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A Texas federal court has overturned an interpretation by the Consumer Financial Protection Bureau (CFPB) which enabled the fierce consumer protection agency to go after discriminatory practices in financial service markets.
Earlier this month, a Texas District Court overturned an update to the CFPB examination manual which stated that discrimination is an unlawful practice and officials will examine companies over such practices in areas such as payments and remittances.
At the centre of the debate was the so-called UDAAP prohibition, which bans regulated companies from engaging in “unfair, deceptive, or abusive acts or practices”.
Congress gave the CFPB the authority to name acts that constitute any one of these practices, issue requirements and examine companies on how their procedures guard against prohibited conduct.
Last March, the CFPB announced that it considers discrimination to be a UDAAP and will begin examining discrimination and whether companies are adequately testing for discrimination in their advertising, pricing and other activities.
For example, the manual directed examiners to scrutinise whether a company regularly analyses all of its decision-making processes and data for discrimination.
It also stated that a company may be liable even absent a discriminatory intent.
The manual update meant that the agency started to look for discrimination across a new range of consumer financial services outside lending, such as payments, remittances, consumer reporting, credit, servicing and deposits.
The move met with significant uproar from banks, credit unions and members of Congress who accused the agency of serious regulatory overreach.
At the same time, some experts highlighted that such a broad extension of UDAAP may hold back laudable efforts of fintech companies to reach the unbanked and underbanked.
As the agency did not move to rescind the manual update, in September 2022, the US Chamber of Commerce filed a complaint in Texas.
Now the court has invalidated the CFPB interpretation and banned the agency from enforcing the changes against members of the US Chamber of Commerce on the ground that the top court’s “major questions doctrine” applies.
That doctrine establishes that courts must “presume that Congress intends to make major policy decisions itself, not leave those decisions to agencies”.
According to the Texas court, the decision as to whether or not the CFPB has the authority to “police” financial services markets for discrimination “is a question of major economic and political significance”.
As to economic impact, the court said companies currently in scope spend “millions of dollars” per year to comply with the UDAAP rule.
The court found that discrimination is often at the discretion of state regulators and the CFPB manual update could “displace the balances struck by the states” on those matters.
Additionally, the Texas court relied on the famous Fifth Circuit Court decision which overturned the CFPB’s payday lending rule arguing that the agency’s funding structure was unconstitutional and the rule was therefore invalid.
The CFPB appealed the decision to the Supreme Court where a hearing is scheduled to take place on October 3.
Key takeaways from the ruling
In a blog post, Alan Kaplinsky, senior counsel for Ballard Spahr, said the court decision was “surprising” in some aspects and “confusing” in others.
“We were surprised that the CFPB didn’t appear to argue that the case ought to be just stayed” pending the outcome of the Supreme Court opinion, as it happened in many other court cases involving the CFPB.
Kaplinsky said he was also surprised that the CFPB did not use legal precedent which laid down that a court must validate an agency’s interpretation of a regulation if the statutory authority is ambiguous and the regulation is reasonable.
At the same time, the Texas court “may have created some unnecessary confusion” when it vacated the changes and at the same time ruled that the changes cannot be enforced only against the plaintiffs and their members.
“Once it vacated the exam manual changes, why did the court decide to even bother with issuing injunctive relief?,” Kaplinsky posed the question.
“By sowing this confusion, trade associations other than the plaintiffs may feel it necessary … to bring a separate suit seeking the same injunctive relief,” he pondered.
Scott Talbott, executive vice president of the Electronic Transactions Association (ETA), told Vixio that the ruling could lead to further challenges where entities suspect the regulatory actions are outside the scope of the agency’s authority.
“This opinion will naturally result in the industry scrutinising other pronouncements by the CFPB based on UDAAP as statutory authority,” Kaplinsky added.
For instance, they may challenge the CFPB’s circular from August 2022 which concluded that data security breaches could be a violation of UDAAP.
“We would expect the industry to scrutinise any past or future explications of what the CFPB deems to be abusive to ensure that it passes muster under the major questions doctrine”, Kaplinsky said.
CFPB is considering appeal
Vixio reached out to the CFPB, which said it was reviewing the court’s decision and will evaluate its options for appeal.
“A longstanding and straightforward federal law prohibits unfair acts and practices, stating that financial firms cannot subject consumers to substantial and unavoidable harm,” the agency wrote in an email statement
“In our view, it is common sense that discrimination can meet that standard, regardless of whether it affects people due to their race, their national origin, or the exercise of their religious liberties."
“The CFPB will continue to root out invidious discrimination to protect American families, using any available tool at our disposal while abiding by the court’s order,” the spokesperson affirmed.
While the agency is weighing in on the possibility of appeal, Kaplinsky said the odds of prevailing would be “very slim”, considering that the appeal would take place at the Fifth Circuit. That court ruled the CFPB funding structure unconstitutional and is “the most conservative” circuit court in the country.
Furthermore, “an appeal could result in a Fifth Circuit opinion affirming the District Court on the merits and that, of course, would be much worse for them than this District Court opinion”, Kaplinsky said.
