The Hydraulic Effect of Loper Bright Enterprises in Consumer Finance: More Regulation By Enforcement

This term's Supreme Court decisions have completely remade administrative law, both by eliminating Chevron deference and by effectively eliminating the Administrative Procedures Act's statute of limitations. In Loper Bright Enterprises v. Raimondo, the Court held that as a constitutional matter federal courts could not give deference to federal agencies' interpretations of ambiguous statutes. And then the Court opened the door to APA challenges to virtually every existing federal regulation, no matter how old, with Corner Post Inc. v. Board of Governors of the Federal Reserve System, a statutory ruling that the APA's six-year statute of limitations runs from the date a plaintiff is allegedly injured by the regulation, rather than from the date of the regulation's finalization. That means that a business that is incorporated tomorrow has at least six years to challenge any regulation that affects it, and maybe more depending on when it is affected. In other words even New Deal or Progressive era regulations could be challenged tomorrow and there would be no deference to the agency's long-standing interpretation of the statute authorizing the regulations. I pity my colleagues who teach admin law--their course lost at least a credit hour's worth of material. Maybe they'll decide to take up commercial law....

These decisions are, taken together, a major rolling back of the administrative state. But these decisions will affect different agencies differently, and the Court's rulings may have some unintended consequences. To wit, many federal agencies have both rulemaking and enforcement powers. In some instances, enforcement is dependent on rulemaking, as the agency lacks a general statutory prohibition to enforce, but can only enforce its particular rules. The EPA is (I think) an example of this type of agency. It doesn't have a general statutory prohibition of "don't pollute." OSHA and the FDA and NLRB and Dept. of Commerce. For agencies in this category, Loper Bright Enterprises and Corner Post clip not only the agencies' rulemaking power, but also their enforcement power, because they will have to defend the rules they are enforcing. 

In other instances, however, the enforcement powers are independent of rulemaking, as there is a broad statutory prohibition that the agency can enforce without rules. This is where federal financial regulators sit.  In these cases, Loper Bright Enterprises and Corner Post will have a hydraulic effect:  agencies are going to do what they're going to do, so if they can't do it through rulemaking, they'll do it through enforcement and supervision. In other words, what the Supreme Court did was to supercharge regulation by enforcement in the financial regulatory space.

An increase in regulation by enforcement is an unfortunate outcome because rulemaking is often the optimal policy tool--it gives everyone notice ex ante of what's acceptable and what's not and it applies across the board, rather than just to individual parties. Even before these recent SCOTUS decisions, the long-standing attack on federal agencies' rulemaking has already pushed agencies away from rulemaking and toward enforcement as a policy tool. Increased judicial scrutiny of rulemakings has caused the rulemaking process to become slower and major rules to become painfully long in an attempt to fortify them against attacks. What's worse, with venue shopping (looking at you 5th Circuit!), an agency knows that it will take 2+ years to promulgate a rule only to have it challenged in a federal court in Texas, where is will be enjoined and then face a hostile court of appeals. Even if the agency prevails, it might take 4 years before the rule can go into effect. As an economic matter it's frequently a no-brainer for regulated entities to challenge rules because the delay alone more than pays for the challenge (e.g., the credit card late fee rule).

So even before these recent SCOTUS decisions, we already had a move toward regulation by enforcement because the courts (and Congress with Magnusson-Moss procedure for the FTC) made regulation by rulemaking too difficult. Loper Bright Enterprises will only accelerate that trend, at least for agencies whose enforcement tools do not depend on regulations. After all, if you're an agency, why risk a non-deferential judicial review? It's easier just to bring an enforcement action to get the point across to industry, and press releases and speeches can underline the policy point the litigation is intended to make. To be sure, it makes it harder for anyone to know exactly what the law is: most enforcement actions result in consent decrees rather than judicial opinions on the merits, and it can be hard to know if a complaint would be filed in another case if the facts were somewhat different. It also makes the "law" much more dependent on the political leadership of the agency as that affects the likelihood of enforcement actions. So regulation through enforcement actions—by which I mean announcing policy through enforcement actions—is usually suboptimal, but that's where SCOTUS has pushed things. 

Among financial regulators, regulation by enforcement is easier for some agencies than others. It's arguably the easiest for the CFPB, which can use the statutory UDAAP power to go after almost all types of violations and the ability to threaten substantial civil monetary penalties, which encourages defendants to settle. It's a little harder for FTC, which only has UDAP and which has weaker remedies available. But both agencies still have powerful statutory enforcement cudgels that do not require implementing rules.

