A LegalUPDATE

by Justin Allen and Adrienne L. Baker

Previous issues of the Arkansas Banker have provided summaries of significant lawsuits that impact the financial industry. Two of them are pending before the U.S. Supreme Court, with rulings expected this year. Below are reminders of those cases, status updates and potential consequences for all.

Scotus Will Soon Weigh In On The Future Of Chevron Deference

In January of this year, the Supreme Court heard oral arguments in Loper Bright Enterprises v. Raimondo. The lawsuit was brought by a group of herring fishermen from New Jersey objecting to a federal rule requiring them not only to host government monitors on their boats, but to pay the cost of those monitors. At issue in the case is the future of Chevron deference.

Since 1984, Chevron deference has given federal agencies broad discretion to interpret ambiguous laws. It has been a cornerstone of how federal agencies exercise their authority. If the Supreme Court moves away from or expressly eliminates Chevron deference, it could limit the government’s regulatory authority and reach. Courts may well find that regulators’ initiatives are not permitted if they do not arise from clear congressional authorization.

In the banking context, this could prove problematic for both the regulators and the regulated, as many of the statutes that create the framework of the banking industry have not been congressionally updated in decades or longer. For example, the National Bank Act enacted in the 1860s has no provision allowing for national fintech bank charters. The sting to the banking industry may be blunted compared to others because there is such a detailed statutory framework surrounding the industry, and many of the existing statutes grant broad “safety and soundness” powers to bank regulators. But, again, the framework has not necessarily been updated to keep with the times.

Based on oral arguments, legal pundits largely agree the votes are there to eliminate Chevron deference, as least as we have come to know it. What would replace Chevron deference? We can’t be certain, but it will likely be far more restrictive in terms of agency authority.

Some on the bank side may welcome such a ruling. Without Chevron deference, it will be easier for all regulated industries to challenge government attempts to expand its authority or impose requirements not expressly contemplated by Congress. Others, though, worry a change could hamper basic housekeeping functions of regulators, such as the day-to-day guidance on which some banks rely. And there is no question the end of Chevron deference would limit regulators’ abilities to respond to novel threats to the industry.

Updates On Cfpb Lawsuits

One case challenging CFPB action stems from the CFPB announcement in

March of 2022 that it would “scrutinize discriminatory conduct” including close examination of financial institutions’ decision-making in advertising, pricing, and other areas “to ensure that companies are appropriately testing for and eliminating illegal discrimination.” CFPB sought to examine documentation of customer demographics and the impact of products and fees on different demographic groups, among other things. In March 2022, CFPB published an updated exam manual outlining these changes, all of which were implemented pursuant to CFPB’s authority to examine for UDAAPs (unfair, deceptive, or abusive acts or practices).

In September 2022, the American Bankers Association and six other trade groups sued CFPB and its director, Rohit Chopra, for exceeding the agency’s legal authority with the update to the UDAAP exam manual. On September 8, 2023, the court granted judgment to the plaintiffs and set aside manual updates, finding CFPB exceeded its statutory authority under the Dodd-Frank Act.

On November 6, 2023, the CFPB appealed that ruling to the 5th Circuit Court of Appeals. Legal observers don’t expect the agency to prevail on appeal given the current legal precedent.

Another case involves a May 2023 Texas lawsuit seeking to invalidate CFPB’s Final Rule regarding data collection by commercial lenders. The Final Rule was issued under section 1071 of the Dodd-Frank Act, which amended the Equal Credit Opportunity Act to require commercial lenders to collect data from loan applications to facilitate enforcement of fair-lending laws. The Act required lenders to determine if the business is woman-owned, minority-owned, or a small business, and to compile and report 13 data points to CFPB. CFPB’s Final Rule significantly expanded the reporting requirement to 81 data points.

In October 2023, the district court enjoined enforcement of the rule. In March of this year, the plaintiffs filed a motion for summary judgment.

The Future Of The Cfpb

The 800 lb. gorilla in the CFPB’s room remains the lawsuit filed against it by the Community Financial Services Association of America challenging the constitutionality of the agency.  The argument is that Congress violated Article I, Section 9 of the Constitution, known as the appropriations clause, when it provided for CFPB funding through the Federal Reserve rather than an annual appropriation by Congress.

The 5th Circuit found the agency’s funding mechanism unconstitutional and the case is on appeal to the United States Supreme Court, which heard oral arguments in October 2023. A ruling is expected by June of this year.

What happens if the Court upholds the 5th Circuit and effectively eliminates the CFPB? Nothing is certain, but many financial experts and business interests are concerned about the impact it could have on financial markets and the economy.  Others suggest that, in that event, Congress could act quickly to restore most of the law and ensure the agency is properly funded. We will know soon.

About The Authors

Justin Allen leads the Government Relations practice group of Wright Lindsey Jennings and assists clients in working with state and local government on matters of policy, regulation and legislation.

Adrienne Baker’s practice centers on commercial litigation, including banking and commercial lending, creditors’ rights and collections, contract disputes and surety law. She also regularly provides contract drafting and review services to a variety of businesses.