RegFi Episode 41: Loper Bright, the End of Chevron and the Future of CFPB Rulemaking
30 min listen
In this episode of RegFi, hosts Jerry Buckley and Sasha Leonhardt welcome John Coleman, Orrick partner and former Deputy General Counsel of the CFPB, to discuss the Supreme Court’s Loper Bright decision overturning Chevron deference and its potential impact on the CFPB’s regulatory authority. The conversation looks at how Chevron has been applied, the implications for the Bureau’s future rulemaking, and how the decision might shape the future of financial regulation. John provides a deep dive into the nuances of Loper Bright and suggests how it could lead to more consistent, durable rulemaking that benefits both consumers and industry participants.
Links:
- “The Supreme Court Shifted Power from Administrative Agencies to the Courts, but Don’t Expect Major Changes at the CFPB” by John Coleman (Law360)
- “Supreme Court Substantially Alters Review Framework For Federal Administrative Agencies” by Robert Loeb & Geoffrey Shaw (Orrick Insight)
- Orrick Financial & Fintech Advisory
- RegFiPodcast.com
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Jerry Buckley: Hello, this is Jerry Buckley, along with RegFi co-host, Sasha Leonhardt. We are joined today by our partner, John Coleman, whom regular listeners may remember as a RegFi guest earlier this year, discussing the CFPB's expanded supervisory authority of fintechs and other nonbanks.
Today we will be calling on John to share his insights on the recent Loper Brite opinion by the Supreme Court overturning the 1984 Chevron decision. John has a unique perspective on the implications of Loper Bright with the CFPB because he served as Deputy General Counsel of the CFPB, leading the team responsible for defending rulemaking challenges.
John, it's great to have you with us. Given the enormous amount of coverage that the overturning of Chevron has received, listeners, particularly some of our financial services listeners, may have the impression that a new regulatory day has dawned and that regulatory authority of the CFPB has been pared back. You bring as deep an insight into this question as anyone we know, so we are glad to have you join us to share your insights regarding the impact of Loper Bright. But to set the table for our listeners, could you share with us some context here?John Coleman: Sure, Jerry, happy to, and before I do that, I just want to thank you for having me on the podcast again; always, always a pleasure to be with you and Sasha.
So, I think it'd be helpful for me to start with some first principles to try to put in broader context the significance of the Loper Bright decision, and I'm going to start at very basic and build my way up. So, first thing that everyone knows, but I'll just repeat, is that agencies are entirely creatures of Congress. Congress can decide whether the agency exists at all, what its statutory authority is, how it exercises that authority, et cetera.
The second point, similarly, is that the federal government, including federal agencies, generally cannot be sued without its consent. It is subject to what is called sovereign immunity. But Congress can waive that immunity and permit members of the public who are impacted by federal government action to sue and seek relief. And Congress has done that by enacting in 1946 the Administrative Procedure Act. And although it's a statute, it is quasi-constitutional in the sense that it applies broadly across the federal government and plays a really central role in the review of agency action.
Now, courts considering challenges to agency action under the APA can set aside that agency action, so vacate the agency action, on a number of grounds, including because the agency failed to follow required process; because the agency action contravenes the Constitution in some respect, for example, the First Amendment; or because the agency has simply acted unreasonably, which the APA describes as arbitrarily or capriciously. It's important when talking about Loper Bright to realize that Chevron and, therefore, Loper Bright never impacted any of these sorts of issues when they are before the courts. Instead, it related to another ground upon which a court could review agency action, which is that the action exceeded the agency's statutory authority or is otherwise contrary to the underlying statute.
Now, the Chevron doctrine, as it became understood, I think what Chevron decided — it was decided in 1984, was just a case, but it developed into a doctrine — a nd what it became to stand for was a presumption that when a statute is ambiguous, courts reviewing agency action under that statute should presume that Congress wanted the agency to resolve that ambiguity in the first instance and not the courts. And that presumption is what was ultimately overturned by Loper Bright.
So, to sort of apply this in the way it works in the real world, the classic formulation of Chevron proceeded in two — well, actually three steps. First, the courts would ask, is this the type of agency action, such as a rulemaking, that is sufficiently formal to warrant the application of Chevron's presumption? This was often referred to as Chevron Step Zero. And so, some agency actions that interpreted a statute were never entitled to Chevron consideration, of Chevron deference, because they were too informal; interpretive guidance is a classic example of that.
Assuming you clear Chevron Step Zero, the next question is, is the agency's construction of the statute foreclosed by the text of the statute? If it was, the agency loses; the agency cannot act contrary to the statute. But, if the statute is ambiguous enough that you could at least argue that the agency's construction of it is reasonable, then you go to what is called Chevron Step Two and ask, has the agency behaved reasonably in its rulemaking or other final agency action?
