lenders or check‐​cashers or give them any sort of federal insurance scheme. So if there is no “bargain” here, as there is with federal depositories, then where exactly is the federal nexus? The vast majority of payday loan transactions, for instance, do not cross state lines. The states already have full power to regulate these activities, and already do. There’s no national marketplace for most of these products.


So if non‐​bank financials lack a federal nexus (due to the absence of any federal guarantee) and are not interstate commerce, then where exactly is the authority (or the need) to regulate them?


Now, I’m not a lawyer, but it’s hard for me to see how the regulation of activities like payday lending meet the three categories spelled out in United States v. Lopez. So in addition to the Appointments Clause challenges to the CFPB, I wouldn’t be surprised to also see a Commerce Clause challenge.