Banks typically try to avoid direct legal confrontation with their primary regulators. But recent wins over the Consumer Financial Protection Bureau will likely embolden banking trade groups to take on the Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency, agency watchers and industry attorneys say.
A federal judge in Texas last week ruled the CFPB overstepped its authority by directing examiners to root out discrimination using the agency’s power to crack down on banks and other lenders for “unfair” practices. That decision came weeks after another federal judge in Texas invalidated a new rule mandating small businesses to collect loan data, and around a year after the US Court of Appeals invalidated the CFPB’s funding mechanism.
That last case, CFPB v. Community Financial Services Association of America, is headed to the US Supreme Court for oral arguments in October.
The successful challenge to the CFPB’s examination manual; the broad interpretation of standing in the Fifth Circuit covering Texas, Mississippi, and Louisiana; and that circuit’s friendliness to industry suits against government regulators mean banks are likely gearing up to fry bigger fish.
“The CFPB lawsuit is part and parcel of this larger assault,” said Todd Phillips, a professor at Georgia State University’s Robinson College of Business.
Banks until now have largely shied away from suing the Fed, FDIC, and OCC.
“You just don’t want to have a habitually antagonistic relationship with your prudential regulator,” said Christopher Odinet, a professor at the University of Iowa College of Law who focuses on consumer finance and financial regulation.
That might be changing, as prudential regulators take a cue from the historically more aggressive CFPB, said Joann Needleman, the head of Clark Hill PLC’s financial services regulatory and compliance practice.
“Clearly, the prudential regulators and the CFPB seem to be very cozy,” she said.
Roadmap for Challenges
The recent ruling by Judge J. Campbell Barker of the US District Court for the Eastern District of Texas blocking a March 2022 update to the CFPB’s examination manual could serve as a template for future challenges to Biden administration financial regulations.
Barker determined the lawsuit filed by the US Chamber of Commerce, the American Bankers Association, the Consumer Bankers Association, and several Texas trade groups dealt with a “major question” under the standard set by the Supreme Court’s West Virginia v. EPA case.
The major questions doctrine states Congress didn’t delegate significant political or economic questions to federal regulatory agencies. Deploying the standard to consumer finance and other financial regulations opens up a wide area for challenges, said Vaishali Rao, a partner at Hinshaw & Culbertson LLP in Chicago.
“Consumer finance issues are always, in a sense, going to be important and hold significant import for the country,” she said.
Banking trade groups have already begun making arguments about the threat to lending activities posed by new capital rules the Fed, FDIC, and OCC proposed over the summer. They’ve made similar claims ahead of coming changes to the Community Reinvestment Act, a 1977 law that allows regulators to grade banks on their lending and investments in low- to moderate-income communities.
While the the Fed, FDIC, and OCC are proposing changes through the formal notice-and-comment rulemaking process, determining whether a bank has enough capital or is lending enough to target communities is “very discretionary,” said University of Iowa’s Odinet.
“Any sort of innovative thinking in the agencies about their statutory authority is going to be met with a lawsuit saying, ‘Oh, major questions doctrine,’” Odinet said.
Industry groups are also likely to push concerns in potential lawsuits that regulators didn’t comply with the Administrative Procedure Act, something Barker’s decision touched upon but didn’t delve into, Phillips said.
Banking trade groups including the Bank Policy Institute, the Financial Services Forum, the Institute of International Bankers, the ABA, and the US Chamber of Commerce fired the first shot in their process fight against the coming capital increases in a Tuesday letter warning the three regulators about shortcomings in their current proposal.
The letter isn’t the first time that banking trade groups previewed their litigation strategy against a regulator’s actions publicly. The ABA, CBA, the Chamber of Commerce, and the Independent Community Bankers of America released a white paper challenging the CFPB’s exam manual changes months before they filed suit.
The broad interpretation of standing requirements at the Fifth Circuit may also provide an opening for trade groups.
A lawsuit that national and state trade groups brought earlier this year seeking to nullify the CFPB’s rule on small business lending data included a small Texas bank as a named plaintiff.
The challenge to the CFPB’s exam manual, by contrast, was limited to trade groups, Rao noted.
“We should prepare ourselves and expect to see more litigation out of trade groups, because it seems like the door is left pretty wide open for a trade group to challenge an agency’s action,” she said.
Possibly the biggest reason banking trade groups are likely to target future rules in the Fifth Circuit is that they expect to encounter district and appellate court judges receptive to their arguments, Odinet said.
“That’s proving to be a fruitful circuit. The Fifth Circuit has always been an incredibly conservative circuit,” he said.