And so, this presumption that is at the core of what was known as Step One of Chevron is now out the window. And the Supreme Court has instructed the lower courts to consider, in the first instance, what is the best reading of the statute, and that is going to be the meaning of the statute that the courts will enforce.Sasha Leonhardt: Thank you, John, and thank you so much for coming back and joining us again on RegFi. To understand the reversal of Chevron deference in the context of CFPB rulemaking, I think first requires understanding the regulatory authority that Congress has assigned to the CFPB, as well as the various ways in which the Bureau promulgates its rules and guidance. Could you walk us through this process and offer your thoughts on how Loper Bright might alter the way the Bureau regulates? John: Sure. So, it's a great question, and I should say at the outset that I'm very familiar with the CFPB and its regulatory authority, which may not be representative of every agency in the government. And I think Loper Bright will have more significance for certain agencies than for others.
One of the key passages in the Chief Justice's opinion recognizes that even without a presumption that underlies Chevron, Congress always has the ability to expressly direct courts to defer to agencies' reasonable constructions of statutes. And it turns out that when Congress enacted many of the laws that are administered by the CFPB, it adopted very broad rulemaking authority in particular. The initial formulation of this was in the Truth in Lending Act, which was enacted in 1968, it's codified in 1604A of Title 15 of the U.S. Code. And I don't have it in front of me, but to paraphrase, it says something along the lines of, “The agency may promulgate regulations to carry out the purposes of the statute. Such regulations may contain such additional classifications or requirements as are necessary or appropriate to carry out the purposes of the statute and may contain such adjustments, modifications as are necessary to facilitate compliance or prevent evasion.” That's not quite right, but that's pretty close to what it is, and Congress repeated that formulation in a number of other statutes that regulate consumer financial services, including the Equal Credit Opportunity Act, the Electronic Fund Transfer Act, and others.
And so, this is broader than a grant of rulemaking authority that was just issue a rule to carry out the statutory directive and arguably provides the agency with a little bit more leeway to enact rules that are not 100% in accord with what a court might think is the best reading of the statute. But one of the directives in Loper Bright was that courts now have to look at the grant of rulemaking authority, as well as the statutory provisions that are being implemented in order to determine whether or not a rule is valid. And it just so happens that the Bureau adopts inheritance from the Fed some of these broad grants of rulemaking authority, and we saw in a decision last week in the Townstone case an example of where the CFPB prevailed in a rulemaking challenge in defending an old rule of the Federal Reserve Board based on this broad grant of rulemaking authority.
So, it is tempting, I would say, to look at Loper Bright and think, oh, this is the silver bullet that is going to allow us to successfully challenge every CFPB or other agency regulation from here on out. But the reality is much more complicated. And rulemaking challenges will, in my view, continue to be hand-to-hand combat, guerrilla warfare, based on a specific text of the grant of rulemaking authority, the specific text of the underlying statutory command, and then all the other bases that courts are permitted to review. Did the agency follow appropriate process? In the case of the CFPB, it has to follow the Small Business Regulatory Enforcement Fairness Act, it has to engage in cost benefit analysis, it has to go through notice and comment like other agencies. It also has to behave reasonably, and I think it often doesn't. And I think the rulemaking challenges that we're going to continue to see are going to have lots of different angles, but it's not going to be any silver bullets. It's going to be very context-specific, frankly, as it has been as long as the agency has existed.Jerry: Well, John, you point out the broad grants of regulatory and rulemaking discretion that the Congress has delegated to the CFPB. And you also point to cases like the PHH case, where the courts have found that the CFPB erred in its interpretation of RESPA. A broad grant of authority to prohibit unfair, deceptive, or abusive acts or practices, or UDAAP, as we call it, was granted to the Bureau under the Dodd-Frank Act. That would seem to be as good an example as any of a broad grant of discretion from the Congress to the Bureau. There is some history around the traditional UDAP, unfair or deceptive acts or practices, authority that is exercised by federal agencies and state attorneys general, but there is less guidance about what is meant by "abusive." Has there been any commentary on how a Loper Bright decision might impact that broad grant of authority under UDAAP provisions of the Dodd-Frank Act? John: It's a really excellent question, Jerry, and it could be a really significant consideration. One thing sort of consistent with my opening soliloquy to point out is that Loper Bright, Chevron, never had any impact on the CFPB's exercise of UDAAP authority in the context of an enforcement action or in the context of the issuance of interpretive guidance or other sub-regulatory actions that were never going to be entitled to Chevron deference. And so, to the extent that the agencies and litigation over whether an act or practice is unfair, deceptive, or abusive, it was not going to get deference before Loper Bright, and it won't get deference after Loper Bright. The court will decide in the first instance based on the codification of the different elements of UDAAP in the Consumer Financial Protection Act, as well as a lot of precedent, particularly about unfairness and deception that exists, whether a practice is unfair or deceptive.
