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US Chamber of Commerce vs CFPB

posted by Adam Levitin

One would have thought that after a dozen years the challenges to the CFPB’s constitutionality would have been over and that the Supreme Court’s decision in Seila Law would have put the matter to rest. But there are still a trio of suits pending that bring constitutional challenges to the Bureau, including one recently filed in the Eastern District of Texas by the US Chamber of Commerce and some banking and business associations. That’s the suit I’m going to focus on. 

The Chamber’s suit alleges that a recent change in the CFPB’s examination manual—guidance for CFPB examiners that the Bureau happens to make public as a courtesy—that indicates that examiners are to consider discrimination in non-credit services to be an unfair, deceptive, or abusive act or practice is a “legislative rule.” A legislative rule must comply with the Administrative Procedure Act, including adequate notice-and-comment, being based in law, and not being arbitrary and capricious. As a kicker, however, the Chamber’s suit adds in a count that the Bureau’s funding is unconstitutional. What's likely to happen?


Is It a Legislative Rule?

Let’s start with the exam manual. The suit depends on the exam manual change being a “legislative rule.” If it’s not, there’s no APA issue whatsoever; if it is, the Bureau loses pretty clearly on notice-and-comment, and possibly on the other APA claims. So is it a “legislative rule”?  A legislative rule is one that “affect[s] individual rights and obligations.”  It’s hard to see how on earth an exam manual could be a legislative rule. The Chamber knows that it’s a far-fetched argument because, as it admits, exams are not binding (“Although a Matter Requiring Attention is not itself legally enforceable”). Therefore, the Chamber has to resort to arguing that the real issue is the scope of the examination, but there’s no evidence that the change in the exam manual would result in a different scope of examination, much less that there’s any right to a limited scope of an examination beyond what is set forth in statute. The statutory scope of examination is incredibly broad:  assessing compliance with the requirements of Federal consumer financial law; obtaining information about activities and compliance systems or procedures of the regulated entity; and detecting and assessing risks to consumers and to markets for consumer financial services.  The Equal Credit Opportunity Act is a “Federal consumer financial law,” but its prohibition on discrimination applies only to extensions of credit. ECOA does not cover discrimination in non-credit financial services, like opening bank accounts. But compliance with law is not the only basis for examination.   Surely examining for discrimination in non-credit markets falls under “detecting and assessing risks to consumer and to markets for consumer financial services.” 

Can UDAAP Cover Discrimination?

The Chamber has a subsidiary argument that UDAAP cannot cover discrimination. Some of this is textual, namely “discrimination” is listed separately from UDAAP in one provision of the Consumer Financial Protection Act. It’s hard to see this as conclusive; there are a bunch of other provisions that muddy the waters, such as ones referring to “Federal laws intended to ensure the fair, equitable, and non-discriminatory access to credit…that are enforced by the Bureau, including [ECOA] and [HMDA]”. Three problems there. First, there are no federal laws on fair lending other than ECOA and HMDA…except for UDAAP. Second, ECOA and HMDA clearly deal with non-discrimination, but what work are “fair” and “equitable” doing?  These words are being used as part of a legal triplet, indicating that a discrimination isn’t actually something distinct from unfairness.  Third, it beggars reality to think that when creating the CFPB, an agency with very broad powers over the entire consumer finance space, wanted to deny it the power to prohibit discrimination in non-credit products, and chose to express this fine-grained policy choice through some oblique phrasing regarding the “objectives” the Bureau without leaving even a trace of its intention in the legislative history. Why would Congress want to prohibit discrimination in credit, but not in other consumer financial markets? Are we really to believe that Congress wanted to prohibit unfair and deceptive acts and practice, but thought that discrimination wasn’t unfair (substantial harm, not readily avoidable and without offsetting benefit) or deceptive (when not disclosed)? It’s frankly a dishonest argument for anyone to make.    

CFPB Funding

That brings us to the challenge of the Bureau’s funding. It’s the after-though bomb in the suit. The Bureau’s is funded through remissions from the Federal Reserve Board, with the maximum amount capped based on an inflation-adjusted cut of the Federal Reserve Board’s 2009 operating budget.  That means that the funding is not through appropriations.  That’s not unusual. The majority of federal spending—things like Medicare, Medicaid, and Social Security—are not appropriated.  Likewise, bank regulators are not subject to appropriations—there are no appropriations for the Fed, the OCC, or the FDIC—and with good reason. If bank regulatory policy were subject to appropriations there would be the specter of a see-saw in funding—and hence regulation—between Congresses.  Good luck running a business when you cannot engage in planning about what your regulatory compliance expectations will be.  It’s hard to see a principled way of distinguishing between the CFPB’s funding and that of other bank regulators.

