On September 8, a federal court in the Eastern District of Texas granted summary judgment in favor of the U.S. Chamber of Commerce (Chamber) and several other trade associations, holding that the Consumer Financial Protection Bureau’s (CFPB or Bureau) “March 2022 manual update is beyond the agency’s constitutional authority based on an Appropriations Clause violation and beyond the agency’s statutory authority to regulate ‘unfair’ acts or practices under the Dodd–Frank Act.”

As discussed here, late last year the Chamber, together with the Longview Chamber of Commerce, American Bankers Association, Consumer Bankers Association, Independent Bankers Association of Texas, Texas Association of Business, and Texas Bankers Association, filed a lawsuit to oppose the amendment to the Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) section of the CFPB’s examination manual in which the CFPB announced that discrimination was “unfair” under the Dodd-Frank Act and announced its intention to apply disparate treatment and even disparate impact claims to areas not covered by the Equal Credit Opportunity Act (ECOA) (like deposit accounts, money transmission, debt collection, consumer reporting, and advertising). The lawsuit alleged that by asserting it could bring these types of discrimination claims, the CFPB exceeded the scope of its statutory authority and violated the Administrative Procedure Act (APA). The complaint also argued that the CFPB’s funding mechanism is unconstitutional because it evades the congressional appropriations process.

After dismissing the CFPB’s arguments that the case was barred by the federal government’s sovereign immunity from suit and plaintiffs’ alleged lack of standing, the district court swiftly granted summary judgment to the plaintiffs under the binding precedent of Community Financial Services Association of America, Ltd. (CFSA) v. CFPB. While noting that the CFPB preserved its argument that the Fifth Circuit’s decision in that case is wrong and that its appeal to the U.S. Supreme Court is still pending, ultimately the court found that the appellate court’s decision finding the CFPB’s funding mechanism unconstitutional “controls in this court.”

But because the CFSA case is pending before the Supreme Court now, the district court also reached the merits of the trade associations’ claims regarding whether the CFPB permissibly interpreted the word “unfair” to prohibit discrimination. The district court held in the plaintiffs’ favor on this basis as well. Since the question of whether the CFPB has the authority to police the financial services industry for discrimination against any group that the agency deems protected, or about statistical disparities concerning any such group, is a question of major economic and political significance, the court found that Congress must grant such authority with “exceedingly clear language” — a reference to the “major-questions doctrine” that was applied by the Supreme Court in the West Virginia v. EPA case last year. After analyzing the statutory text, structure, and history of the Dodd–Frank Act, the court held that the “language authorizing the CFPB to regulate unfair acts or practices is not the sort of ‘exceedingly clear language’ that the major-questions doctrine demands before finding a conferral of agency authority to regulate discrimination across the financial-services industry, independently of the CFPB’s separately conferred antidiscrimination power in specific areas.”

The court concluded its opinion by stating it will issue a final judgment declaring that pursuing any examination, supervision, or enforcement action against any member of a plaintiff organization based on the CFPB’s interpretation of its UDAAP authority announced in the March 2022 examination manual update would be unlawful as exceeding the Bureau’s statutory authority and as based on its unconstitutional funding. The final judgment will be issued “forthwith.”

Our Take:

We called this one a year and a half ago. When the CFPB amended its exam manual in March 2022 to add discrimination as “unfair,” we noted that we believed it was beyond the agency’s statutory authority, and then again when the Supreme Court released its decision in West Virginia v. EPA, we noted that it presented a likely basis for setting aside the “discrimination is unfair” assertion by the Bureau. We weren’t the only ones, of course — many observers recognized the CFPB’s overreach in connection with this issue, and the district court reached the correct, and anticipated, result in this case.

From a practical standpoint, this ruling puts a major dent in any plans the CFPB had to use the UDAAP/discrimination theory in supervision or enforcement, making it much less likely that the agency could successfully apply a discrimination theory to non-credit products like deposit accounts. It also leaves the agency significantly boxed in with respect to advertising and redlining claims under ECOA, because the Townstone decision notes that ECOA only prohibits discrimination against “applicants,” and now this decision makes it difficult for the agency to use UDAAP to plug the pre-application “gap” in ECOA’s coverage.

Finally, the decision reinforces the conclusion that UDAAP is not unlimited, and that the CFPB does not have a license to interpret its authority in novel and unconventional ways. The decision reinforces that the rule of law applies to the CFPB, which is an important reminder to both the industry and the Bureau.