It could, however, come into play if the CFPB were to pursue UDAAP rulemaking. And you both will recall the Bureau's first final UDAAP rulemaking was the payday rule that was finalized very, very late in Director Cordray's administration. A big piece of it was rescinded during Director Kraninger's administration and, so, the courts never passed on that. But a piece of the payday rule survived Director Kraninger's administration and was actually upheld by a district court in Texas and upheld by the Fifth Circuit in the CFSA case that ultimately went to the Supreme Court, but only on the funding issue. And there, the Fifth Circuit upheld the Bureau's rulemaking as being within the grant of its statutory authority and otherwise reasonable.
The Bureau is engaged in a rulemaking right now. It has issued a proposed rule based on its abusiveness authority — its authority to issue rules identifying abusive acts and practices and imposing requirements to prevent those acts and practices — that is related to the charging of NSF fees in certain withdrawal transactions. And it will be interesting to see whether the agency behaves in a more restrained way in light of the decision in Loper Bright or whether it continues to proceed along the proposed course. Some of this, of course, might depend on the outcome of the election. But you could see a court deciding for itself what "abusiveness" should mean and what the constituent elements of an abusive act or practice should mean and being less willing to defer to the CFPB's construction of those terms than it might have been six months ago. So, I think time will tell, but I think it could be a fairly significant impact of this decision.
I think my concern, is that the agency will be discouraged from pursuing UDAP rulemakings because of a concern that they will not prevail in a challenge and will instead just sort of regulate through enforcement and supervision and the issuance of informal guidance that is effectively a threat of enforcement, which I think is bad for the industry and is bad for the rule of law, in my opinion. So, I hope that they do engage in reasonable rulemaking that provides folks an opportunity to participate, that operates prospectively, and that lands at a reasonable place from a policy perspective. And I guess time will tell whether that comes to pass.Jerry: You know, you raise a very good point about the discouragement that Loper Bright may bring about, where you have an agency that doesn't want to have itself tested through the traditional Administrative Procedures Act process and, therefore, decides it's going to go another way. I'm not sure, but I don't know what you think, John, that the courts will smile favorably on that approach.
But the other thing that's very interesting is that UDAAP and statutes like it, but particularly UDAAP, the UDAAP, that is under the jurisdiction of the CFPB, are basically principle-based regulations. They are not so much rules-based; they're more the equitable determination of what's really fair, what's really abusive. And that type of grant of authority to make those type of decisions, which are sort of the decisions that are made in courts in equity, is an interesting grant of authority, which may be a little different than the type of grant of authority that the court had in mind when it said, "Well, we'll let you — with a broad grant of authority — make decisions as long as you have that grant of authority." There may be some nuances there, it seems to me.John: Well, what's troubling to me in UDAAP is not so much a standards-based grant of rulemaking authority — in my view, that's Congress's prerogative and unless the nondelegation doctrine comes roaring back, it's probably constitutional, or at least UDAP rulemaking authority has withstood many constitutional challenges — I think it's much more troubling from a rule of law perspective than just from a practical compliance perspective that the agency can literally just, in the course of an examination, decide that something that was never regarded as unfair and indeed was always sort of a broad industry practice is all of a sudden unlawful and apply that understanding retroactively. I think that's a real, real problem with the way that these statutes have been enacted and interpreted. And I think it's really interesting to contrast the CFPB's UDAAP authority with that of the FTC.
As you know, in the wake of the AMG decision, the FTC can only get prospective injunctive relief for an alleged UDAAP that has not been codified in a rule or otherwise made known to industry participants through a formal agency adjudication. And I think there's some sanity in that approach because it avoids what I think is maybe the central problem right now in our world, which is this abuse of, for lack of a better term, abuse of UDAAP authority by the agencies who can wield it. And I think a responsible agency should pursue rulemakings under UDAAP authority, and I think as long as those rulemakings are reasonable and have a sound policy basis, it might be in the industry's interest to participate in those rulemakings, but encourage the agency to proceed in that direction as opposed to through enforcement.Sasha: And John, to take a slightly different tack on that, you talked about regulators and the Bureau going through an examination and deeming that something is unfair. To what extent do you think that we're going to see the industry use Loper Bright as a basis to push back? Remember PHH, for example, when the defendant went to court, engaged in contentious and long litigation through the administrative courts and then the circuit courts and ultimately prevailed. But that has not happened often in the history of the CFPB, or for that matter, the financial regulators more broadly. So, do you think Loper Bright may encourage industry participants to go to court more often on these issues? John: Well, I think that that impulse has been increasingly prevalent even before Loper Bright. And I'll raise an example that you all are very well aware of, and Jerry and I have talked extensively about it. But when the CFPB revised its examination manual to announce for the first time — not through a rulemaking, but through literally just a revision to the examination manual — that discrimination was not simply subject to the Equal Credit Opportunity Act or the Fair Housing Act, but was an unfair practice. And it directed its examiners to search for and cite institutions for such unfair practices, even those that were not already subject to the ECOA or the Fair Housing Act or other anti-discrimination laws.
