Five ways the Chevron deference's demise will reshape bank regulation

September 19, 2024 10:00 AM

A person jogs outside the Supreme Court building in Washington, D.C.

WASHINGTON — The Supreme Court overturned a decades-old legal doctrine with their June decision in Loper Bright Enterprises v. Raimondo. The demise of the doctrine — known as the Chevron deference — promises to reshape bank regulation. Courts will change the way judges evaluate the legality of bank regulation, opening the door for legal challenges to agency rules.

The Chevron doctrine was first established by a 1984 Supreme Court decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., which broadly directed judges to give credence to agency interpretations of ambiguous statutes so long as those interpretations were reasonable. In Loper Bright, the court nullified the Chevron doctrine because, six of the nine justices reasoned, the Administrative Procedure Act — the foundational law governing how federal regulations are written — directs courts to perform their own analysis of the legality of agency rules, rather than deferring to the executive branch's interpretation.

Opponents of stronger regulation argue the ruling could produce a more accountable regulatory landscape, while critics warn it casts considerable uncertainty over scores of regulations that could face legal challenges. Agencies will need to be meticulous in their rulemaking, providing clearer justifications for their interpretations, and will need to bolster their legal teams. Congress will need to draft legislation with greater precision, and judges will play a pivotal role in determining the fate of various administrative rules. Here are five ways the Chevron decision could upend bank regulation going forward.

Justices of the US Supreme Court during a formal group photograph at the Supreme Court in Washington, DC, US, on Friday, Oct. 7, 2022. Seated from left: Associate Justice Sonia Sotomayor, Associate Justice Clarence Thomas, Chief Justice John Roberts, Associate Justice Samuel Alito Jr. and Associate Justice Elena Kagan. Standing from left: Associate Justice Amy Coney Barrett, Associate Justice Neil Gorsuch, Associate Justice Brett Kavanaugh and Associate Justice Ketanji Brown Jackson. The court opened its new term Monday with a calendar already full of high-profile clashes, including two cases that could end the use of race in college admissions. Photographer: Eric Lee/Bloomberg

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Chevron is a game changer for bank regulation — to an extent

Over its 40-year history, Chevron has been cited by federal courts tens of thousands of times. The decision to overrule the doctrine — which combined two similar cases, Loper Bright Enterprises v. Raimondo and Relentless Inc. v. Raimondo — made a point of not invalidating prior rulings made based on the Chevron deference because of that deference alone. Karen Solomon, senior of counsel at Covington & Burling and a former official with the Office of the Comptroller of the Currency, said this means the effects of the Supreme Court decision in Loper Bright will take time to bear out.

"Loper Bright expressly does not overrule prior cases decided under the Chevron framework," Solomon said. "The immediate effect of the Loper Bright and Relentless rulings on prudential banking regulation therefore is likely to be limited because the decisions do not disturb existing case law that relies on Chevron."

Lower courts are now expected to perform their own statutory interpretation to review the work of agencies. However, Solomon says the Supreme Court has allowed for some reliance on agencies' judgment by preserving the use of a different standard known as "the Skidmore deference," which allows courts to weigh agency interpretations without those interpretations being binding.

"If the agency supports its regulation by carefully explaining the facts that led it to regulate in a particular way, the court could accept that explanation as a reason to uphold the agency's regulation," she said. "[However,] the court doesn't have to do that — it could find that the statute requires something more or different than the agency has put forward and overturn the agency's regulation on that basis."

Isaac Boltansky, an analyst at BTIG, noted that Loper Bright is part of a decades-long effort to chip away at Chevron.

The Chevron deference's application was limited in 2022 by the Supreme Court's ruling in West Virginia v. EPA, which considered agency actions dealing with "major questions" of political or economic significance. The court declared that agencies need clear congressional authorization to take action on such major questions.

