The U.S. Chamber of Commerce and six trade groups, including four banking groups, recently sued the Consumer Financial Protection Bureau in what industry experts tabbed as a signal of growing pushback against the agency that has cracked down on financial regulation.
Along with the Chamber, the American Bankers Association, the Consumer Bankers Association, the Independent Bankers Association of Texas and the Texas Bankers Association, among others, sued the CFPB on Sept. 28 for expanding its examination manual in March to include illegal discrimination. That manual is used in audits to determine whether banks are using "Unfair, Deceptive and Abusive Practices," or UDAAP.
"This is the product of the industry's view that the CFPB is being very highly aggressive," Chris Willis, co-leader of the Consumer Financial Services Regulatory Practice at Troutman Pepper, told S&P Global Market Intelligence in an interview. "This is a pattern that is developing."
The examinations will now cover all consumer finance markets, including credit, servicing, collections, consumer reporting, payments, remittances and deposits. Supervised companies will be required 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.
In announcing the lawsuit, CBA said that while it takes discrimination seriously, "The changes to the UDAAP Exam Manual raise profound substantive and procedural legal concerns while also threatening banks' ability to deliver the products and services millions of Americans rely on to meet their financial needs."
In a statement emailed to Market Intelligence, a CFPB spokesperson said the agency's exam manuals "allow banks to ensure they are following the law and help make certain that consumers are receiving the fair and equitable treatment they deserve."
Statutory authority challenged
In the lawsuit, the Chamber and trade groups contended that the agency has exceeded its statutory authority under the Dodd-Frank Act, which tightened banking industry rules as a response to the 2008 financial crisis. In addition, they alleged that the CFPB's action should be considered "arbitrary and capricious" under the Administrative Procedures Act because it fails to consider the CFPB's prior position on UDAAP authority and to provide well-founded reasons for the change.
Industry attorneys said the CFPB's action, unveiled as an announcement rather than as a formal rulemaking process, raises a host of questions.
The exam expansion "left unanswered substantive questions about precisely what type of conduct the bureau is targeting and what makes it unlawful," John Coleman, a partner at law firm Buckley LLP, said in emailed comments.
Troutman Pepper's Willis said the lawsuit faces a tough road ahead in court.
"There is going to be a significant fight as to whether they have standing to challenge the CFPB action," Willis said. "The court may say, 'There's no standing to sue because nobody has been injured.'"
However, regardless of who wins the case, the lawsuit could provide much-needed insight into the CFPB's approach to discrimination, said Buckley's Coleman, a former CFPB deputy general counsel.
"Whatever the outcome of the litigation, one positive aspect is that it may force the bureau to clarify and defend its novel position that the prohibition on unfair practices applies to conduct that, while not intended to discriminate, results in 'discriminatory practices,'" Coleman said.
Republican lawmakers applaud the lawsuit
Republican lawmakers echoed the Chamber and trade groups' contention that the CFPB went beyond its legal authority to expand the exam manual to cover discrimination.
While the agency should enforce laws protecting against discrimination in consumer finance, the agency's action is a "sneaky change" that would punish financial service providers "even without evidence of discriminatory intent," Sen. Patrick Toomey of Pennsylvania, the top Republican on the Senate Banking Committee, said in a news release.
The legal action is "a welcomed statement that 'enough is enough,'" Rep. Blaine Luetkemeyer, R-Mo., ranking member on the House Financial Services Subcommittee on Consumer Protection and Financial Institutions, said in a news release.