The industry pushed back first and tried to engage with the agency and when they basically couldn't get the agency to engage with them, they sued them. And they sued them in district court in Texas and they prevailed. And they prevailed over both the agency's objections that, "Hey, this is just industry guidance. It's not actually reviewable"; they persuaded the district court that, in fact, it should be subject to judicial review, and they persuaded the district court that, in fact, the Bureau did not have the authority to declare this an unfair practice. And that case is pending in the Fifth Circuit. I won't try and predict how it will come out, but I think it's an example, and I think we're going to see lots of other examples, of industry pushback on sort of sub-regulatory agency actions. And I think, frankly, it is just desserts for agencies who are abusing, in my view, the bully pulpit in their ability to do this sort of thing, rather than provide fair process to regulated institutions and cut square corners.Sasha: John, we've talked about the broad grants of authority in the enabling statutes under the Bureau's purview, like the Truth in Lending Act, RESPA, and so forth, and how they're not really going to be that affected by Loper Bright in your view. Obviously, many seem to be disappointed by this outcome, but you and I have spoken about this a bit. And I understand your view is a little bit different, that it may be necessary and desirable for an agency like the Bureau to have interpretive authority and for that authority perhaps not to be struck down entirely or that significantly impacted by Loper Bright. Could you just kind of share your thoughts on this? John: Yeah, happy to. Try and imagine a world, right, where you've got an agency that is actually expert in the area, both in its understanding of the law and the legal and regulatory history, as well as its understanding of the industry, the way it works, and its understanding of how institutions actually develop and run their compliance operations, et cetera, and establishes rules that are maximally protective of consumers while being minimally inefficient or destructive of innovation or other value-creating work by companies; the so-called expert agency that I think people used to assume was an actual thing. If that existed, I think you would much prefer, if you were a company, to have that agency setting the rules of the road nationwide in a way that was durable, that would give sufficient guidance and ensure that as long as you play by those rules, you didn't have to worry about the agency; all you had to do was compete in the marketplace where everyone was playing by the rules.
That world is far preferable to a world where you've got district judges scattered across the country who might have a different view of what the law requires, or appellate courts across the country who might have a different view of what the law requires. And if you're running a national credit card program, it would be really disruptive if TILA required one thing in the Eleventh Circuit, one thing in the Fifth Circuit, and a totally different thing in the Ninth Circuit. And so, I do think that there are advantages to an agency that is actually empowered to implement rules that will withstand judicial review and create sort of nationally applicable rules of the road. I think the concern that has motivated courts now for quite a while, right, at least during the Roberts era and perhaps even before that, is that agencies aren't acting like the experts that they were supposed to act like. They're entirely political or at least more political than is appropriate, and they are issuing rules to score political points and not rules that are really thoughtful and reasonable and designed to last for a long time. And I think courts sort of sensing this have been stepping in increasingly to assert their authority vis-a-vis agencies.
And we've seen a lot of examples of this during this administration. I think the quintessential one, in my view, is the student debt relief case where it was obvious what happened: the president wanted Congress to enact some legislation, Congress refused , some clever lawyers came up with a theory of why their statutory authority allowed them to get the same thing that Congress wouldn't enact, and the court looked right through that.
And so, I think we're sort of working through this sort of moment in our regulatory history, but I do hope that we get to a place where agencies behave responsibly and where courts recognize that agencies are behaving responsibly and actually uphold rules so that there is more certainty, less flux in the regulatory world because it is hugely expensive and unnecessarily so by and large for institutions who really should be focusing on developing great products, providing great customer service, and doing all the other things that our clients do.Jerry: John, thank you. That's very statesmanlike and the statement of a person who's been there and been through the process and has seen it on all sides. And I hope that our listeners include some who might take notice of that. Really a very helpful comment.
What you're really saying is, "Don't push your authority beyond what really makes sense, just because you have an ideological agenda. Just because you can do it, don't do it." And fortunately, we have the benefit of the balance of powers and the courts are fulfilling their function and putting restraints on that. So, it's very interesting to watch this play out and it's great to have somebody as thoughtful as you comment. So, thank you so much for being with us and I wish we could go on, but our time is out.John: Thank you, Jerry, very much for having me back on the podcast. Thanks, Sasha, as well. And we should get together again in a year and sort of look at what's happened in the wake of this Supreme Court term and whether all the predictions have come to pass or not. But, we'll see. Jerry: Thank you. John: Thanks, everyone.