"There is still some ambiguity about what qualifies as a 'major question,' but the shift away from deference to the administrative state has already been in motion," Boltansky said. "The Supreme Court's decision in the Loper Bright case is, as Justice Gorsuch put it, a 'tombstone on Chevron no one can miss.'"

TD Cowen analyst Jaret Seiberg noted that Federal Reserve Chair Jerome Powell testified to Congress that the ruling would likely not have major immediate effects on banking agency rulemaking. Seiberg said Powell's comments — specifically that the Fed already is careful in how it interprets the banking laws that Congress enacts — means Loper Bright will not change bank regulation overnight.

"The Fifth Circuit has not given financial regulators deference for years…we see limited impact from how the Supreme Court ruled," Seiberg said. "The Fifth Circuit has been willing to repeatedly overrule how agencies interpret their authority."

Banks feel more empowered to challenge agency rules

The Chevron deference required courts to follow a two-step analysis when evaluating agency interpretations of statutes. First, the court would determine if the statute was ambiguous regarding the issue at hand. If ambiguity was found, the second step required the court to defer to the agency's interpretation, provided it was "reasonable," even if the court believed there was a better reading of the statute.

Solomon said one impact of the end of Chevron will be that banks will feel they have more leeway to challenge agency rules, and regulators will need to put more thought into their regulations in anticipation of such challenges. That means the already lengthy regulatory timetables required by the Administrative Procedure Act could get even longer.

"The agencies will need to prepare detailed, carefully reasoned records of their decision making so that their conclusions will be persuasive under the Skidmore standard," she said. "Interagency negotiations could be even more protracted than they are now, and individual agencies may add layers of internal review to their decision making in an effort to protect against reversal of their decisions in court."

Ian Katz, managing director of Capital Alpha Partners, said the end of Chevron is more likely to shape future rules than undo existing ones, because it leaves cases already settled under Chevron intact. And while courts will likely err on the side of agency expertise to an extent, the banking industry will likely feel more emboldened to challenge regulatory interpretations they balk at, Katz said.

"Regulated companies, knowing they have the judicial winds at their back post-Chevron, will have a bargaining chip when discussing potential regulations with agencies," he said. "We wouldn't expect them to drop planned proposals altogether, but those proposals probably won't be as assertive as they would have been previously."

Adam Rust, director of financial services at the Consumer Federation of America, said another case decided in July could be just as consequential as Loper Bright. In Corner Post Inc. v. Board of Governors of the Federal Reserve, the court ruled 6-3 that the long-standing statute of limitations for bringing a suit against a regulation was unconstitutional, a decision that could enable businesses to file suits and challenge rules over a longer time horizon.

"Often, an agency rule represents a negotiated compromise among many views [where] few get everything they want, few get nothing, most are heard and then markets adjust to the new norms, [but] there are always a few who disagree strongly," Rust said. "This rule is a recipe for those outliers to pursue fishing expeditions."

Rust said agencies will now need to ensure they are not relying too heavily on the assumption that courts will defer to their perspective. Even so, he cautioned that the heightened threat of legal action could have the effect of stripping rules of their potency.

"Agencies will have to be careful not to rely on Chevron deference when issuing rules, but it is equally important that skittish agencies push back against litigious bullies," he said. "They must make the right rule, not just the one palatable to extremist views."

Congress must take care in writing new legal frameworks

Senators, representatives and their staff members are not always legal experts. Pre-Loper, staffers often wrote statutes in an intentionally vague way, under the assumption that the agencies would fill in the gaps. Going forward, however, experts say Congress will need to be clearer about expressly delegating certain authority to agencies.

Covington & Burling's Karen Solomon said Congress could adjust to the decision by building express delegations of authority to implementing agencies into legislation.

"In Loper Bright, the Supreme Court recognizes that Congress sometimes expressly delegates discretionary authority to agencies — for example, to define particular statutory terms … [saying] a reviewing court should respect the delegation while policing the agency's adherence to its boundaries," she said. "So, in enacting new legislation — such as a statutory framework for crypto or AI — Congress may be able to achieve greater predictability about how the statute will work if it expressly delegates authority to agencies in areas where it wants agencies to act."

