While credit unions do not usually sue regulatory agencies, this CFPB proposal may be an exception should it become final.
Can the Consumer Financial Protection Bureau force credit unions and banks to grant financial technology companies access to their core banking systems without compensation?
De Facto Public Utilities Providers
The Fifth Amendment to the U.S. Constitution states: “Nor shall private property be taken for public use, without just compensation” and the U.S. Supreme Court has extended this doctrine to allow public utilities to charge fees sufficient to recoup their reasonable costs and capital investments, as well as to provide compensation when the government takes private property to give to a third party (such as a real estate developer) and for “regulatory takings.”
If finalized as proposed, CFPB’s “Required Rulemaking on Personal Financial Data Rights,” would turn credit unions into de facto public utilities providers. This may allow credit unions to seek compensation from the U.S. Treasury Department’s Judgment Fund unless CFPB establishes a mechanism for credit unions and banks to charge fintechs for access.
As proposed, CFPB’s rulemaking would result in an open banking system similar to the European Union’s requiring credit unions and banks to create, at their own expense, computer access portals allowing fintech companies to transact on depository institutions’ core banking systems free of charge.
America’s Credit Unions and other credit union trade associations like the Cooperative Credit Union Association have sensibly opposed this proposed rule in public comments, including arguing that the proposal goes far beyond its statutory basis in Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as I wrote about for CUES last year. Section 1033 only discusses financial institutions giving consumers access to consumers’ own data and makes no mention of third-party access or creating an open banking system. If CFPB finalizes the rule as proposed, credit unions would have a strong legal basis to challenge the rule in court as an impermissible regulatory interpretation of the Dodd-Frank Act.
Even if the courts upheld the CFPB regulation as a reasonable statutory interpretation, credit unions and banks may still be able to seek compensation from the federal government. When a federal government agency like CFPB has a final judgment entered against it by a court, the U.S. Treasury pays the judgment from its Judgment Fund. The Judgment Fund generally cannot seek reimbursement from the federal agency that was sued.
Normally, regulated entities like credit unions are not able to seek compensation for their compliance costs from the government. CFPB’s proposed Required Rulemaking on Personal Financial Data Rights may be different, however, because it would turn credit unions into de facto public utilities. Credit unions would have to provide access to any fintech that desired it under the rule, which is quite similar to how a railroad or a rural electrical cooperative must serve virtually any member of the public who wishes it. The U.S. Supreme Court has interpreted the Constitution’s takings clause to mean that public utilities are entitled to charge rates giving them a reasonable opportunity to recover their prudently-incurred costs as well as to earn a fair and reasonable rate of return on their capital investments.
Alternatively, CFPB’s mandate requiring credit unions and banks to give fintechs access to their core banking systems could be considered a “regulatory taking.”
In its landmark 1978 decision, Penn Central Transportation v. New York, the Supreme Court established a three-part test for determining whether a regulatory action (such as New York City designating Grand Central Station as an historic landmark) qualified as a “regulatory taking” based on: (1) the regulation’s economic effect on the owner; (2) the extent to which the regulation interferes with reasonable investment-backed expectations; and (3) the character of the government action.
Most of these “regulatory takings” cases have focused on the government action physically intruding on property, such as a mandate to install cable boxes in apartment buildings. In the 21st century, however, virtual spaces in computer systems have become ubiquitous as well as highly valuable—take social media platforms, for example—which is precisely why fintech companies want to use a CFPB mandate to gain access to the virtual space of credit unions’ core banking systems for free.
While credit unions do not usually sue regulatory agencies, this particular CFPB proposal may be an exception since it not only exceeds the agency’s statutory mandate but also provides no viable avenue for compensating credit unions and banks for the significant costs they would incur.
Even if the courts held that CFPB’s interpretation of the statute was reasonable, credit unions should not have to build the infrastructure for an open banking system to help their competitors unless credit unions receive fair and reasonable compensation. Credit unions may have to seek that compensation from the U.S. Treasury via litigation, however, unless CFPB withdraws this proposal or revises it to include a mechanism to compensate credit unions similarly to how public utilities are compensated.
Michael S. Edwards is an attorney-at-law with extensive experience representing credit unions, community banks and credit union organizations in the United States and around the world on a wide range of regulatory, compliance and other legal matters. Now with his own law firm based in the Washington, D.C., area, Edwards previously served as SVP/advocacy and general counsel of the World Council of Credit Unions and was senior assistant general counsel in the regulatory advocacy section of the Credit Union National Association.