For prudential banking regulators there is sometimes the ability to use UDAAP, but even when there isn't, there is still broad discretion regarding safety-and-soundness tools in the supervisory process. A determined regulator can probably use supervisory prods to achieve almost any policy outcome it wants because at the end of the day if a bank gets into a public fight with its regulator over its soundness, the bank is risking a run.

In contrast to CFPB, FTC, and the prudentials, the SEC has perhaps the most difficult time. The SEC has been the focus of "regulation by enforcement" criticism for because it has treated cryptocurrencies as securities. I've argued that is a misguided criticism--all the SEC is doing is applying the long-standing Howey test about what is a security to crypto; once the SEC concludes that a token is a security, there's really no new law being applied. The "regulation by enforcement" critique of the SEC is really an ask for a crypto exemption from regulation. The irony of this false attack on the SEC is that the SEC actually has the least ability to do regulation by enforcement because the SEC doesn't have as broad of a statutory tool as the CFPB. The SEC doesn't have an equivalent to "unfair" or "abusive". Instead, its broadest tool, section 10(b)/Rule 10b-5 (securities fraud) is narrower than "deception" as it requires scienter, unlike UDAAP/UDAP.

So to sum it all up, I expect that Loper Bright will mean that the CFPB in particular to rely more on enforcement and the prudential regulators to do more through the supervisory process, at least if they actually want to do things. For consumer financial services in particular Loper Bright might produce a surprisingly unwelcome outcome for regulated firms.

Two post scripts:

(1) Congress can readily remedy Corner Post by amending the APA. But it won't.

(2) Loper Bright has shifted interpretation of statutes from expert agencies to generalist courts. I get the constitutional argument, but generalist federal judges are not well positioned to figure out technical issues. Congress can't override Loper Bright, but it could set up a bunch of specialist federal courts with limited jurisdiction and create qualification requirements for the judges on those courts. They don't have to even be Article III courts (and they could be paid more because of lack of life tenure and the need to get expertise), but if they have expertise, then their decisions will likely get deference on appeal (and perhaps that could be legislated).

Comments

[Chi Chi Wu]

Great post, and excellent points. A couple questions:

1. Loper Bright was based on the APA, at least the main opinion (disregarding Thomas's concurrence). Couldn't Congress also amend that to override it? I mean, they won't, but it's technically possible.

2. What do you think of this discussion in the main opinion? There seem to be a LOT of provisions in the federal consumer laws that fit this description:

"In a case involving an agency, of course, the statute’s meaning may well be that the agency is authorized to exercise a degree of discretion. Congress has often enacted such statutes. For example, some statutes “expressly delegate[ ]” to an agency the authority to give meaning to a particular statutory term. Batterton v. Francis, 432 U.S. 416, 425, 97 S.Ct. 2399, 53 L.Ed.2d 448 (1977) (emphasis deleted).5 Others empower an agency to prescribe rules to “fill up the details” of a statutory scheme, Wayman v. Southard, 10 Wheat. 1, 43, 6 L.Ed. 253 (1825), or to regulate subject to the limits imposed by a term or phrase that “leaves agencies with flexibility,” Michigan v. EPA, 576 U.S. 743, 752, 135 S.Ct. 2699, 192 L.Ed.2d 674 (2015), such as “appropriate” or “reasonable.”6

"When the best reading of a statute is that it delegates discretionary authority to an agency, the role of the reviewing court under the APA is, as always, to independently interpret the statute and effectuate the will of Congress subject to constitutional limits. The court fulfills that role by recognizing constitutional delegations, “fix[ing] the boundaries of [the] delegated authority,” H. Monaghan, Marbury and the Administrative State, 83 Colum. L. Rev. 1, 27 (1983), and ensuring the agency has engaged in “ ‘reasoned decisionmaking’ ” within those boundaries"

[Adam Levitin]

Chi Chi, yes, Loper Bright is technically a statutory decision, although the Article III argument is woven into the majority opinion. I imagine Congress could write in deference in the statute, but I'm skeptical that this Court would allow that. After all, Congress lived with the Chevron interpretation for around 40 years, which should give rise to some sort of implied ratification argument about the interpretation.

As for the issue of express delegations of discretion, I think we'll have to see how that plays out. The language you quote could open the door to a fair amount of deference or it could push courts to find that the delegation is narrow. I'm really not sure how this will play out in lower courts.