The End of Chevron Deference: What It Means for Banking Regulation

In a landmark decision this year, the Supreme Court overturned the long-standing Chevron doctrine, fundamentally reshaping how courts will interpret federal agency regulations - including those impacting the banking industry. 

What Was Chevron Deference?

The Chevron doctrine, established in a 1984 case, required courts to defer to a federal agency's reasonable interpretation of an ambiguous statute. Essentially, if Congress hadn't directly addressed an issue, courts were required to defer to an agency's interpretation so long as it was reasonable. 

In the case of Loper Bright Enterprises v. Raimondo, the Supreme Court found the Chevron doctrine to be "fundamentally misguided and contrary to the framers' understanding of our form of government." The Court determined that judges, not agencies, should have the final say in interpreting federal laws. 

Banking Rules that Might be Impacted by the Overturning of Chevron Deference  

Let's examine how some specific rules might be impacted. 

Community Reinvestment Act (CRA) Modernization 

The CRA modernization efforts, which aim to update how banks are evaluated for meeting community credit needs, may face new scrutiny. Without Chevron deference, courts may be less inclined to accept regulatory agencies' interpretations of what constitutes "meeting community needs" or how assessment areas should be defined. This could potentially lead to a narrowed interpretation of the CRA, limiting its scope or enforcement mechanisms. 

Small business lending data collection (Section 1071)

The CFPB's rule requiring financial institutions to collect and report data on small business lending (known as Section 1071) could be vulnerable to new legal challenges. Critics argue the CFPB's interpretation of what constitutes a "small business" or what data points are necessary exceed the statutory language, however, the agency has the authority to collect any additional data that the Bureau determines would aid in fulfilling the purposes of the rule. Without Chevron deference, courts might be more receptive to these arguments, potentially narrowing the rule's scope or data collection requirements. 

Unfair, Deceptive, or Abusive Acts or Practices (UDAAP)

The CFPB's inclusion of discrimination as an "unfair" practice under UDAPP may also be at risk of facing a legal challenge. The CFPB removed the changes, providing that unfair acts or practices encompassed discriminatory conduct in September 2023, but the agency has a good argument under the statutory language for including discrimination.  

Under the Consumer Financial Protection Act (CFPA), an act or practice is unfair if it causes or is likely to cause substantial injury to consumers, which is not reasonably avoidable by consumers, and the injury is not outweighed by countervailing benefits to consumers or to competition. 

Without Chevron, courts may be more likely to scrutinize whether this interpretation aligns with the statutory language and process, potentially limiting the CFPB's enforcement authority in this area. 

Overdraft and NSF fee regulations 

Proposed rules around overdraft and non-sufficient funds (NSF) fees could face challenges. The industry might argue that regulatory agencies are overstepping their authority in limiting these fees. Without Chevron deference, courts may be more inclined to side with banks if they find the regulations go beyond the clear language of relevant statutes. 

Open banking and consumer data access rules

As agencies work to implement rules around open banking and consumer data access, they may face increased scrutiny. Courts may more closely examine whether these rules align with the statutory language authorizing them, potentially limiting the scope or implementation of open banking initiatives. 

Anti-money laundering (AML) regulations 

While AML regulations are generally well-established, any new interpretations or expansions of these rules could face challenges. Banks might argue that certain requirements go beyond what's explicitly mandated by relevant statutes. 

Related: Creating Reliable Risk Assessments: How to Measure BSA Risk 

Fair lending enforcement

The agencies' interpretation of fair lending laws, particularly in areas like disparate impact theory, which is where a bank applies facially neutral policies or practices, but in practice disproportionately excludes or burdens certain persons on a prohibited basis under FHA and/or ECOA, may be more vulnerable to legal challenge. Courts might be less inclined to defer to agency expertise in determining what constitutes discrimination under these laws. 

Capital and liquidity requirements

While major capital and liquidity rules are based on international agreements and explicit statutory authority, any attempts to expand or reinterpret these requirements could face new legal hurdles. 

Chevron Overturn and Implications for Banking Regulation 

The decision to overturn the Chevron doctrine has major ramifications for how banking regulations will be interpreted and enforced: 

1. Increased legal challenges. Financial institutions now have a clearer path to challenge regulations in court. Without Chevron deference, agencies like the CFPB, FDIC, and OCC may face more litigation over their interpretations of banking laws. 
2. Regulatory uncertainty. As courts begin interpreting banking regulations without deferring to agency expertise, we may see inconsistent rulings across different jurisdictions. This could create a patchwork of regulatory interpretations. 
3. Delayed rulemaking. Agencies may become more cautious in drafting rules, anticipating potential legal challenges. This could slow down the process of implementing new banking regulations. 
4. Congressional action. To maintain regulatory stability, Congress may need to pass specific, well-drafted legislation, leaving less room for agency interpretation. 
5. Reexamination of existing rules: Long-standing banking regulations that relied heavily on agency interpretation may now be vulnerable to legal challenges. 

What the Overturn of Chevron Deference Means for Financial Institutions 

The full impact of this ruling will take years to unfold. In the short term, we can expect to see an increase in litigation over banking regulations. Longer-term, this shift may lead to a more complex and potentially less stable regulatory environment for the banking industry. 

On the one hand, financial institutions may have more power to leverage to shape regulations through legal challenges and some existing banking regulations could be weakened or overturned. 

While the potential for reduced regulatory burden is music to most financial institutions’ ears, Chevron also comes with some downsides. First, there is no guarantee that any existing or pending regulations will be overturned. Instead, financial institutions are likely to face increasing compliance uncertainty, and it may become harder to predict how courts will interpret certain regulations, complicating compliance efforts. 

Institutions will need to closely monitor court decisions that could impact regulatory interpretations and be prepared to move forward in their compliance efforts.  

Think of the student who doesn’t know if they’ll have a snow day tomorrow. Should they do the homework that’s due tomorrow or should they postpone it, taking the risk that school won’t be cancelled, and their assignment will be marked late? The best students do the work because they value their high GPA. 

As the regulatory landscape evolves, financial institutions will need to stay informed and agile, ready to adapt their compliance strategies to this new era of judicial interpretation.  

Want more on how court decisions are impacting regulation? Watch our on-demand webinar  

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