On September 8, 2023, the U.S. District Court for the Eastern District of Texas issued an opinion and order vacating a March 2022 anti-discrimination update to the UDAAP section of the Consumer Financial Protection Bureau’s (“CFPB” or “Bureau”) Supervision and Examination Manual (“Exam Manual”), holding that the Bureau exceeded its statutory UDAAP authority and that the Bureau’s funding structure is unconstitutional. The court also declared unlawful any attempt by the Bureau to pursue any examination, supervision or enforcement action against members of the seven plaintiff trade associations (including the U.S. Chamber of Commerce), based on the Bureau’s interpretation of its UDAAP authority as announced in the update, and enjoined such efforts as to those members.
The court’s widely expected decision represents a major defeat for the Bureau, with significant implications for its ongoing efforts to expand consumer protection laws through regulatory actions not specifically authorized by Congress.
The Exam Manual Update
In March 2022, the CFPB announced that it would alter its supervisory operations to combat “illegal” discrimination, “including in situations where fair lending laws may not apply.” Specifically, the Bureau stated that it would “require supervised companies to show their processes for assessing risks and discriminatory outcomes, including documentation of customer demographics and the impact of products and fees on different demographic groups,” and that it would “look at how companies test and monitor their decision-making processes for unfair discrimination, as well as discrimination under ECOA.” The Bureau simultaneously released an update to the UDAAP section of its Exam Manual, requiring examiners to evaluate potential discriminatory conduct during examinations.
The U.S. Chamber of Commerce, the American Bankers Association, and five other trade associations sued the Bureau and its Director in September 2022, seeking to invalidate the Exam Manual update on several grounds, including that the Bureau’s funding structure is unconstitutional, the update exceeded the Bureau’s statutory authority under the Dodd-Frank Act, and it violated the Administrative Procedure Act (“APA”) substantively and procedurally. The parties agreed to forgo discovery and filed cross-motions for summary judgment and to dismiss the case.
After dispensing with the Bureau’s arguments that the trade associations’ claims were barred by sovereign immunity, that they lacked standing, and that venue was improper, the court turned to the trade associations’ motion for summary judgment. Because the Bureau had acknowledged that the court was bound by the Fifth Circuit’s decision in Community Financial Services Association of America, Ltd. v. CFPB, 51 F.4th 616, 623 (5th Cir. 2022), cert. granted, 143 S. Ct. 978 (2023) (No. 22-448), which held that the Bureau’s funding mechanism is unconstitutional, the court ruled summarily in favor of the trade associations on that issue, noting that the Bureau had preserved its argument that the Fifth Circuit decision was wrongly decided. That case is currently on appeal before the Supreme Court and scheduled to be heard this fall.
The bulk of the opinion focused on whether the Exam Manual revisions exceeded the Bureau’s UDAAP authority under Dodd-Frank, engaging in a careful analysis of the statutory language and applying the major questions doctrine. That doctrine, which was recently revitalized by the Supreme Court in decisions including West Virginia v. EPA, holds that agencies need clear congressional mandates for major policy decisions. The court noted that the Bureau’s asserted authority “to police the financial-services industry for discrimination” would have “significant political implications to both state and federal power.” Moreover, the court zeroed in on the Bureau’s asserted authority to prohibit disparate-impact discrimination in the revised Exam Manual, noting that Congress only authorized such liability in narrow circumstances.
The court found that the CFPB faced a high burden in arguing that Congress conferred “sweeping antidiscriminatory authority” into the UDAAP section of the Dodd-Frank Act, without using the word “discrimination” in its text or statutory history, a stark contrast to statutes like the Equal Credit Opportunity Act, which specifically outlaws discrimination in consumer and small business credit markets on articulated, prohibited bases. Accordingly, the Dodd-Frank Act’s UDAAP provisions do not provide the “exceedingly clear language that the major-questions doctrine demands before a finding a conferral of agency authority.”
The court did not reach the APA claims asserted by the trade associations, noting that a court of appeals can affirm on any basis evident from the record and “no judicial efficiency is gained by this court reaching those alternative grounds.”
An Appeal by the Bureau Is Likely
The Court’s decision vacates the revisions to the Exam Manual and blocks the CFPB from enforcing it against companies that belong to the plaintiffs’ member companies. Although it is possible that the CFPB could decline to appeal on the rationale that the Fifth Circuit likely would affirm and thereby establish a broader precedent, the vacatur of the Exam Manual update makes it likely that an appeal will be filed. We will continue to monitor the case as it develops.
Implications of the Decision
Although the Exam Manual update may be one of the more egregious examples of the Bureau attempting to legislate using its UDAAP authority, it is only one example, and recent history suggests that companies will continue to face other CFPB actions that “push the envelope” of its authority. This case illustrates that pushing back with litigation can be successful and that the major questions doctrine offers a strong basis for doing so.