A five-judge concurrence to a previous 5th Circuit 17-judge en banc decision attempted to do so, but the reasoning is embarrassingly bad and clearly result-motivated.  The concurrence states that "an executive, law-enforcement agency with complete fiscal independence is unprecedented."  The Bureau, according to the concurrence "is a fully self-funded agency with vast rulemaking, enforcement, and adjudicative authority."  The problem is that describes the Fed, the FDIC, and the OCC. The concurrence tries to distinguish them, but its attempt is frustratingly pathetic, based on the allegation that these other agencies have a "narrower" mission (what's the constitutional importance of that? what's the constitutional metric for mission "width"?) and on they're being multi-member commissions.  The concurrence declared that the Fed's mission, for example, is narrower than the CFPB's because it is about maintaining price stability and maximum employment in the economy. That hardly sounds narrower to me (does anyone really think the CFPB is more powerful than the Fed?), but it isn't even an accurate statement of the Fed's authority:  the Fed regulates bank holding companies and many banks and operates payment systems that are the backbone of the economy. The Fed engages in rulemaking, enforcement, and adjudication, just like the CFPB. Likewise, the concurrence says that the FDIC's mission is narrower because it merely insures deposits and examine insured banks—but that's not accurate. The FDIC is a full fledged regulatory agency with rulemaking, enforcement, and adjudication authority.  And the OCC actually gives out operating licenses—bank charters.

The Fed and FDIC are multi-member commissions, to be sure, but the OCC is not. It's not clear why constitutionally it is ok for a multi-member commission to have unappropriated funding, but not for a single-director agency—the concurrence is just making up constitutional principles—but the concurrence really has no answer for the OCC other than to say that it as part of the Treasury it is politically accountable---but isn't that the same as the CFPB post-Seila Law? The Treasury Secretary's authority to remove the Comptroller is unclear, but at the very least the Treasury Secretary cannot direct the Comptroller to undertake or not take certain actions. There's no honest way to claim that the CFPB's structure is problematic, but not that of the OCC, a structure that no one has found problematic over the past 158 years. And distinctions with the Fed are hard to support:  declaring the CFPB’s funding unconstitutional poses the risk of a serious political crisis because it will all but guaranty a challenge to the Fed’s independent funding. 

What’s the Remedy?

Here's the thing:  the Chamber carefully filed suit in a friendly jurisdiction and is likely to win there. (The Chamber drew the same Trump-nominated judge who struck down the CDC’s eviction moratorium.) The key question will be the remedy.

The Chamber’s suit focuses entirely on the supposed APA flaws of the CFPB’s exam manual change, but it also throws in the funding challenge. If the Chamber wins on the APA, the remedy is simple enough—the change in the exam manual is voided. Depending on the particular APA violation, it will not prevents the CFPB from interpreting UDAAP to prohibit discrimination against protected classes; there would be no issue preclusion as the issue before the court is notice-and-comment, for example. 

The funding issue is more complicated. If the CFPB’s funding is unconstitutional, what is the remedy?  Is it enjoining the CFPB from receiving unappropriated funds?  Is it voiding the entirety of the Consumer Financial Protection Act because the funding is not severable from the structure of the agency?  Is it preserving the CFPA other than the funding provisions, which would leave the agency at least temporarily without funding and effectively kill it off? Or given that the only injury the Chamber claims relates to the exam manual, are they entitled to a remedy that goes beyond the exam manual? 

Consider the implications of the CFPB (or really the Consumer Financial Protection Act) being declared unconstitutional.

  • Who has authority to administer the various Enumerated Consumer Laws? Does it revert to the pre-2010 status?
  • What happens to regulations that were repealed in reliance of the existence of the Bureau? Reg AA (the Fed’s UDAP regulation for banks) comes to mind as an example. I don’t think it springs back into place.
  • What happens to CFPB adoptions of pre-existing rules? All of the rules implementing the enumerated consumer laws were reenacted with the CFPB. For example, the CFPB’s Reg Z might be substantively the same as the Fed’s old Reg Z, but it isn’t actually the same regulation—there’s a whole new Federal Register publication for it. Does that mean that all of the implementing rules are gone, at least until they can be reenacted by the agencies to whom authority would devolve without the Consumer Financial Protection Act? 
  • What happens to post-2011 CFPB rules? The CFPB has engaged in original rulemaking, not just claiming pre-existing rules. Those original rulemakings include safe harbors from various statutes. For example, the QM (Qualified Mortgage) safe harbor from the Dodd-Frank Ability-to-Repay requirement would be gone. What happens to all the mortgages securitized with representations that they were Qualified Mortgages?  It’s going to be litigationpalooza.  So too would go the reasonable and proportionate safe harbors for credit card penalty fee under the CARD Act. And Reg F validation notice safe harbor for the Fair Debt Collection Practices Act would be gone.  Gone would be all of the Bureau’s inflation adjustments since 2010 and the TILA-RESPA integrated disclosure used for all mortgages. And so on. 

To use a term of art, declaring the Consumer Financial Protection Act would be a hot mess.  Perhaps that’s just fine with the MAGA crowd, but I’d like to think that there are still grown-ups in the room in the federal judiciary and that they’d see that whatever they think about the reach of the regulatory state, this is no way to run a railroad. 

I would anticipate the Chamber prevailing the district court given the politics of the case. The real issue will be whether it prevails on the funding and the remedy, if so. If the Bureau loses on the funding, I would expect to see some expedited appeals that will garner a lot of triumphalist anti-regulatory noisemaking, but it’s hard to see the Supreme Court killing of the Bureau now. It had a chance to do so in Seila Law and it didn’t. To be sure, the composition of the court is a bit different now and the real question in Seila Law was the fate of Humphrey’s Executor, not the funding, but no one was too exercised about the funding in Seila Law. I’m wary of making predictions about this current court, but I am skeptical that they will pull the plug on the Bureau given the chaos it would cause.


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