CFPB Just Got Checked - Using UDAAP to Regulate Discrimination Is Out of Bounds – At Least for Some

The U.S. District Court, Eastern District of Texas, on September 8, 2023, issued a ruling vacating the Consumer Financial Protection Bureau’s expansion last year of its Unfair, Deceptive, or Abusive Acts or Practices (“UDAAP”) examination manual to include discrimination, which we wrote about here.  The court also enjoined the CFPB from examination, supervision, or enforcement action against any member of the plaintiff trade associations based on the agency’s unlawful interpretation of UDAAP.  The court found the CFPB’s 2022 update to its UDAAP exam manual (“2022 Update”) unlawful as exceeding statutory authority.  The court also based its decision on the recent 5th Circuit decision that the CFPB is unconstitutionally funded (the district court is within the 5th Circuit, so must follow 5th Circuit precedent), the appeal of which is pending before the Supreme Court (see prior article here).

The case arose because the CFPB announced in its 2022 Update that “discrimination” was covered by the CFPB’s UDAAP authority and directed its staff to begin examining for discrimination, and whether companies are adequately “testing for” discrimination in advertising, pricing, and other activities.  In its press release, the CFPB stated that examiners must “require supervised companies to show their processes for assessing risks and discriminatory outcomes, including documentation of customer demographics and the impact of products and fees on different demographic groups.” 

Several trade associations sued, including the U.S. Chamber of Commerce, American Bankers Association, Texas Association of Business, and a number of other national and Texas associations.  Arguments included that the new directives were invalid because the CFPB’s funding violated the Appropriations Clause based on Fifth Circuit precedent, and exceeded CFPB’s statutory authority under the UDAAP provision of the Dodd-Frank Act. 

The CFPB moved for dismissal based on sovereign immunity, standing, and venue.  In the alternative, it moved for summary judgment on the non-constitutional claims, stipulating that plaintiffs would prevail on their Appropriations Clause claim under Fifth Circuit precedent.  The court disagreed, holding that the CFPB’s 2022 Update was a “final agency action” marking the consummation of CFPB’s decision-making process, in which rights or obligations had been determined, or from which legal consequences would flow.  The court also upheld plaintiffs’ standing.  The association sued on behalf of its members, and inherited the standing of any single member with standing, provided the lawsuit was germane to the organization’s mission.  The associations established that their members were incurring costs to comply with the 2022 Update.  The court held that venue was proper because one of the plaintiffs is a resident of the district.

In resolving the issue of whether the CFPB had the statutory authority to extend UDAAP to include “discrimination”, the court said no. Disposing of the notion of Chevron deference (a judicial doctrine under which courts defer to administrative agencies’ interpretations of ambiguous statutes) because the CFPB waived that defense, the court held that the question fell under the Major Questions Doctrine, which a recent Supreme Court case upheld applying to questions of major economic and political significance and which generally holds that such major questions must be expressly delegated by Congress to an administrative agency.  The court thus held that the CFPB was required to point to clear congressional authorization for the power claimed.  Congress had in the past directly spoken to discrimination in its legislation, and federal nondiscrimination statutes typically define what classes are protected, what outcomes or actions are prohibited, and defenses to liability – all of which are lacking in the UDAAP provision in Dodd-Frank.

The court further referred to the Dodd-Frank Act’s text directing the CFPB to exercise its authority to ensure that, with respect to financial products and services, “consumers are protected [1] from unfair, deceptive or abusive acts and practices and [2] from discrimination.”  The court observed that Congress did not say “including discrimination” or “such as discrimination” but instead used the word “and” to conjoin two distinct concepts – UDAAP and discrimination.

The court also noted that Dodd-Frank’s language authorizing the CFPB to regulate unfair acts or practices is not the sort of “exceedingly clear language” that the Major-Questions Doctrine demands.  For that reason, the court granted summary judgment in favor of the plaintiffs on their statutory authority claims.

The court vacated the CFPB’s 2022 Update and enjoined the CFPB from enforcing its theory against members of the plaintiff trade associations.  Some questions for you:  Should the CFPB appeal to the 5th Circuit?  Should the agency continue to bring discrimination cases based on UDAAP authority despite the ruling?  The website currently states that the language in the update is no longer operative, and the agency is reviewing the ruling, but the injunction technically only applies to the plaintiff trade association members and enforcement actions do not necessarily need to start in the examination process.  Will membership in the plaintiff organizations grow substantially (as well as their dues)?  Will state regulators fill this void under their state versions of UDAP laws?

 For more information on this matter, contact Troy Garris at troy@garrishorn.com.