Katz, of Capital Alpha Partners, said that in order to adapt, the congressional committees writing legislation will likely need to go deeper into the subject matter to ensure they provide adequate judicial cover for agencies to write effective rules. However, courts will still defer to agency interpretations on highly technical matters that cannot be fully fleshed out in authorizing legislation, he said.

"It's possible that over time, both the courts and congressional committees will employ the services of more subject matter experts who can get into the weeds," Katz said. "[However] ambiguities in laws won't disappear, because in the short-to-medium term, we don't see Congress writing the specifics of something like the Fed's tailoring chart."

Agencies will need to "dot their i's and cross their t's"

Boltansky predicted that the overturning of Chevron means the already painstaking and deliberative process for crafting agency rules could be even more arduous. He said that could incentivize agencies to accomplish "regulation by enforcement" or penalize conduct in order to illustrate rough — rather than explicit — regulatory boundaries to market participants.

"Under the new legal paradigm, regulators will be more reticent to advance rules, those rules will take longer to write, and there is no certainty at the end of the process given the elevated risk of litigation," he said. "Perhaps more importantly, we could see more aggressive regulators choose to pursue additional regulation through enforcement action."

Coupled with another high court decision, Cantero v. Bank of America, Loper Bright means that the Office of the Comptroller of the Currency will need to revisit its standards which no longer jibe with the legal precedent, said bank regulatory expert Art Wilmarth. One of the main issues affected is federal preemption of state banking laws on national banks.

Cantero v. Bank of America held that courts may rule that state law is preempted if it "prevents or significantly interferes" with a national bank's function, a precedent established in the 1996 decision Barnett Bank v. Nelson. While this preemption standard was already codified in the Dodd-Frank Act with regard to state consumer finance laws, the Cantero decision underlines the higher bar for preempting state laws.

"The OCC will have to demonstrate a persuasive basis for all of its rulings to qualify for Skidmore deference," Wilmarth said. "Taken together, Cantero and Loper will make it much more difficult for the OCC to defend rulings that seek to exempt national banks from complying with nondiscriminatory state consumer financial laws and other state laws."

The OCC has since announced it is reviewing its preemption regulations in light of the Supreme Court's recent decisions.

Corporate litigator Eugene Scalia — former Secretary of Labor and son of the late Supreme Court Associate Justice Antonin Scalia — specializes in challenging regulations under the Administrative Procedure Act.

Scalia has already been hired by the Bank Policy Institute, which represents the nation's largest banks, to advise on potential legal challenges to a Federal Reserve proposal for higher capital standards, which has drawn fierce pushback from the industry.

He said to American Banker recently, "All regulators are wise to be more careful than they've been" in recent years "to make sure they're acting within the authority Congress gave them, and they're giving thoughtful consideration when the public tells them what its concerns are."

Chevron's demise empowers proponents and opponents of regulation alike

When the eagerly awaited Loper Bright ruling was handed down, bank trade groups were staring down major new regulations. Rob Nichols, president of the American Bankers Association, called the decision "an important win for accountability and predictability at a time when agencies are unleashing a tsunami of regulation."

The end of the Chevron deference, however, could be a double-edged sword for banks, according to industry experts. The Supreme Court's decision will also make it easier for advocacy groups and state attorneys general to challenge rules they oppose, which would introduce more uncertainty for banks.

"It is important to underscore that the courthouse is open to all stakeholders," Boltansky said. "Including competing industries and parties opposing deregulation."

Kate Judge, a professor at Columbia Law School, wrote that the end of Chevron introduces more uncertainty, but does not automatically ensure deregulation.

"[Banks] may see Chevron's fall as a win, but the Chevron doctrine was central in facilitating deregulation," Judge wrote on X. "The result today does not mean less regulation; it just ensures more uncertainty about the obligations the law imposes on regulated entities."