A federal judge has ruled that the Consumer Financial Protection Bureau overstepped its authority by adopting a sweeping anti-discrimination policy last year in a major victory for banks and the trade groups that sued the agency.
In a ruling late Friday, Judge J. Campbell Barker of the U.S. District Court for the Eastern District of Texas, vacated a CFPB policy that directed the agency's examiners to root out discriminatory behavior when conducting routine exams of financial institutions.
The CFPB adopted the policy in March 2022 by stating that discrimination in any financial product is an "unfair" practice that can trigger liability under the federal prohibition against "unfair, deceptive or abusive acts or practices," known as UDAAP. The judge ruled that Congress did not give the CFPB broad authority to look for discrimination beyond those areas specified in the statute. The ruling puts a major dent into the CFPB's efforts to apply anti-discrimination principles to non-lending products such as advertising.
"The CFPB faces a high burden in arguing that Congress conferred a sweeping anti-discrimination authority without defining protected classes or defenses, without using the words 'discrimination' or 'disparate impact,' and while separately giving the agency authority to police 'discrimination' only in specific areas," Judge Barker wrote in a
The CFPB under Director Rohit Chopra sparked an uproar last year when the agency updated its
"We will be expanding our anti-discrimination efforts to combat discriminatory practices across the board in consumer finance," Chopra
In response, the U.S. Chamber of Commerce and six business groups including the American Bankers Association and Consumer Bankers Association
"The CFPB's claimed authority to prohibit disparate-impact discrimination is something that Congress rarely authorizes. When it does, Congress authorizes disparate-impact liability only in narrow circumstances, with limits that exist to avoid 'serious constitutional questions,'" Barker wrote. "So one would naturally expect a clear statement for Congress to authorize a version of discrimination liability that even explicit nondiscrimination statutes usually do not cover and that can raise serious constitutional questions."
Rob Nichols, president and CEO of the American Bankers Association, said he was pleased with the decision because it made clear that the CFPB "exceeded its statutory authority" by updating its exam manual and announcing "an open-ended and novel power to examine banks for alleged discriminatory conduct."
"This authority is nowhere to be found in the agency's mandate from Congress, as the court concluded today," Nichols said in a press release. "We strongly support the fair enforcement of nondiscrimination laws, but the Bureau's extraordinary expansion of its regulatory reach crossed the line."
The CFPB said in an emailed statement that it is reviewing the court's decision and will evaluate its options for appealing the case. The bureau said in an emailed statement that federal law prohibits unfair acts and practices that inflicts substantial harm and that consumers cannot avoid.
"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 bureau said. "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."
Congress has enacted a number of specific discrimination statutes including the Fair Housing Act that bans discrimination in housing and the Equal Credit Opportunity Act that bars discrimination against credit applicants. Non-credit products currently are not subject to ECOA. But the CFPB had sought under the new policy to look for discrimination in a wide range of noncredit financial products including checking accounts, debt collections, consumer reporting, payments and remittances.
The policy directed CFPB examiners to determine if a bank or financial firm had policies in place to prevent discrimination.
"Historically, one of the biggest sources of leverage that the CFPB has when they bring an enforcement action is to accuse someone of discrimination or disparate impact, which is unintentional discrimination," said Chris Willis, a partner at the law firm Troutman Pepper. "The headline risk associated with that is very large and [the CFPB] would like to have that leverage over noncredit products like deposit accounts."
Supervised companies had to show that their "processes for assessing risks and discriminatory outcomes, including documentation of customer demographics and the impact of products and fees on different demographic groups," Barker wrote.
Lindsey Johnson, president and CEO of the Consumer Bankers Association, said the CFPB has sought "to punish banks for perceived discrimination even without evidence of discriminatory intent."
"We appreciate the Court's recognition that changes made by the Bureau to the UDAAP Exam Manual stand contrary to law and the intent of Congress," Johnson said in a statement.
For years, banks and financial firms have fought over the federal prohibition on UDAAP — one of the strongest tools the CFPB was given by Congress through the Dodd-Frank Act. But the precise meaning of what constitutes each of those three legal prongs has been the subject of disputes. In April, the CFPB in April issued a
She said the group's members "oppose discrimination in any form and strongly support fair, objective, and transparent enforcement of civil rights and fair lending laws."
The other plaintiffs in the lawsuit were the Longview Chamber of Commerce, Independent Bankers Association of Texas, Texas Association of Business and Texas Bankers Association
The district judge first had to decide if the trade groups had standing to challenge the anti-discrimination policy. The bureau had argued that the policy was not a formal rule and that the trade groups did not have standing to contest the agency's instructions to its own examiners. The judge rejected that argument.
Barker also referred in his opinion to the "major questions doctrine," which got a boost last year when the Supreme Court ruled in a
"What the major questions doctrine says is that when you're going to interpret a statute in a novel way that falls outside of the expected norm, you have to look for an explicit indication of congressional intent," said Willis.
A federal agency can't "just take a word in the statute and interpret it in a brand new way, particularly on something as sensitive as discrimination, where Congress has legislated in a very specific, very controlled, very limited way," said Willis.
Barker, an appointee of President Trump, wrote that the "major-questions canon applies here," because the issue of discrimination against any group "is a question of major economic and political significance." He said the financial-services industry would have to spend millions of dollars per year attempting to comply with the new UDAAP policy.
"The Supreme Court recognizes that sweeping grants of regulatory authority are rarely accomplished through 'vague terms' or 'subtle devices,'" Barker wrote. "Courts must 'presume that Congress intends to make major policy decisions itself, not leave those decisions to agencies.' If that major-questions canon applies, 'something more than a merely plausible textual basis for the agency action is necessary. The agency instead must point to clear congressional authorization for the power it claims.'"
