On November 6, the CFPB filed a notice with the Texas federal district court that it is appealing to the Fifth Circuit the district court’s order granting summary judgment to a group of trade associations in their lawsuit against the CFPB challenging the changes made to its UDAAP Exam Manual in March 2022.  In making the changes, the CFPB purported to use its authority under the Dodd-Frank Act to prohibit unfair, deceptive, or abusive acts or practices (UDAAPs) to target discriminatory conduct, even in circumstances to which federal fair lending laws, such as the Equal Credit Opportunity Act (“ECOA”), do not apply.  Specifically, the CFPB relied on the unfairness prong of its UDAAP authority to make these changes.

The trade associations’ complaint attacked the Exam Manual changes on several grounds.  In vacating the changes, the district court concluded that the changes were invalid because: first, based on the Fifth Circuit’s opinion in CFSA v. CFPB, the CFPB’s funding is unconstitutional under the Appropriations Clause, and, second, relying on the Supreme Court’s “major questions doctrine,”  the changes exceeded the CFPB’s UDAAP authority.  Under the “major questions doctrine,” courts will presume that Congress does not delegate to federal agencies issues of major political or economic significance unless it expressly states that it is doing so.

Putting aside collateral issues, such as the trade associations’ standing to challenge the Exam Manual changes, the Fifth Circuit is likely to affirm the district court order based on the Fifth Circuit’s CFSA v. CFPB decision unless the Supreme Court has reversed that decision by the time the Fifth Circuit decides this case.  It is uncertain whether the Fifth Circuit will reach the issue of whether the “major questions doctrine“ applies.  Should it do so, it will likely first need to determine whether the Exam Manual changes are tantamount to a substantive regulation under the Administrative Procedures Act (“APA”).  If it determines the changes are tantamount to a substantive regulation under the APA, we would expect the Fifth Circuit to affirm the district court order based on the “major questions doctrine.”

By the time of a Fifth Circuit decision, the Supreme Court may also have overruled the Chevron doctrine.  Two cases are presently pending before the Supreme Court which may result in that doctrine being overruled.  Under the Chevron doctrine, based on the 1984 Supreme Court opinion, if a statute is ambiguous, then the court must uphold a reasonable agency interpretation of that statute.  If the Chevron doctrine has been overruled by the time the Fifth Circuit decides this case, it would create an additional obstacle for the CFPB in this case.

We will be following this case very closely because a reversal by the Fifth Circuit (which we think is unlikely) would be very impactful on banks and others subject to the CFPB’s jurisdiction.  First, such entities would need to try to comply with the Exam Manual changes in a situation where there will be a great deal of uncertainty as to what practices are covered.  Second, the changes appear to cover all types of consumer financial services, not just credit covered under the ECOA.  Thus, for example, deposit products would appear to be covered.  Third, the Exam Manual changes also appear to apply to persons who are treated differently on any basis by banks and non-banks subject to the CFPB’s jurisdiction, not just on the basis of protected characteristics under fair lending laws, such as  race, gender, or marital status.  Fourth, the changes might also encompass the disparate impact doctrine under which practices which have the effect of treating one class of persons differently than another class of persons would constitute a violation of the Exam Manual.  

In the event of a reversal by the Fifth Circuit, there is also the possibility that the CFPB could take the position that it can enforce its extreme UDAAP interpretation against nonbanks that are not subject to the CFPB’s supervisory jurisdiction.  There would seem to be nothing to stop the CFPB from issuing a formal regulation that would ultimately apply to all banks, not just large banks, subject to the CFPB‘s supervisory jurisdiction.  This is because the federal prudential banking regulators would be required to enforce the CFPB’s regulation against the smaller banks that they supervise.  Since the FTC has also interpreted the unfairness prong of its UDAP statutory authority to encompass discrimination, a reversal by the Fifth Circuit would obviously affect nonbanks subject to the FTC’s enforcement jurisdiction.  Finally, a reversal would invite Director Chopra to continue to push the envelope by making extreme interpretations of the CFPB’s authority to regulate other practices.