Monday, we blogged about the opinion issued on September 8 by the Federal District Court for the Eastern District of Texas in the lawsuit brought last year by several trade associations against the CFPB. In that lawsuit, the trade associations challenged changes made by the CFPB to its UDAAP Exam Manual in March, 2022 to encompass discrimination claims within the “unfairness” prong even when such claims go well beyond the scope of the Equal Credit Opportunity Act. The Court granted summary judgment to the plaintiffs on two of its claims: first, that the Exam Manual changes are contrary to the Fifth Circuit opinion in CFSA v. CFPB holding that the CFPB was and is unconstitutionally funded and that any rules issued by the agency necessarily draw on such funding and are thus invalid; and, second, that the Exam Manual changes are simply not authorized by the Dodd-Frank UDAAP provision given the “major questions doctrine” and the complete absence of the “exceedingly clear language” that the major questions doctrine demands for a finding that the UDAAP provision confers on the CFPB the authority to regulate discrimination across the financial services industry.
The Court then vacated in their entirety the Exam Manual changes. We then stated the following in yesterday’s blog: “Curiously, the Court also granted an injunction against the CFPB preventing it from enforcing the changes in the Exam Manual against only members of the plaintiff trade associations.”
Later in our blog, we made the following observations about this curiosity:
The Court may have created some unnecessary confusion by issuing an injunction precluding the CFPB from enforcing the Exam Manual changes only against the plaintiffs and their members after it had previously vacated the Exam Manual changes in their entirety as to everyone affected by those changes. Once it vacated the Exam Manual changes, why did the Court decide to even bother with issuing injunctive relief? Once it decided to grant this additional and seemingly superfluous remedy, why did it confer the benefits only on the plaintiffs and their members? We assume that it did so to insure that the CFPB does not seek to bring any supervisory action or enforcement action against the plaintiffs under the now discredited theory that it can assert that allegedly discriminatory practices are unfair. However, by sowing this confusion, trade associations other than the plaintiffs may feel it necessary to seek to intervene in the lawsuit and seek their own injunctive relief to benefit their own members or they may feel it necessary to bring a separate suit seeking the same injunctive relief. That is, of course, precisely what has recently happened in the lawsuit brought by the American Bankers Association and Texas Bankers Association challenging the legality of the final rule recently promulgated under Section 1071 of Dodd-Frank dealing with mandatory data collection with respect to small business loans…We don’t expect that to happen in this case since we very much doubt that the CFPB would investigate or bring an enforcement action against a company that is not covered by the injunction unless the CFPB is hoping to create a split in authority by suing in another Circuit, like the Second Circuit which has held that the CFPB’s funding is constitutional.
In retrospect, and after reviewing the briefs filed by the parties, we may have been a bit too sanguine about the CFPB not taking any further action against non-parties to the lawsuit based on its theory that discrimination is an “unfair” practice within the meaning of the Dodd-Frank UDAAP provision. In taking further action, the CFPB would not, of course, be relying on the Exam Manual changes (which the Court vacated), but rather on its purportedly “longstanding” interpretation of the “unfairness” prong of UDAAP as encompassing discrimination. Here is a relevant excerpt from one of the CFPB’s briefs submitted in opposition to the plaintiffs’ motion for summary judgement:
The Exam Manual does not change the legal status of the parties, including by authorizing new topics of examination. The Dodd-Frank Act prohibited unfairness prior to the issuance of the Manual. 12 U.S.C. § 5536(a)(1)(B). There has never been an unstated, atextual exception to the prohibition on unfairness for discrimination, just as there is not an unstated exception to unfairness for conduct that happens on Leap Day. Nor were CFPB examiners, prior to March 2022, prohibited from examining regulated parties on the topics addressed in the revisions: the updates to the Manual provide a roadmap of additional preliminary factual assessments for examiners to make (depending on the scope of the particular examination), but examiners could have made those preliminary assessments without the updates. After all, the Manual does not provide the source of authority for those examinations—that authority derives primarily from statute. See 12 U.S.C. §§ 5514(a), 5515.
This totally explains why the plaintiffs felt it was necessary to seek an injunction. The plaintiffs asked for injunctive and declaratory relief to enjoin CFPB from using this new UDAAP interpretation in any context (i.e., investigative subpoena). Unfortunately, the court limited the injunctive/declaratory relief to members of the plaintiff trade associations, which as we noted in yesterday’s blog, creates confusion.
Notwithstanding the provocative language quoted above from the CFPB’s brief, we think that it is unlikely, but not beyond contemplation, that the CFPB could take supervisory or enforcement action against entities that are not beneficiaries of the injunction granted by the Court. Thus, it is certainly rational for non-parties (including additional trade associations) to consider filing intervention and injunction motions in the Texas lawsuit just as they have done in the other Texas lawsuit where a court limited its injunctive relief to just the plaintiff trade associations and their members. However, that is a time-consuming and costly process. As a result, we think that it would be appropriate for non-parties to adopt a “wait-and-see” approach and do nothing further unless and until word gets out that the CFPB, notwithstanding the Texas opinion, is continuing to take the position that it has the right to examine or investigate non-parties for discrimination based on the “unfairness “ prong of UDAAP. We will be very surprised if the CFPB engages in such selective enforcement of the CFPB’s interpretation of the “unfairness” prong of UDAAP in light of the strong rejection of that interpretation by the Texas court. That would certainly be very unfair.