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.
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.
Let's examine how some specific rules might be impacted.
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.
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.
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.
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.
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.
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.
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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.
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.
The decision to overturn the Chevron doctrine has major ramifications for how banking regulations will be interpreted and enforced:
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.
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Mid-Year Regulatory Landscape 2024: 1071, CRA and Other Hot Topics